Alabama Legislature

Grocery Taxes Face the Chopping Block in South Dakota (and Alabama)

Source: pxfuel

This article was originally published by the Center for Public Integrity, a nonprofit investigative news organization based in Washington, D.C.

High food prices and the end of extra food-stamp allotments mean hard choices around the country for lower-income people.

“You’re having to make the decision between ‘am I paying my mortgage, or my medical bills or my medication or buying food?’” said Stacey Andernacht with hunger relief organization Feeding South Dakota.

But in her state, there’s yet another factor pushing up costs: South Dakota is one of just three — along with Mississippi and Alabama — that levies its full sales tax rate on groceries without a credit or rebate to offset the costs.

The Alabama passed legislation that eventually could cut the state’s 4% sales tax in half. The bill is awaiting the governor’s signature.

That hits low-income people hardest because they spend a higher percentage of their income on groceries than wealthier residents, said Rick Weiland, co-founder of grassroots advocacy organization Dakotans for Health. It’s the reason that most states have eliminated sales taxes on groceries over the past couple of decades.

A bill to do the same has been introduced in the South Dakota Legislature for years to no avail. But in November 2024, South Dakotans may have the opportunity to repeal the grocery tax themselves.

Dakotans for Health began collecting signatures earlier this month on a ballot measure that would eliminate the state portion of the grocery tax. Municipalities would be able to continue taxing groceries, as the state has more resources than localities, Weiland said. Dakotans for Health is forming a coalition of nonprofits and faith-based groups to work together on the campaign.

“This is just something that’s long overdue,” Weiland said. “And so I don’t think the timing could be any better than to do this after 20 years of failed attempts to get it done by the Legislature.”

Grocery Taxes Falling Out of Favor

Statewide sales taxes originated in Mississippi during the Great Depression and quickly spread throughout the nation. Groceries were included in the general sales tax in most states at first, said Eric Figueroa, senior manager of strategic projects and initiatives at the Center on Budget and Policy Priorities.

A few decades ago, concerned about the impact on hunger, states began to exempt groceries from that tax. Of the 45 states that impose sales taxes, only 12 still apply it on groceries. And nine of those — Hawaii, Oklahoma, Utah, Arkansas, Idaho, Kansas, Tennessee, Illinois and Missouri — do so at a reduced rate or offer rebates or credits.

A surge in food prices has brought repealing grocery taxes back to the forefront of policy discussions. “It has always been an issue that anti-hunger advocates have rallied around, but I think recently we’ve seen both parties be involved in efforts to try to eliminate it and try to figure out how to pay for the loss of revenue,” Figueroa said.

Earlier this year, Virginia eliminated its 1.5% state sales tax on groceries. (Local jurisdictions there can still levy up to 1%.) Alabama’s Legislature is poised to cut its state grocery tax rate in half. A cut already went into effect in Kansas in January, while Idaho increased its credit on the tax beginning this year. Illinois residents are in a year-long pause on collection and Tennessee instituted a three-month suspension that begins in August.

During South Dakota Gov. Kristi Noem’s re-election campaign last year, she promised to eliminate the grocery tax. But the proposal died in the House earlier in the year. There was also concern that eliminating the tax could reduce $2 million that goes to the nine Native American reservations’ tribal government operations, though Noem later said that the tribes’ contracts would be renegotiated so they would not be economically affected.

However, state leaders did agree to reduce the statewide general sales tax for four years, starting in July, from 4.5% to 4.2%, which will also affect groceries.

Noem originally expressed support for Dakotans for Health’s petition. She backed out due to fear that as written, the ballot measure would jeopardize an annual $20 million that the state receives through a 1998 agreement with major tobacco companies to settle lawsuits for healthcare costs related to smoking.

“She supported it in the past, in the present, and will in the future. But that tax cut needs to be written appropriately,” her chief of communications, Ian Fury, said in an email. He added, “The language proposed by the Governor and legislators during the legislative session did not have these problems and is the right way to go for the state.”

Weiland expressed skepticism about the potential risk to the settlement.

“If the initiated law we are currently circulating passes, and if the courts determine that it exempts tobacco from state sales tax, the Legislature with its one-party supermajority has full authority, before the initiative goes into effect on July 1, 2025, to eliminate any of the Governor’s recent concerns about any potential problem by amending the initiated law to fix any alleged problem,” Weiland said in a press release.

In 2004, over 67% of South Dakotan voters cast ballots against a similar initiative to eliminate the tax on groceries. But Weiland, whose group was among those coordinating a successful 2022 ballot measure to expand Medicaid in the state, believes that the governor’s campaign for eliminating the grocery tax and legislative action in recent years will help garner widespread support for a new citizen-led proposal. He said the organization is working with the tribes to try to ensure that the loss in revenue won’t impact them.

“By letting the people vote on it, we can bypass all the politics that goes on in the Legislature and do what we did with working on the Medicaid expansion campaign — by taking it directly to people and letting them make the decision,” Weiland said.

The organization is going door-to-door, attending events and standing outside public buildings to collect the 17,509 valid signatures needed from registered voters. Those signatures must reach the secretary of state by May 2024 in order for it to appear on the November 2024 ballot.

The State of Hunger

Accessing healthy food is already a challenge in the rural state of South Dakota, where grocery stores are sometimes few and far between. One in 12 people in the state, and one in nine children, experience hunger, according to Feeding America.

A 2021 study that looked at grocery taxes between 2006 and 2017 found that areas with the tax experienced some of the greatest food insecurity in the nation.

In South Dakota, food insecurity is particularly pronounced in the state’s nine Native American reservations, where residents face the additional challenge of lack of transportation. On the Rosebud Indian Reservation in St. Francis, Feeding South Dakota’s Andernacht said, residents shop at a convenience store when they can’t reach the closest grocery store 40 miles away. Getting a ride there and back can cost around $100. The nonprofit has increased its food distribution to the reservation from every other month to once a month.

Another client in the central part of the state lives 30 miles from a discount grocery store, so she bought more expensive groceries at a nearby shop where her food stamps didn’t stretch as far. As a result, she used the nonprofit’s mobile distribution food drive to supplement her groceries until she found a better paying job. Now she’s returned to the food drive due to increased food prices, Andernacht said.

Feeding South Dakota provides food for hungry families throughout the state through programs including drive-through sites, school pantries and food boxes for seniors.

Over 11,500 families are served through mobile food distribution per month, which Andernacht says is a 22% increase since last year. She attributes that rise to higher food costs and an end to the Supplemental Nutrition Assistance Program’s emergency allotments, which resulted in a $90 a month decrease in grocery money for the average SNAP recipient nationwide.

Filling the Revenue Gap When Grocery Taxes Disappear

Any state repealing its grocery tax must account for the loss of revenue. In South Dakota, the tax brings in about $102 million annually.

The sales tax on groceries has an even greater impact in Alabama, generating about $500 million that goes toward the state’s already strained education coffers.

“It’s been a very hard political problem to eliminate the tax and make up for the revenue in a way that satisfies everybody,” said Figueroa, from the Center on Budget and Policy Priorities.

However, a 2020 paper he co-authored suggests that states can raise revenues in ways that don’t hit lower-income people hardest, such as expanding taxes for the wealthy and corporations and cutting special-interest breaks.

Figueroa also referenced a proposal in Alabama he found powerful. Proposed by the organization Alabama Arise, the plan would replace grocery-tax revenue with a cap on the state income tax deduction for federal income taxes, which would bring in an estimated $520 million annually.

Carol Gundlach, senior policy analyst at Alabama Arise. (Source: Alabama Arise)

“We are in this peculiar position that we have an incredibly regressive tax in the sales tax on groceries and we have a tax cut that is really a tax break that benefits … mainly the top 5% of income earners in the state,” said Carol Gundlach, senior policy analyst at Alabama Arise.

The plan would require a constitutional amendment, so it was not included in a current state bill to cut the sales tax for groceries in half, which Gundlach expects will pass. Eliminating the sales tax on groceries has been a priority for Alabama Arise for three decades. The organization was involved in writing the bill, education, outreach and lobbying.

Gundlach is hopeful that South Dakota will manage to eliminate its grocery sales tax next year.

“We get Alabama and South Dakota, then all we’ve got to do is Mississippi,” she said.