Soda Taxes: Regressive and Unnecessary
Cities across the nation have passed tax increase on sugar content in sweetened beverages. Despite the good intentions, research has shown efforts by companies have already reduced sugar and offered alternative options to informed consumers.
In November 2016, political efforts to attach a major tax on the consumption of soda and other sugar-sweetened beverages (SSBs) registered several local government successes. In San Francisco, 62 percent of voters passed a referendum assessing a one-cent-per-ounce soda tax that applies to SSB distributors effective on January 1, 2018, while in nearby Oakland, 61 percent of city residents passed a referendum on a one-cent-per-ounce soda tax taking effect on July 1, 2017. In Albany, another Bay Area municipality, 71 percent of voters passed a one-cent-per-ounce soda tax to be implemented in 2017. In Boulder, Colorado, 54 percent of city residents passed a two-cent-per-ounce soda tax, the steepest such tax in the nation, effective July 1, 2017. Lastly, in Illinois, the Cook County Board of Commissioners passed on a 9-8 vote a one-cent-per-ounce soda tax, to be implemented July 1, 2017.
A soda tax internalizes the negative externalities of market activities — in this case the “public” health costs of obesity and other diseases — by assessing at least a portion of these costs to consumers or soft drink manufacturers. Soda taxes are also flat taxes, thus regressive in nature, negatively impacting lower-income consumers.
According to data compiled by the Robert Wood Johnson Foundation, as of January 1, 2014, 34 states and the District of Columbia applied sales taxes to regular, sugar-sweetened soda sold through food stores, and 39 states and the District of Columbia applied sales taxes to regular, sugar sweetened soda sold through vending machines. The average tax on soda sold in food stores was 5.172 percent, with a maximum rate of 7.0 percent, while the average tax on soda sold in vending machines was 5.261 percent, with a maximum rate of 7.0 percent.
In recent years, however, major “soda taxes”, i.e., so-called per-ounce taxes, have been defeated through intense industry lobbying and advertising campaigns (touting the regressive nature of such taxes) more than 40 times on ballots across the country. So the four-win municipal sweep this past November may be a tipping point for soft drink companies that have, until now, been used to winning these state and local tax referendum battles — with one notable local exception: In November 2014, Measure D, a one-cent-per-ounce soda tax, was passed by Berkeley, California voters with a 76 percent plurality, becoming the first soda tax referendum to be implemented in the U.S.
The soft drink industry has had similar success in defeating major soda taxes proposed in state and local legislatures — with two notable exceptions. On July 1, 2015, the state of Vermont introduced a 6 percent sales tax on soft drinks, part of a $30 million package of tax increases passed by the Vermont legislature to close a $113 million gap between projected state spending and revenue. The Vermont soda sales tax was projected to generate $7.9 million in revenue. In Philadelphia, with the active support of Mayor Jim Kenney, the Philadelphia City Council, by a vote of 13–4, approved a one-and-one-half-cent-per-ounce excise tax on soda and other specific drink products in June 2016, with the law taking effect on January 1, 2017. This sugar sweetened beverage (SSB) excise tax was advocated by Kenney as a sustainable revenue source to fund expanded pre-K education programs and parks.
However, with U.S. consumption of full-calorie soda dropping by nearly one-fourth over the past 15 years, the focus on soda as the target of SSB taxes may be short-sighted, as there are less draconian responses available to encourage informed consumer choice. For example, an information-based strategy, embracing disclosure and education, is being considered by the Baltimore City Council. It will target billboard advertising, restaurant menus, and at any point of sale where such SSBs are sold, warning consumers that SSBs contribute to obesity, diabetes and tooth decay.
In July 2016, San Francisco begin enforcing a warning about the dangers of added sugar on advertisements: “WARNING: Drinking beverages with added sugar(s) contributes to obesity, diabetes, and tooth decay. This is a message from the City and County of San Francisco.” This public education/information approach needs to be carefully evaluated for effectiveness and, if it shows positive results, encouraged for implementation by other local governments in lieu of a SSB tax.
Nonetheless, if the public policy rationale of instituting a regressive soda tax is to reduce consumer sugar consumption, a much more effective means would be to tax sugar content in food products. Rather than taxing SSBs only, an input tax (such as presently applied to gasoline sales) on prescribed levels of sugar content in domestically manufactured food products would equitably impact all food products. While rarely utilized, an input tax, applied at a point in the supply chain calculated to maximize its impact on decisions concerning product sugar content, will affect not only consumer demand (due to tax pass through), but also the way food manufacturers formulate the sugar content of their products.
And focusing on SSB reformulation is the superior public health outcome. According to Sean Cash, an associate professor at Tufts University School of Nutrition Science and Policy, although consumers might not pay attention to small price increases, “dozens of people are paying a lot of attention. If we could achieve a 5 percent reduction by reformulation, that would swamp what we can achieve with consumer-level intervention.”
But soda manufacturers have already been paying attention to critics’ charges and consumers’ demands. Under the auspices of the American Beverage Association, in 2014 major beverage companies voluntarily pledged to reduce the beverage calories consumed per person by 20 percent by 2025. In October 2016, PepsiCo announced that by 2025, two-thirds of its drinks will have 100 or fewer calories. The Coca Cola Co. has similar initiatives in the product development process to reduce sugar (and calories) in their existing products.
Moreover, these long-term market and nonmarket signals have influenced the Coca Cola Co. and PepsiCo product development planning horizon, as these companies are already in the process of diversifying their beverage offerings in lower sugar content drink products, including tea, coffee, and bottled water. Already, global sales of Pepsi’s bottled water and unsweetened drinks are similar to global sales of soda. In addition, soda manufacturers are attempting to stem the decline in their products by reducing the size of their packaging, i.e., cans and bottles. This not only tends to reduce consumer consumption of their sugary beverages, but also has the advantage of higher profit margins for the company.
Based on these recent industry initiatives, one can conclude that competitive market forces, consumer choice, and data analytics are changing the SSB marketplace for the better.
[Originally Published at RealClearPolicy]