A Framework for Sales Tax Base Expansion: Food Taxation in North Carolina and Applications for Other States

Abstract The review of sales tax exemptions represents a significant undertaking for states across the United States. This analysis introduces a set of tax policy criteria to evaluate these exemptions in response to prevalent stakeholder considerations. We implement these criteria in the context of North Carolina's exemption of unprepared food from the sales tax base, outlining a specific methodology for each. In addition, we leverage a distinctive feature of North Carolina's tax revenue data to generate projections for other states using a machine learning approach. By repealing their food sales tax exemptions, our calculations suggest that states could increase revenue by approximately 12 percent or, if revenue neutrality were pursued, decrease their general sales tax rate by an average of 0.62 percentage points. These results align closely with our North Carolina analysis. We also find that repealing the food exemption would decrease revenue volatility in North Carolina, and, under a revenue‐neutral approach, result in a progressive change in tax burdens for the lowest‐income households once accounting for government food assistance. One notable downside to repealing food exemptions is the potential revenue loss for local governments that currently tax food—a challenge that could be mitigated through intergovernmental transfers.