Tax system essentials
March 7, 2009
All tax breaks aren’t necessarily equally good. Bad tax breaks have been known to give an unfair advantage to a particular group of taxpayers. While good tax breaks should protect the basics that people need to survive. This is why most states except for two provide some kind of sales taxes break for grocery shopping – Arkansas cut its grocery tax in half this year, leaving Alabama and Mississippi as the only states that still charge sales tax on groceries with no rebate or reduced rate.
In fact Alabama offers a homestead exemption wherein you don’t have to pay property tax on the first $40,000 of value of your home. And most states have income tax deductions for a family of four to exempt them from taxes for at least the first $20,000 of their income. Rep. John Knight’s House Bill 555 is aimed at updating your income tax deductions and cutting the grocery tax as well.
Alabama has a regressive tax that seems to be unfair when you cross over to Florida. If you buy groceries worth $100 worth in Montgomery or Mobile, you pay $110. But if you buy $100 worth of groceries in Pensacola, you still pay only pay $100. Although this tax on groceries is “just” 10 cents on the dollar, it does add up, every week, and every month. Amongst the elements of tax reform, reduction of the grocery tax is possibly the most popular. Most people don’t t feel that we should tax the essentials of daily life. One of the reasons for this is that no one has agreed on ways to fill the budget gap. In order to replace the four-percent state part of the tax, about $300 million has to be found for public education.
Different states have taken different approaches. Florida for instance has no grocery tax; Tennessee has reduced the sales tax on groceries by one percent, which isn’t much; while Georgia has exempted groceries from the state portion of sales taxes, but they are still subject to local sales taxes. This implies that in certain counties you may pay two percent on groceries with six percent on detergent or toothpaste.
Georgia has removed the state tax and left the local portion alone. Knight’s bill specifies that the 4-percent state sales tax will not apply to groceries, but the local portion of the sales tax would still apply to these items. The USDA website says that a family of four with a ‘reasonable’ grocery bill spends $181 a week. The family can save $376 a year if the state portion of the grocery tax is removed. The USDA claims that a family of two with a ‘reasonable’ grocery bill of $113 can save $235 a year.
With reference to Income Tax, there is a wide disparity between the effects on middle to high income earners. The deduction for incomes over $300, 000 a year reduces the states income taxes by thousands. While for the average tax filer who comprises the middle three-fifths of earners, taxes are reduced by less than a $100. If the deduction for Income Tax is exchanged for a four percent reduction in grocery tax, the majority of middle income families will be able to trade that tax cut which is worth less than $100 for a grocery tax cut which will be worth twice or thrice that amount.
If Alabama can remove the federal income tax $600 million deduction and fill up the $300 million gap left by the grocery tax, there will be about $300 million left over. Knight can then use this balance to widen the standard deduction to $11,100 per couple and raise the personal exemptions to $2,000 for each child and adult.
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