A Humanitarian Approach The political debate over taxes should include the well being of our poorest citizens. by BILL STEINBERG magine you are paying for a cart of groceries at your local supermarket. It doesn't matter whether you are in the check-out line at Seessel's, Kroger, or Wild Oats. Your mind may be busy contemplating the gourmet dinner you plan to cook that evening or you may be bracing for the other family-related errands that remain to be checked off your endless list. In your busy life, the last thing on your mind is the sales tax you are about to pay. It will add just over 8 percent to your grocery-store receipt. And you will pay that tax every time you shop. Taxes on groceries are a form of "regressive taxation," a term which recently made its way into mainstream conversation after Governor Don Sundquist proposed abolishing state sales tax on food. But the term may still not be widely understood by the general public. By most common-sense measures, regressive taxation is unfair because the poorest individuals in our society tend to bear the heaviest burden. An example will help clarify the point. Let's assume that families tend to spend, on average, similar dollar amounts for their food purchases. Let's say $500 per month. The combined state and county sales-tax rate of 8.25 percent (6 percent plus 2.25 percent) on $500 of monthly food purchases is $41.25. If you annualize that figure, the yearly sales-tax bite on food purchases comes to $495. A family struggling to make ends meet with an after-tax income of $15,000 will see 3.3 percent of that money spent on food tax, while another family with an after-tax income of $30,000 will only pay about 1.7 percent of their spendable income on food tax. (This represents half the effective food-tax rate of the first family.) A third family with a more comfortable after-tax income of $60,000 pays only 0.83 percent of their spendable income on food sales tax. (This represents one quarter the effective food-tax rate of the first family.) People with lower incomes pay a higher relative percentage of their annual incomes in sales taxes. This is regressive. Discussions between local residents on the validity of state and county sales tax on food usually lasts about two minutes before someone reminds the participants of how lucky we are that Tennessee does not have a state income tax. And with that bit of cherished Southern comfort, the banter usually turns into a mantra of other coveted "low-cost-of-living" subjects, like the attractive cost of housing in the Mid-South relative to other parts of the country, or the comparatively low rates Memphis Light, Gas and Water charges for essential utilities. You will rarely hear the word "regressive" uttered. You will rarely hear the issue debated from a humanitarian perspective. Progressive taxation (the opposite of regressive taxation) is an easier concept to understand. The more money you make, the more taxes you pay. The purest form of this type of taxation would be the flat income tax, without the exemptions, credits, and deductions that have made an industry out of tax preparation. Tax calculations would be greatly simplified under that hypothetical system. Our current IRS code for federal taxation is a modified version of a progressive tax system. This is evidenced by the familiar ring of the marginal tax brackets of 15 percent, 28 percent, and 31 percent with which most of us pay taxes on our last dollars earned. The lower tax brackets are progressively filled first with your income dollars. That explains why your effective tax rate (the simple percentage you get by dividing your actual IRS tax bill by your real income) is typically much lower than your highest marginal tax bracket. Is any form of regressive taxation in the best long-term public interest? What are the real chances that the sales tax on food might actually be repealed? And, more importantly, what new forms of taxation would be mandated if the sales tax on food was finally terminated? I respectfully leave those questions to be addressed and answered by someone of the stature of Flyer senior editor and award-winning political columnist, Jackson Baker. By nature, I am not a political person. But I do believe in humanitarian causes. (William I. Steinberg, CFP, is an advisory associate at the Memphis financial planning firm of Kelman-Lazarov, Inc. His e-mail address is bill@kelman-lazarov.com).