Silver City’s Supermarket Switcheroo

The Pew Research Center’s Stateline is lamenting the fact that 13 states “and many localities continue to tax the sale of groceries, even though the taxes disproportionately hurt the poor and may affect the quality, variety and even the amount of food they can afford to put on the table.”

But New Mexico offers an instructive lesson in the “progressivity” of exempting groceries — i.e., cut or eliminate a levy somewhere, and the foregone revenue will be obtained someplace else.

On January 1, 2005, sales of food at grocery stores were made exempt from the state’s GRT. But to compensate, the tax’s rate was raised on other purchases. And a few years ago, local governments were allowed to impose GRT hikes, to produce revenue that the state would no longer provide.

Such “hold harmless” hikes have been implanted all over New Mexico. Last week, the Silver City Town Council passed a “notice of intent ordinance” to hike its GRT. Mayor Ken Ladner explained that the action was “necessary so that the town can position itself so that it can move quickly to enact the hold harmless gross receipts tax if a special session of the legislature results in the elimination of the planned revenues upon which the town created its budget. If that unfortunate action does occur, the town needs to be able to adopt this ordinance instituting the tax before September 30 of this year in order for it to be effective on January 1, 2017.”

In 2013, Dick Minzner, a former secretary of the New Mexico Taxation and Revenue Department, and Brian McDonald, a former director of UNM’s Bureau of Business and Economic Research, concluded that the effect of the food-tax exemption “has been the opposite of that intended.” Why? By providing “only limited benefit to the poorest … of our households, combined with a tax increase on all other purchases, [it] probably made our tax system more regressive by most measures.”

Give Stateline’s Elaine S. Povich credit for balance. She interviewed the Tax Foundation’s Scott Drenkard, who noted that states “might be looking at getting rid of sales tax on groceries, but groceries are between a sixth and a seventh of all consumption. If you want to raise the same amount of money you might have to increase the [general] sales tax by a full percentage point.”

There are no free lunches in tax policy.