Special Subcommittee Studying the Sales Tax on Food

August 6, 1998, Richmond

Because a number of legislative proposals dealing with the phase-out of the sales tax on food gained support during the 1998 Session of the General Assembly, the co-chairmen of the House Finance Committee appointed a special subcommittee to study the idea during the interim. The subcommittee held its first meeting in Richmond to begin its examination.

Nature of the Tax

The discussion revolved around the nature of the tax, what portion of the sales tax should be eliminated and over what period of time, and how any lost revenues could be replaced if the tax on food is eliminated. It was agreed that the sales tax on food is a regressive tax which affects low- and middle-income individuals more than those at the upper-income level. A low-income taxpayer must use a greater percentage of income to pay for groceries than the upper-income taxpayer.

The 4.5 percent sales tax has three main components. One percent is the local option component, which goes directly to the locality; one-half percent is the Transportation Trust Fund component; and three percent is the general fund component. It was agreed that the Transportation Trust Fund portion should not be eliminated. It was not as definite that the one percent local option portion should be spared. All agreed that the three percent state general fund share should be eliminated, if at all possible.

The Department of Taxation estimates the cost of repealing the three percent tax on food would be $363.4 million in fiscal year 1999, or approximately $121.2 million per one percent of tax. If the tax is eliminated, it will most likely be phased out over a three-year period, thereby reducing the annual revenue loss.

Revenue Replacement

A number of suggestions were made on how to replace the lost revenues. Depending on the Commonwealth's economic growth during the next few years, it may not be necessary to impose or increase some other tax but instead use such growth, combined with spending cuts, to lessen the impact of removing the sales tax, or a portion thereof, on food. Another option would be to increase the sales and use tax rate on other items from 4.5 percent to a rate that would produce the same amount of revenues as the tax on food. Virginia has the lowest sales tax rate among its neighboring states and one of the lowest rates, if not the lowest, in the nation.

Finally, broadening the sales and use tax base to include more services was mentioned. This suggestion has been made before without any results; however, as time goes on and our economy continues to become more service-oriented, more serious consideration of this suggestion may be in order.

Of the neighboring states, Kentucky and Maryland do not impose any sales tax on food purchased for home consumption. North Carolina is currently phasing out its four percent state sales tax on food for home consumption, while leaving the two percent local sales tax on such food alone. Tennessee and West Virginia impose a sales tax on food for home consumption and show no signs of changing their laws.

Next Meeting

At the special subcommittee's next meeting, two legislative proposals will be reviewed and discussed: one would eliminate the state sales tax (3 percent) on food over a three-year period, and another would eliminate the state sales tax (3 percent) and the local option sales tax (1 percent) on food over a three-year period. Further consideration will be given to how to replace the foregone revenues from such a reduction in the sales tax on food for home consumption.

The Honorable Jay W. DeBoer, Chairman
Legislative Services contact: Joan E. Putney