Tax Discussion Definitions: Elasticity

In order to have a better understanding of all the nuances of discussing tax policy, I’m going to spend some time talking about terms that policy wonks and lawmakers throw around a lot. This entry will focus on the concept of elasticity; if you’re an economist this might be old news but a refresher never hurts right?

So what is elasticity?  Basically, elasticity is a measure of responsiveness. It tells how much one thing changes when you change something else that affects it.  Best analogy is a rubber band; it’s elastic when it stretches in response to you pulling it.  In economics, there is elastic demand—this happens when a consumer buys less of something when the price increases and more of something when the price drops.  There’s also inelastic demand, which occurs when a consumer buys about the same amount if the price goes up or down. Dr. Samuel Baker from the University of South Carolina created an interactive tool that provides more examples of this concept. The first example he provides is about a bleeding unconscious man that’s brought to an emergency room.  This would be considered inelastic since he’ll get treatment regardless of the price.

So what does this have to do with tax policy?  Lawmakers always have to consider how much of a burden they’re imposing when raising taxes and know who actually ends up paying for a tax that might be aimed a different group (example: buyer vs. seller).  This concept is know as tax incidence

If a tax is raised too much, use of the taxed service or product could decrease below the expected level of tax revenue a government is aiming to collect.  Also, politicians need to be aware of how the public will react to certain taxes.  For example, food is pretty inelastic since we need it to survive. If groceries were taxed in Washington, consumption might decrease some but the tax will be paid due to the necessity of eating. This would be a burden on families, especially those with lower incomes (Link to Catherine’s food brief). 

Also, policymakers use the concept of elasticity to reduce certain behaviors. The best example of this is tobacco (link to Catherine’s tobacco brief).  It’s commonly known that the long-term effects of smoking and chewing tobacco physically harm and kill people.  This makes tobacco an easy target in terms of raising taxes. To change consumption behavior, lawmakers raise the tax to try and make smoking too expensive for consumers.  When this happens,  revenue from the tax declines and it’s easy for the Legislature to argue in favor of the declining revenue of tobacco sales because the decreased use offsets future healthcare costs.  As Catherine mentioned, the State recently closed a loophole for consumers when they raised the fee for roll-your-own cigarettes.

That’s elasticity in a nutshell!  Without using mathematical models to describe pricing points and such, just know that elasticity is how you react to certain things like cost and how flexible you are when market variables change.  This is a relationship that government needs to understand well if it wants to implement tax policies that are a) fair to the majority of citizens, and b) politically possible.   We’ll add more definitions like this one to give you a clearer perspective of underlying issues that come up when folks talk about taxes.

Why Washington doesn’t tax the food you buy at the grocery store.

Food for thought—Ever wonder why you do not have to pay taxes on most food you buy at the grocery store? Most food purchased for your family to eat is not taxed. This exemption comes from a 1977 initiative to the people which passed with a vote of 54%. The thought behind a tax exemption on unprepared food, like the majority of food you find at the grocery store, is that it eases the financial burden for families. It is an attempt to make Washington’s tax structure less regressive and make it easier for families to buy food for meals. The only time the tax exemption on food was lifted since 1977 was for a little over a year in 1982.

While the intent is to lessen the burden on grocery costs for families, food taxes make up a large portion of the tax base for states. By offering food tax exemptions, states take in less money, suffer large losses, and are less stable during any fluctuating economic cycles.

Washington, along with 27 other states, offers tax exemptions on groceries. Washington’s exemption does not cover every item you could potential buy at the grocery store, a general rule to follow is that it applies to unprepared foods. The exemption does not include carbonated beverages, dietary supplements, and food that is prepared by vendors (think delis, pizza, subs sandwiches etc.).
During the 2010 Legislative Session, state lawmakers passed 2ESSB 6143, sponsored by Senator Prentice who represents the 11^th District which includes parts of Renton and Tukwila. 2ESSB 6143 included multiple tax modifications, a few of which related to food and beverages. As a part of the bill, candy and gum would now be charged the state’s sales tax rate. Carbonated beverages would be temporarily taxed an additional 2 cents for every 12 ounces. This temporary tax would be in place for three years—starting in June of 2010 and going until July of 2013. A condition of this bill allowed the first $10 million in sales of carbonated beverages to be exempt from the tax. Currently, soda is charged the state’s sales tax rate.

On May 19, 2010, an initiative was filed with the Secretary of State’s Office that would repeal the candy, gum, and soda tax that became law with 2ESSB 6143. Initiative 1107 became one of the most funded initiatives in Washington State history.

According to the Public Disclosure Commission, Stop the Food & Beverage Tax Hike, the group supporting the initiative, raised and spent $16,042,628.67. This money was put towards television commercials, flyers, radio ads, etc. to urge citizens to vote for the initiative and repeal the candy, gum, and soda taxes. Out of the over $16 million that was raised, over $15 million of it was donated from the American Beverage Association. The group against the initiative, Citizens to Protect our Economic Future, raised and spent $426,828.81 which went into urging citizens to vote down the initiative. Initiative 1107 was adopted on November 2, 2010, and took effect on December 2, 2010.
Something to keep in mind is that food stamps are not charged sales tax in any state.

Have you ever thought about how your grocery shopping would change if you were charged taxes on certain items?

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