Putting grocery food taxes on the table: Evidence for food security policy-makers

Published: May 2021
Bibliographic reference: Yuqing Zheng, Jianqiang (Jason) Zhao, Steven Buck, Shaheer Burney, Harry M. Kaiser, Norbert L. Wilson. Putting grocery food taxes on the table: Evidence for food security policy-makers. Food Policy 101 (2021) 102098

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Abstract

In the United States, grocery tax policy varies at both state and county levels, with 16 states having grocery taxes in 2020. Several states are engaged in active debates about whether to remove or impose such taxes. Although the extant literature evaluates multiple factors that may contribute to food insecurity, little is known about the relationship between grocery food sales taxes and food insecurity. We present county-level panel data on grocery taxes from 2006 through 2017 and find that jurisdictions with grocery taxes are among the most food insecure in the country. The regressiveness of grocery taxes exacerbates food insecurity, at least in theory. We link our tax data with county-level food insecurity measures and other data from the Current Population Survey. Treating grocery taxes as exogenous, we estimate that a one percentage point increase in grocery tax rates is associated with a 0.84% increase in the probability of being food insecure for low-income households. Using these estimates, we conduct policy simulations of grocery taxes that have been recently considered in six states and assess the potential impacts on food insecurity. One caveat is that our estimator may be biased towards or away from zero depending on whether increases in grocery taxes within counties over time are positively or negatively correlated with unobservables affecting food security. However, assuming the onset and removal of grocery taxes within a county are exogenous, our results show that proposed grocery taxes may exacerbate food insecurity by one to five percentage points.

Summary

This research examined the issue of whether grocery taxes impact food insecurity. Jurisdictions impose grocery taxes in 16 states as a state tax, a county tax, or both. These jurisdictions represent over one-third of U.S. counties and can cost a family hundreds of dollars per year.

Although most states and counties in the U.S. exempt grocery foods from sales tax, the seven most food-insecure states in the U.S. have or are proposing a grocery tax at or above 4% (and offer no substantial tax exemption). Examining whether a link between food insecurity and grocery taxes exists is an important topic because these taxes affect populations that may be most vulnerable to becoming food insecure. To our knowledge, no previous study has examined the implications of these taxes for food insecurity. However, over a dozen state legislatures have been debating grocery taxes in recent years. Therefore, the significant benefit of studying the consequences of grocery taxes is to inform these states of the relevance of this food policy issue.

Our main hypothesis is that households living in counties with a non zero grocery tax rate have a higher probability of being food insecure than households living in exempt counties. Households living at or near the poverty level are likely the most vulnerable to the negative repercussions of the imposition of a grocery tax. We developed our analysis from detailed household demographics, the food security status data from the CPS-FSS, and county-level grocery tax rates in the United States from 2006 through 2017. From these data, we estimated the impact of grocery tax rates on the probability of a household being food insecure with an IV probit model.

We find that a one percentage point increase in grocery tax rates relates to a 0.84% increase in the probability of a low-income household being food insecure. The result suggests that localities that tax groceries on average at 4.2% increase the probability of their low-income households food insecurity by 3.3%, with the caveat that our estimator may be biased towards or away from zero depending on whether increases in grocery taxes within counties over time are positively or negatively correlated with the unobservables. Given that 11.8% of Americans were food insecure in 2017, this result indicates that taxing food groceries contributes to food insecurity.

We also find similar but somewhat higher results than others on the impact of SNAP on food insecurity. Our results indicate that a $1 increase in SNAP benefits reduces the probability of a low-income household being food insecure by 0.17%, holding all other variables constant. Multiplying this number by the average monthly SNAP benefits received for participants ($243.83) reveals that SNAP benefits reduce food insecurity of low-income families by an average of 41.4%. In comparison, Ratcliffe, et al. (2011) and Gundersen et al. (2017a,b) found that SNAP receipt reduces food insecurity by 31.2% and 44%, respectively, using Survey of Income and Program Participation (SIPP) panels.

Grocery taxes increase food insecurity among the poorest residents, especially ones that do not participate in SNAP. We found a larger tax impact than the price impact reported in the literature (0.84% vs. 0.407%). The discrepancy is likely because our analysis focuses on all low-income populations, and the latter is of SNAP participants only. Policymakers can lessen the prevalence of food insecurity by lessening the burden of grocery taxes on lower-income households. Providing a rebate or credit or lowering or eliminating the grocery tax could remedy the grocery tax’s effects. Nguyen and Wilson (2017) suggest that policymakers eliminate the tax on healthy foods to lessen the tax burden, mitigate the revenue loss, and encourage healthy food consumption. Such moves are worthy of consideration, especially in times such as the COVID-19 pandemic, which has significantly increased U.S. food insecurity in a short time. However, these reforms would reduce tax revenue. Government officials would need to look at alternative revenuegenerating options. Alternative revenue sources include higher taxes on tobacco product/alcohol sales, income, or property (some of which may also affect food insecurity). Still, income and property taxes are less regressive taxes than grocery taxes, and sin taxes may yield other benefits.

To conclude, we provide some future research directions related to grocery taxes. Our analysis prompts at least three research questions worth further investigation. First, it would be useful to understand better the impacts of grocery taxes on detailed food consumption. For example, how do grocery taxes impact the nutrition of households? Second, how do these taxes impact the composition of food purchased? For instance, do consumers shift to more store brands or generics in response to grocery taxes? Finally, do these taxes impact long-term health?

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Podcast Zheng and Wilson

E137: Why Grocery Taxes Hurt Low Income Families More – Evidence for Policymakers
Wednesday, August 25, 2021

Taxes fund many important services, such as education, transportation, parks, and healthcare that benefit us all and our society. But does it make sense to tax groceries? Today, we're exploring research on the impact of grocery taxes, particularly, on low income families. We have two guests today who have collaborated on a really interesting project. Agricultural economist, Yuqing Zheng, of the University of Kentucky, and Norbert Wilson of Duke University. They're co-authors on a research paper entitled Putting Grocery Taxes on the Table, Evidence for Food Security Policy Makers.