“When you go to the grocery store and buy a pound of bologna, a pound of cheese, and a loaf of bread, these items are not taxable. But when these items are made into and sold as a sandwich, they become a taxable food item, whether you eat the sandwich where you buy it or take it with you to eat somewhere else.”
From: www.tax.ny.gov
Selecting the items they will tax, many state and city governments try to avoid necessities. So, they assume a bologna sandwich at home is a necessity but one that a store prepared for us is not.
Where are we going? To deciding which purchases to tax.
Should Tampons Be Taxed?
The French National Assembly just reduced the tampon tax from 20 percent to 5.5 percent while Canada has eliminated the tax entirely. In the U.S. the tampon exemption battle has moved to California. You can see (below) that only five states don’t tax tampons.
More than feminine hygiene products, the tampon tax is about a dilemma. Each state has to decide whether to tax necessities. If they answer yes then their revenue will probably be higher because people need the taxed items. However, taxing necessities creates questions about incentives. For items that we need, it might not be ethical for society to levy a tax that creates the incentive not to buy it. (The Huffington Post estimates that a woman spends $1773.33 on tampons during her lifetime.)
As the municipality imposing the sales tax, state decisions about necessities have varied. Connecticut taxes baby diapers but not the diapers that adults wear. Colorado does not tax pregnancy tests. Illinois actually says items with the following descriptive data are unqualified for a low medicinal tax:
A) “cools”; B) “absorbs wetness that can breed fungus”; C) “deodorant” or “destroys odors”; D) “moisturizes”; E) “freshens breath”;
As you go from state to state it gets more and more complicated. However, at the heart of the debate are questions about revenue, fairness (and I guess whether it is an election year).
Our Bottom Line: Inelasticity
The sales tax debate takes us to two economic ideas.
Elasticity: The first is elasticity. Referring to how much a change in price affects the amount we buy, demand elasticity predicts the impact of a tax. If our demand (really price elasticity of demand) is inelastic then changes in prices have little impact on how much we buy. Consequently, a state might as well charge a higher sales tax on necessities if they want to generate more revenue. For milk or pharmaceuticals or tampons, a tax on items with inelastic demand will bring more money into state coffers.
Regressive Taxes: When all of us pay the same sales tax because we purchased the same item, those with less income feel the tax bite more. The reason? Whatever they pay is a larger percent of their income than the percent paid by a more affluent individual. Because sales taxes are regressive, they can be unfair.
We could say that a tampon tax is a regressive tax levied on an item that has inelastic demand. The result is a tradeoff…
More revenue or more equity.
