An ideal sales-tax base should have a broad base, be simple and have a stable revenue stream. Including food in the sales-tax base fits all these requirements. Yet a reality of taxing the sale of groceries is that it’s regressive.
A tax credit or a refund is a way to reduce the regressivity. Currently, seven states include food in their sales-tax base, and five of them include a credit or refund for food.
Kansas recently added an income-tax credit to compensate for the tax on food. To qualify for the credit, an individual must have purchased food in Kansas; have federal adjusted gross income for the year that did not exceed $30,615; and be either disabled, older than 55 or have at least one dependent child under 18.
Kansas used to have a tax refund for the tax on food sales. A credit is different from a refund in that a credit only reduces the tax liability to zero, whereas a refund can result in a check from the government. In 2011, individuals with income of less than $17,500 could claim a $90 refund for each exemption claimed on federal returns. Those with income between $17,501 and $35,000 received a $45 refund for each exemption. The Kansas Department of Revenue issued $59 million in food sales-tax refunds to nearly 379,000 eligible filers that year. The food tax refund for tax years 2013 and beyond was canceled as of early 2013 as part of the tax-reform plan. But six months later the food tax refund came back, albeit in a different form.
On the surface, it seems that the new tax credit is more generous than the old one ($125 for each exemption versus $45 or $90), but it has a narrower target. The problem with the new Kansas tax credit is that it won’t contribute to a refund, is applied after all other income-tax credits are counted (which minimizes payouts), and does not carry over to future tax years. According to KDOR, the effective income-tax rate of individuals in the lowest income group is minus 0.25 percent. A nonrefundable credit gives nothing to individuals with no income-tax liability.
Because low-income individuals pay little or no income tax, it is doubtful that this change will help low-income individuals as intended.