Five bills have been introduced to eliminate the sales and use tax on groceries and essential personal hygiene products. Currently, food purchased for human consumption and essential hygiene products are taxed at 2.5 percent, a reduced rate relative to the general sales tax applied to other purchases. The 2.5 percent is composed of a 1.5 percent state sales tax and a 1 percent local option sales tax. From the 1.5 percent state portion, 1 percent is distributed to localities, based on school-age population, for school funding needs, and 0.5 percent is deposited to the Commonwealth Transportation Fund. Estimates developed by the state Department of Taxation indicate that the elimination of the sales tax on groceries and essential hygiene products would reduce revenues in FY 2023 by $238.5 million for the 1 percent local option, $236.1 million for the school-age population distribution, and $119.3 million for the Commonwealth Transportation Fund. The loss of the school-age population distribution funding would be partially offset by an increase in state basic aid funding, although this additional aid would be distributed based on the Local Composite Index.
The introduced budget provided for the elimination of the state portion of the tax on groceries, effective January 1, 2023, with a one-time hold-harmless appropriation in each year of the biennium associated with the school-age population distribution.
As introduced, the bills take two different approaches to this issue:
HB 1008 (Durant), SB 571 (Newman), and SB 609 (DeSteph) would eliminate the state and local sales tax on groceries and essential personal hygiene products, effective July 1, 2022. As introduced, the bills do not provide for revenue replacement.
HB 90 (McNamara) and SB 380 (McDougle) would eliminate the state and local sales tax on groceries and essential personal hygiene products, effective July 1, 2022. The bills would compensate for the lost revenue by requiring an annual supplemental school payment to be made to each county and city. In FY 2023, this payment would be the amount the county or city received in FY 2022 from the local school age population distribution, plus the amount of local-option sales tax revenue attributable to taxes on groceries and essential personal hygiene products. For FY 2024 and thereafter, the supplemental school payment would be indexed to the growth in sales tax revenues in the county or city. The supplemental school payment revenues are derived from the unrestricted general fund portion of the state sales tax.
VACo encourages members to be in contact with your legislators about these bills.
- Sales and use taxes provide significant revenues to local governments that would be extremely difficult to replace based on other revenue sources that are available to localities. While varying by locality, exempting groceries from sales taxes would reduce the taxable sales base by an estimated statewide average of 17 percent.
- VACo takes no position on the question of elimination of the sales tax on groceries; however, if the state pursues this policy option, localities must be made whole for the lost revenue.
- Revenue must be replaced on an ongoing basis, via a direct distribution to localities in statute, with a mechanism that allows for growth.
VACo Contact: Katie Boyle