Let’s Think Again Before Ending the Tax on Groceries

When Bill Richardson gets into the specifics of tax relief, he’ll receive lots of advice to end the tax on groceries. It’s not a bad idea. Everyone seems to agree that New Mexico needs lower taxes, and the food tax is a tempting target. But other taxes could be cut with much better results for the state’s lagging economy and for the quality of life in New Mexico.
Proponents of ending the gross receipts tax (GRT) on food say it would combat hunger, but in fact its effects would be undetectable. Look at the numbers. The tax is about 5.8 percent, so its removal would reduce the cost of food by that amount. Data on consumer spending show that families with income of $7500 spend, on average, $1,800 on groceries, which is 24 percent of their income. So ending the tax would put about $105 back into their pockets to be spent on food or anything else.
But how much of this extra money would be spent on food? Consumer data also show that at the margin people in that income bracket spend only about 10 percent of any extra income for food, the rest going to housing, clothing, transportation, and other items. So this means that our representative family would spend just $11 extra per year on groceries. Even maintaining its food spending at 24 percent of income would result in just $25 worth of additional food.
And even this small increment in the food budget is doubtful. For one thing, people in the low income brackets qualify for food stamps, which aren’t subject to the gross receipts tax anyway. Moreover, opponents of the food tax often propose raising some other tax to make up the lost revenue. One frequent idea is to raise the tax on cigarettes, a tax that ironically targets lower income people. Another proposal is to eliminate the food tax but raise the gross receipts tax on everything else. Clearly, simply rearranging taxes is not going to do much for the poor or anyone else.
Well, you might say, even though ending the food tax won’t do much for food consumption, at least it will give more money to the poor; and isn’t that a good thing? Maybe so, but New Mexico’s tax system is already quite progressive, and the resulting economic malaise leads me to challenge the need to tilt it further. What’s more, the tax savings wouldn’t go exclusively to the poor, and indeed the richer you are the more benefits you’re likely to get. A family with income of $67,500 would get a tax break of around $230, larger than the poor family’s tax savings (although smaller as a portion of income).
But the real problem with ending the food tax is that it would make it more difficult to cut other taxes that would have a much more beneficial impact on the quality of life and the New Mexico economy. It would lose about $50 million of state revenues and another $39 million at the state and local level. The state faces a tough budget situation, and the legislature needs to concentrate on tax cuts that would do the most good.
A prime example of a “quality of life” tax cut would target the gross receipts tax on medical services-New Mexico’s worst tax, in my view. It continues to drive doctors out of New Mexico, degrading the quality of health care for the rich, the poor, and everyone in between. Eliminating this tax would cost relatively little in lost revenues, and Governor-elect Richardson has said he’d work to get rid of it.
Another necessary target is the state’s high income tax rates, higher than those of any of our neighboring states and unquestionably a drag on the economy. Reducing the top and middle rates would be a major economic stimulus, particularly as it would encourage companies to locate in New Mexico. Analysis by the Rio Grande Foundation indicates that lowering the top income tax rate to six percent would create around 35,000 jobs and increase average earnings by $2,800 after four years. In contrast, ending the food tax would give little if any economic stimulus, particularly if other taxes were raised to compensate for the lost food-tax revenue.
Other tax cuts, in corporate profits and capital gains, for example, offer potential improvements to the business climate.
Ending the grocery tax by itself would have some modest benefits, but it’s not a priority. Let’s concentrate on the tax cuts we really need to make New Mexico better for everyone.
The author is research director of the Rio Grande Foundation.