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Rio Grande Foundation
P.O. Box 2015 Tijeras, NM 87059

505-286-2030

Lower Taxes - Period:
The Right Way to End the Food Tax

By Harry Messenheimer, Ph.D.
President, Rio Grande Foundation

June 2002

EXECUTIVE SUMMARY

Eliminating the tax on groceries is not a bad idea. In fact, any tax reduction is probably a good idea in New Mexico. But we need to be realistic: eliminating the tax on groceries will not "reduce hunger" by any appreciable amount. And when coupled with tax increases meant to recapture lost revenues, ending the tax on groceries does more harm than good.

Two bills were introduced in February 2000 to end the tax on groceries. But coupled with the first bill is an increase in the excise tax on cigarettes by 60 cents per pack. Coupled with the second is an increase in the excise tax on cigarettes by 25 cents per pack and an increase in the overall statewide Gross Receipts Tax rate by one-quarter of one percent.

The intent of the bills was to aid the poor and hungry. But neither would do so. Since a disproportionate number of low-income people smoke, the harm imposed on them would more than offset the benefits from not paying the tax on groceries. The higher taxes on cigarettes would be even more regressive than the existing tax on groceries. In essence, the bills merely transfer wealth from smokers to nonsmokers.

Moreover, the new cigarette taxes would not raise nearly enough revenue to offset revenue lost from ending the tax on groceries. Since cigarettes are readily available in other jurisdictions (Indian land, other states), cigarette consumers would shift a large portion of their purchases to where they would avoid the higher New Mexico tax. Consequently other taxes would have to be increased if the bills are to remain "revenue neutral."

Supporters of the bills alarmingly assert existence of a serious hunger problem in New Mexico. But they do so by relying on a controversial U.S. Department of Agriculture study and its update. The Department actually surveys a murky concept called "food insecurity," not hunger. Other studies of hunger itself conclude that nutrition levels, particularly among children, are affected very little by income. Even the data on purchase of groceries supplied by the bills' supporters implicitly deny a hunger problem: Poor people spend a small portion of their income on groceries; and as their income increases they tend to spend less and less for groceries out of each extra dollar of income.

There is a small extent to which the bills would induce consumers to purchase more groceries. But the extra groceries purchased would substitute mostly for already prepared food (such as fast food and restaurant food). Consequently there would be no noticeable improvement in nutrition among the poor.

Claimed tangential benefits from increasing the tax on cigarettes will not be realized either. Health care costs will not be lowered, and sin taxes are not an effective way to reduce problems of smoking and alcohol use among our youngsters. Health care costs will not be lowered because the earlier mortality of smokers tends to reduce nursing home and pension costs more than enough to offset smokers' comparatively higher health care costs. To the extent that it is really an issue of public policy (rather than parental guidance), reducing the perceived problem of youth smoking would be better dealt with by directly penalizing youth smoking or the parents of youth smokers.

New Mexico is a poor state compared to others, falling near the bottom of most rankings. Moreover, the past 15 to 20 years have seen New Mexico record the slowest growth of per capita income among the lower 48 states. Bills such as those "ending the tax on groceries" (while quietly raising other taxes) come out with great fanfare, claiming that we are doing something to help our poor and make life better.

Yet these bills do not address the real problem and, in fact, would only make matters worse. Too much government interference (in the form of high taxes, regulation and disincentives to work) is the problem. What we need is real tax, regulatory and welfare reform, not just window dressing disguised as lowering taxes. Specifically, if we want to join those states with higher growth rates, we need more economic freedom in the form of lower tax rates, less regulation and smaller government. In that spirit the Rio Grande Foundation would embrace ending the tax on groceries as long as no other taxes are increased.

Download Adobe Acrobat file of the full report