Phoenix To Tax Groceries

February 3, 2010

Phoenix officials have approved a five-year 2 percent tax on food purchases, to take effect April 1. The $50 million the tax is expected to raise will help close a budget gap that the city estimates at $241 million.

Grocery taxes battle property taxes as the most despised form of taxation at the state-local level. It’s no wonder: everyone buys groceries, sales taxes are visible, and visible taxes that everyone pays are the least popular taxes. Sometimes the rhetoric is about helping the poor, but a small percentage discount given to everyone is an inefficient way to deliver aid to the poor. A specific program targeted to those in need (such as food stamps) would be a more efficient method.

Nonetheless, most (but not all) states exempt groceries from the sales tax, even though taxing groceries would both (1) help keep sales tax revenues stable year-to-year, thanks to the fact that grocery purchases don’t change much with the economy and (2) allow the sales tax rate to be as much as a percentage point lower, thanks to the sheer volume of grocery sales.

That said, this is not what Phoenix is doing. Rather than tacking groceries onto the base statewide and lowering the overall rate, it’s more like Phoenix is adopting an ad hoc temporary tax on groceries alone. The separate city sales tax base will create complexity for businesses and consumers, and whatever stability taxing groceries may bring will end with the tax. That begs the question: what the city will do when it gets used to the revenue but the tax expires?

Taxing groceries can be part of a sound tax system. But Phoenix needs to get a handle on its spending before it uses temporary taxes to shore up this year’s budget.

Note: This blog post was revised on February 9, 2010.

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A tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.

The tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates.