Who Benefits From the Food Tax Exemption

Brian McDonald and Chuck Wellborn

A pending bill in the Legislature (HB 412) seeks to bring badly-needed reform to the state’s gross receipts tax (GRT) by removing ill-considered deductions and exemptions, thereby expanding the GRT tax base and  enabling the GRT tax rate  to be reduced. The latter is a well-recognized principle of state taxation—tax a broad base of economic activity at a low tax rate.

One aspect of this bill that should be widely embraced is in fact one of its most controversial provisions. That is reimposing GRT on food—though at a reduced rate.

There are more reasons to support the tax on food than many know:

• It’s not at all clear that exempting food from GRT actually benefits the poor,
• The benefits of the food tax exemption flow almost entirely to the non-poor,
• The food tax break is a primary contributor to our current fiscal woes, reducing tax revenues by more than  $200 million each year,
• These lost revenues are desperately needed for public education, early childhood development and Medicaid, which do benefit the poor, and
• Lost GRT tax revenue on food sales has forced cities and counties to increase their GRT rates on non-food items such as utilities and clothing, further burdening the poor.

Opponents of reinstating the food tax say that even though the poor get federal SNAP (food stamp) assistance, SNAP assistance only provides a portion of their food needs. Co-author Brian McDonald, a Ph.D. economist who headed UNM’s Bureau of Business and Economic Research until his retirement, points to data that raises serious questions about this premise.

In FY 2015, SNAP (food stamp) assistance totaling $685.2 million went to 205,540 New Mexico households with each household receiving $3,333 per year on average. By federal law, SNAP benefits have never been  subject to GRT.The 2004 legislation eliminating food from the GRT tax base therefore provided little tax relief to the poor in New Mexico. New Mexico SNAP recipients today receive GRT tax benefits totaling $47.96 million (assuming a 7.0% GRT tax rate) by virtue of this federal exemption, not the 2004 New Mexico legislation exempting food.

How does the $3,333 in SNAP assistance each household received compare to the annual food purchases of similar households?

U.S. Bureau of Labor Statistics Consumer Expenditure Survey data for that year show that the lowest 10% of households in the U.S. by income spent $2,566 on “food at home” (the closest data concept to the New Mexico GRT tax base on food). The second lowest 10% of households by income spent $2,432 on food at home.

Extrapolating these data to New Mexico’s poor, the lowest 20% of households are receiving SNAP benefits which typically cover most or all of their expenditures on food and which are not subject to GRT taxation by federal law.  Under HB 412, these $685.2 million in food purchases by the poor will still be exempt from GRT.

The lower GRT tax rate proposed by HB 412 will give the poor in New Mexico real tax relief on their non-food purchases such as utilities, clothing, food consumed at restaurants, and school supplies. Arguably, the poor in New Mexico will pay more GRT if HB 214 excludes food from the tax base because the GRT tax rate will have to be increased in order to generate the same level of tax collections with a smaller tax base.

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