Comparing Washington And Idaho's Sales Tax System

The states of Washington and Idaho both have a sales tax system in place. Washington’s is an 8% sales tax on all items excluding food. Idaho’s is a 5% sales tax on all items; however the first $200 of sales tax on food is refunded on the state income tax. For Washington residents the tax creates a change in relative prices of food and non-food items; a substitution effect away from the taxed item. Along with an income effect. In Idaho the tax creates an income effect. For Washington consumers their budget constraint for the taxed item moves inward. When any non-food item (taxed item) is purchased the WA consumer will see a loss of utility. There is a negative substitution effect of non-food items for food items, and if the non-food item is a normal good there will also be a negative income effect associated with the purchase. The State of Washington is using the tax to raise money, but they are also using the tax to encourage consumers to spend on food over non-food items. Consumers gain more utility from purchasing food items because they are not taxed. Thus they are encouraged to purchase food, instead of non-food.

With up to $200 of food taxes being returned to residents via the state income tax refund. The $200 refund in some ways acts as a subsidy for food. Because the tax is on all goods the refund helps encourage people to spend their income on food. The all-good sales tax also does not cause any changes in relative prices, so consumers do not lose utility when purchasing one good versus another. In fact this style of tax allows the consumer to have a higher overall utility than the sales tax that is only on non-food goods. Essentially what the tax causes is the consumers’ income to be decreased by 5%. The all-good sales tax is better for the consumers’ utility because there is less skewing of income compared to the non-food sales tax where there are relative price