As Inflation Drives Up Prices, State Lawmakers Eye Cutting Food and Sales Taxes

More than a dozen states are considering cutting taxes this year in the wake of budget surpluses and optimism that the worst of the Covid-19 pandemic is over.

While income tax cuts are a perennial feature in state legislatures, there is considerable buzz around easing the cost of goods as inflation pushes up household expenses. Sales tax cuts are up for consideration in at least five states and lawmakers in a few states are also pushing gas tax cuts.

But what’s particularly unusual this year is the focus on food. Food prices are reaching record highs and of the 13 states that tax groceries, nine are considering tax relief. At least three others are circulating proposals to eliminate taxes on prepared food. The Urban Institute’s Richard Auxier said it’s the most activity around food taxes he’s seen in at least a decade.

Both Republicans and Democrats are pushing the idea. Bills that would repeal grocery taxes outright have been introduced so far in Alabama, Kansas, Missouri, Oklahoma, Utah and Virginia. 

“Today is about tackling the high costs in Virginia—the high costs I believe are unnecessarily borne by those that can afford it the least,” Virginia Gov. Glen Youngkin, a Republican, said in a recent appearance to push his tax cuts package that also includes suspending the gasoline tax and doubling the state’s standard income-tax deduction.

Illinois Gov. JB Pritzker, a Democrat, is calling for a one-year suspension of the grocery tax and the Mississippi legislature is considering reducing its grocery tax rate. Idaho is moving forward on a bill to increase its grocery tax credit.

Bills repealing sales taxes on prepared foods are also under consideration in Colorado and Kansas while Connecticut is debating a temporary repeal.

Food Tax Cuts Hit Roadblocks

But despite all the attention and bipartisan support, Auxier cautioned that food tax cuts are politically difficult. For one, income taxes are also on the table in a number of these states and those tend to be costlier but more popular with Republican-led legislatures. Idaho Rep. James Ruchti, a Democrat, recently said in a floor debate he would have liked his bill to grant more tax relief on groceries—but that the Republican-controlled legislature used up about a third of the state’s surplus when it passed a $600 million income tax cut. 

Another roadblock is what to do about the loss in grocery tax revenue. “Grocery taxes bring in a lot of revenue—that’s why these states still have them,” Auxier told Route Fifty. “So you typically have to raise another tax to offset it. You can’t just rely on cuts or economic growth.”

Kansas knows that all too well. In the post-Great Recession era, lawmakers enacted what’s now ruefully called the “Kansas Experiment,” a phased-in income tax cut that was expected to generate economic growth. But what followed was years of budget deficits and in 2017, the Republican-controlled legislature restored income tax rates. 

Rep. Adam Smith, a Republican, said fixing the failed experiment is one of the reasons he ran for office and he doesn’t want to return to those tumultuous days.

Smith, who chairs the taxation committee, said the idea he sees as most viable would take a phased approach to cutting the state’s 6.5% grocery tax: For example, cutting it in half this year, then stepping it down incrementally when certain revenue triggers are met until the tax is fully eliminated. The grocery tax brings in about $500 million in annual revenue.

“There seems to be a lot of concern about how long this surplus is going to be sustainable,” Smith said. “We’re trying to do the sensible thing.”

Income Tax Cuts

Historically, income tax cuts tend to take the biggest bites out of budgets. At least 11 states (Colorado, Idaho, Indiana, Michigan, Mississippi, Missouri, Nebraska, New York, Oklahoma, South Carolina and West Virginia) have been considering them. 

Utah passed one in February. And, earlier this month, Iowa Gov. Kim Reynolds signed what her office described as the "most significant tax reform bill in state history," which included phasing the state's income tax down to a 3.9% flat rate and invoking other tax changes, including a reduction to the state's corporate income tax rate.

But most tax cut proposals this year are modest. Utah’s income tax cut package, which includes creating an Earned Income Tax Credit and expanding the state’s Social Security tax credit, gives $160 million back to Utahns. The state’s 2023 budget is expected to total around $25 billion.

"Let Iowans keep more of their hard-earned money, and make our state more competitive. With this bill, Iowa is now the fourth lowest for individual income tax rate in the nation," Reynolds said in a statement earlier this month.

New York Gov. Kathy Hochul wants to cut two years off the state’s planned income tax cut schedule, providing $1.2 billion worth of tax cuts to 6.1 million middle class workers in next year’s $216 billion budget. 

Income tax revenues have soared over the past year, increasing by double -digits in many places. Still, some policy watchers say they are worried states could be making budget moves based on what turns out to be a one-time revenue boost.

“These surpluses haven’t been a reality long enough to say it’s wise to rely on this as a motivating factor to make any legislative changes,” said Carlton Huntley, content editor for Thomson Reuters Tax and Accounting. “Once you turn the spigot on....no one wants to be the person to turn that spigot off.”