By David Ferguson
The good news is the state of Arkansas collects almost no sales tax on groceries. The bad news is in many cities and counties the local sales tax on groceries has risen.
Taxes on things such as groceries are known as “regressive taxes” because they hurt low-income residents the most.
The Arkansas’ sales tax rate is 6.5%, but thanks to legislation championed by Governor Mike Beebe groceries are exempt from all but a 1/8th percent state levy.
The story is different with local sales taxes (cities and counties). Every time a city or county passes a sales tax it automatically applies to groceries as well. According to the Tax Foundation the average local sales tax is only 2.97% but with a maximum of 6.125% local sales tax.[i] (Click here to see the sales tax rates imposed by your city and county.)
During the 1980’s and 1990’s former Senator Bud Canada tried various plans to eliminate the sales tax on groceries but there was always too much opposition. The opposition came from two groups. The first group was those legislators who thought eliminating the tax on groceries would take away too much money from the state. The second group opposed to exempting groceries was cities and counties. Local governments are always scrambling to find revenue and they didn’t want their tax collections reduced.
Governor Mike Beebe had served in the Arkansas Senate and was an ally of Senator Canada. Governor Beebe took a new approach to providing tax relief. He avoided opposition from cities and counties by only focusing on the tax levied by the state, not the local taxes, and opted to reduce the state tax in phases to reduce opposition from state lawmakers who feared removing the tax on groceries would cause too big a hit on the state budget. When legislation was passed in 2007 to reduce the state grocery tax rate to 3% Governor Beebe invited his friend Bud Canada to the signing ceremony.[ii]
The last part of Governor Beebe’s legislation to reduce the state rate on groceries had an economic trigger that was reached after Beebe was out of office.
Remaining State Levy on Groceries
The only part of the state tax on groceries that has not been eliminated is a 1/8th percent tax levied in the Arkansas Constitution. It is commonly referred to as the environmental enhancement tax and is divided as follows: Game and Fish 45 %, parks and tourism 45%, Department of Heritage 9%, and Keep Arkansas Beautiful 1%.
Is taxing groceries to support Game and Fish a good policy? I don’t think so. Plus, I think in most instances it is better for taxes to go into the general revenue fund where the legislature can decide each year how much money should go to agencies through an appropriation bill.
Can Groceries Be Exempted From the 1/8th Percent Tax in the Constitution?
Arguably a state law could be passed to exempt groceries from all sales tax levied by the state while not addressing taxes levied by local governments. But the safest route may be to amend the constitution to exempt groceries from the 1/8th percent levy. If the legislature proposed such an amendment to the constitution the people would easily approve the exemption.
The legislature can propose three amendments to the constitution every two years, so why hasn’t it been done already? The tax rate is small and no one has been talking about it. Exempting groceries from the tax hasn’t been on the radar. With food prices increasing due to inflation and the state having a huge surplus of general revenues perhaps exempting groceries from the tax will become of more interest.
Is It Feasible to Exempt Groceries From Local Sales Taxes?
Eliminating the local tax on groceries still does not look politically feasible. Cities and counties are still scrambling to find more revenue and they would be formidable opponents to any effort to exempt groceries from their sales taxes.
There are however some alternative approaches for grocery tax relief that might have some chance of passing in the legislature. One approach would be to exempt groceries from any new local sales tax. This would allow existing local taxes to continue to apply to groceries while keeping local grocery tax rates from increasing any further.
Even this small step would likely be difficult to pass but it might be more desirable to local governments than having all new local tax proposals met by tax opponents who make a big issue out of groceries being taxed more under the proposed sales tax increases.
Another approach would be to only allow new local taxes to apply to groceries if the ballot specifically says groceries will be taxed.
In addition to the one of the first two options, legislation could be proposed to allow a city or county to exempt groceries from any of their existing sales tax levies. Obviously, this would be much more difficult to pass than a limitation on new local sales taxes.
Regressive Tax and Inflation
Taxing groceries today is just as regressive as when the effort to reduce the tax on groceries first began. Today’s inflation makes things worse. The question is whether the legislature will revisit grocery tax relief or just declare the substantial reduction in the state’s rate good enough for taxpayers. If the grocery tax is not a big deal to you then don’t expect it to be on your legislators’ list either. Arkansas taxes are high in general so there are lots of areas where tax relief is needed. Whether the grocery tax should be one of the priorities for tax relief is completely up to you.