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Neither does Richard Pomp — and he literally wrote the book on this. (State and Local Taxation is now in its seventh edition.) The University of Connecticut law professor probably spends Ayers' yearly income on "coffee picked on the mountaintops of Papua New Guinea by virgins, cheeses that look like they were deported from foreign countries after being used for medical research, and tiny Japanese mushrooms with unpronounceable names" — none of which is taxed at the high-end grocery stores Pomp frequents. He earns a good living. The vagrants he sees eating burgers in fast food parking lots do not. "Why should I not pay any sales tax and they should?" asks the professor. Allowing the Richard Pomps of the world to skate on paying sales taxes to supposedly benefit Jim Ayers — while taxing Ayers — is "probably the silliest of all approaches," Pomp notes.
The silliness extends beyond necessitating an overarching bureaucracy to determine the tax status of the Icee ("a carbonated beverage and ... therefore subject to tax") and dinging impoverished people forking over spare change for Big Macs. The 20 to 25 percent sales tax revenue losses states incur by exempting food are massive — and the way to make up for those lost billions is to raise the overall sales tax rates. The poor, intuitively, spend an oversize portion of their money on food. But they also buy clothes, books, and steel doors — and now pay an accordingly higher rate of sales tax on it.
A state with myriad tax exemptions and a high sales tax rate is essentially gambling more chips on fewer slots — meaning California's official policy is "exactly the reverse of what we teach in taxation courses," notes Indiana University's Mikesell. Not surprisingly, high tax rates collected on limited items lead to fluctuating, unpredictable returns — and render states vulnerable to economic swings. Professor Bill Fox, the director of the University of Tennessee's Center for Business and Economic Research, points out that states' tax revenues have grown far more unstable in recent decades — "right when sales tax was taken off food in many states.... What was done is a fairly stable tax structure was taken out of the base, and that made it more volatile."
As Californians know all too well, this sort of volatility leads the government to establish spending commitments based on rosy projected revenue streams that, following the onset of bad times, quickly become the subject of nostalgia. We'll give you one guess as to who suffers in this scenario — and it's not rich people.
A shotgun approach to food taxation that allows everyone to partake in benefits intended for the poor — while states hack apart the social safety net — may not be "regressive." But it is perverse. "What's sensible is to tax food — and then give the money back to the truly needy," says Pomp. To do so, adds Fox, "is much more effective — we can aim right at the people we care about."
When asked where states should look for inspiration, Fox can answer in one word: Aloha.
Hawaii has plenty going for it — the sun, the surf, the Spam sushi. But the real paradise — at least according to a subset of economists and number-crunchers — is its general excise tax. Singing "Tiny Bubbles in the Wine" kept Hawaiian musician Don Ho employed for life. But Hawaiian state attorneys have been spared the chore of discerning the taxable status of carbonated alcoholic beverages. Arcane rules regarding hot chocolate's taxability don't apply in Hawaii either. "You don't have to guess as to what's taxable and what's not," notes Cathy Tokishi, an information specialist for Hawaii's Department of Taxation. "Most things are." Champagne is. Cocoa is. And so is food.
As a result, the state doesn't have to create volumes of labyrinthine regulations, riddle them with confusing exemptions, and impose the system upon retailers. Retailers simply pay a percentage of their gross revenue. Because Hawaii's sales tax base is so broad, its corresponding rate is very low: 4 percent. And residents qualifying as "low-income" receive all or much of their estimated food expenditures back through an income tax credit — a system similar to those in Idaho, Kansas, Oklahoma, and South Dakota. "This is a way you can direct the relief to the people you really want to," notes Mikesell. And you can use the rest — billions of dollars — to run the state.
Since everything from soup to nuts is taxed in Hawaii — albeit at a rate less than half of many California counties — there's no worry about whether that soup is gazpacho or cream of tomato, or if the nuts are hot or cold. When asked if a consumer could initiate a class-action lawsuit because she was charged 71 cents in sales tax on supposedly tax-exempt to-go coffee at Target, Hawaiian tax officials broke out laughing. Their California equivalents did not — and also declined to discuss pending litigation. Just such a case has worked its way to the state Supreme Court. Its outcome may set a precedent on whether class-action lawsuits are permissible in pending cases against Ralph's (regarding sales tax on hot coffee to go); Sav-On (accused of collecting sales tax on tax-exempt glucose test strips and skin puncture lancets); and even Cingular Wireless (a litigant claims he was charged sales tax "based on the full value of the cellular phone purchased rather than the bundled price.").
If California were to adopt a system more like Hawaii's, the state would be saddled with the task of deciding just how "low-income" a household must be to qualify for a food credit — or could simply disburse a flat amount that would likely represent all or most of a poor family's expenditures but only a fraction of a well-off family's. But, under such a scenario, even those not qualifying for the food credit could prosper. If the state began taxing food — but also lowered its tax rate by even 1 percent — a wealthier family would, naturally, pay hundreds more in food taxes. But it could also save hundreds on big-ticket purchases now taxed at a lower rate.