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Research & Commentary: Philadelphia First Major City to Enact Flawed Soda Tax

June 27, 2016

Philadelphia is now the first major city to enact a so-called “sin tax” on sugary drinks. Proponents of the tax say it will provide increased funding for pre-kindergarten, community schools, and recreation centers.

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Philadelphia is now the first major city to enact a so-called “sin tax” on sugary drinks. Proponents of the tax say it will provide increased funding for pre-kindergarten, community schools, and recreation centers. The new tax, which will take effect January 1, 2017, places a 1.5 cent-per-ounce tax on sugary beverages, including “diet” soda and other drinks using sugar alternatives. The tax is expected to generate an estimated $90 million in new tax revenue in 2017, and the new tax dollars will be included in the fiscal budget that starts July 1.

Nate Benefield, director of policy research at the Commonwealth Foundation, argues the new tax was not created as a means to improve public health, but to fill budget holes created by years of fiscal mismanagement. “There has been so much fiscal mismanagement that these cities are always looking for new ways to tax people. This tax will hit the poor the hardest—people who are buying soda—and it really is a ploy for new revenue,” Benefield told The Heartland Institute’s Budget & Tax News.

While the soda tax is technically levied on distributors, it will ultimately be passed on to consumers. According to the Associated Press, if the tax is passed on to consumers, the cost of a 12-ounce can of soda would increase by 18 cents; a six-pack of 16-ounce bottles would increase by $1.44. Budget & Tax News estimates the tax would add $2.88 to every 12-pack of soft drinks and would threaten more than 2,000 beverage-industry jobs in the Philadelphia area.

Soda taxes have been passed in 33 states, but it has never been proven these taxes lower obesity rates or improve public health. In a 2009 study, Jason Fletcher, David Frisvold, and Nathan Tefft found while increasing the cost of sugary drinks did decrease consumption of these beverages, the losses were often offset by increases in whole milk and other sweetened drinks. The authors concluded soda taxes could have unintended consequences, and may be an ineffective ‘obesity tax, Budget & Tax News also notes the five most obese states, Mississippi, Alabama, West Virginia, Tennessee, and Oklahoma, all have soda taxes.

In a 2011 study, Scott Drenkard of the Tax Foundation found instead of improving obesity rates and health outcomes, soda taxes create a complex and unnecessarily confusing tax system where it is difficult to determine which products are “good” and which are “bad.” Drenkard also notes these taxes are applied to everyone, even those who use the products properly in moderation. “The solution to the obesity problem will not come from abdicating personal decisions like eating choices to government,” wrote Drenkard. “It will come from consumers making prudent decisions about their own diets, exercise and health needs.”

Sin taxes have a strong detrimental effect on local small businesses; when they are implemented, retailers and wholesalers find themselves with decreased sales, as consumers seek to avoid the tax by purchasing products outside the county, city, or state imposing the tax. While sin taxes do sometimes result in increased revenue over the short term, they often lead to an even greater increase in expenditures, which often cannot be supported by the tax over the long term, thereby creating budget shortfalls.

Sin taxes have demonstrated a tendency to be shifted to other products when their revenue runs short of expectations. While many states now place sin taxes on tobacco and alcohol, new sin taxes are beginning to expand to other items that are subjectively determined to be bad for consumers, such as soda pop, plastic bags, and tanning beds.

Like nearly all sin taxes, the soda tax will impact lower-income families more than any other group. In a paper published in 2009, Ryan Vinelli of Yeshiva University argues a soda tax may be the most regressive tax used today: “If is true that low-income individuals maximize their caloric intake, then a tax like this would be one of the most regressive taxes in place. As a result, any Pigouvian tax on sugary drinks would be highly regressive and could have a dramatic impact on low-income individuals.”

Sin taxes encourage unsustainable increases in government spending while placing an excessive burden on lower-income taxpayers. Instead of creating and increasing discriminatory taxes, cities and states should focus on tax reforms that lower rates, put dollars back into the pockets of taxpayers, and encourage government efficiency by creating reasonable limits on spending.

The following documents examine soda and other sin taxes in greater detail.
 

Overreaching on Obesity: Governments Consider New Taxes on Soda and Candy
https://www.heartland.org/policy-documents/overreaching-obesity-governments-consider-new-taxes-soda-and-candy
Scott Drenkard of the Tax Foundation examines soda taxes and their effect on obesity rates. The study finds “such moves are unlikely to have an impact on obesity rates and health outcomes.”

Sugar Taxes Aren’t Sweet: The Case Against Pigouvian Taxes on Sugar-Based Drinks
https://www.heartland.org/policy-documents/sugar-taxes-arent-sweet-case-against-pigouvian-taxes-sugar-based-drinks
This research paper, written by Ryan Vinelli at Yeshiva University’s Benjamin N. Cardozo School of Law, examines arguments made against using tax policies to drive changes in public health behavior. Vinelli spends significant time analyzing governments’ use of sin taxes to discourage the consumption of sugar in beverages and foods.

Ten Principles of State Fiscal Policy
http://heartland.org/policy-documents/ten-principles-state-fiscal-policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.” 

Davis, California Soda Tax Idea Fizzles Out
http://news.heartland.org/newspaper-article/2016/03/21/davis-california-soda-tax-idea-fizzles-out
Dustin Siggins writes in Budget & Tax News about an effort to impose a soda tax in Davis, California. The increased tax on sweetened beverages and recreational marijuana failed to move out of the Davis City Council.

Non-Linear Effects of Soda Taxes on Consumption and Weight Outcomes
https://www.heartland.org/policy-documents/non-linear-effects-soda-taxes-consumption-and-weight-outcomes
University of Wisconsin-Madison associate professor Jason Fletcher, University of Iowa-Iowa City economics professor David E. Frisvold, and University of Washington-Seattle health services professor Nathan Tefft study the potential effects of significant excise taxes on consumer populations’ health. The researchers’ findings suggest high taxes on soda are ineffective tools for discouraging people from consuming sugary drinks.

The Impact of Soda Sales Taxes on Consumption: Evidence from Scanner Data
https://www.heartland.org/policy-documents/impact-soda-sales-taxes-consumption-evidence-scanner-data
This study, written by University of Massachusetts-Amherst researchers Francesca Colantuoni and Christian Rojas, uses empirical brand purchase data in two states to derive how consumers react to newly enacted health-related taxes. “Our results show the taxes in Maine and Ohio did not significantly decrease consumption,” they write. “These taxes have the effects of raising tax revenues for the states. While this added tax revenue should, in principle, be reinvested in programs and campaigns to promote a healthier consumption of food, in most of the cases the revenue from the ‘snack-taxes”’ has become part of the general treasury, as occurred in Maine.

Cities Look to Soda Taxes for New Revenue
http://news.heartland.org/newspaper-article/cities-look-soda-taxes-new-revenue
Krystle Russin writes in Budget & Tax News about the various soda taxes being considered in cites across the country as a source of new tax revenue.

The Dirty Dozen: 12 States That Bet Big on Sin
http://www.bloomberg.com/money-gallery/2013-06-26/the-dirty-dozen-12-states-that-bet-big-on-sin.html#slide12
Nikhil Hutheesing of Bloomberg News examines the dozen states with the greatest percentage of total tax revenue derived from “sin.” Sin taxes in this article include tax revenue from tobacco, alcohol, and pari-mutuel betting, using data from the State Government Tax Collections survey produced by the U.S. Census Bureau. 

Sin Taxes: Size, Growth, and Creation of the Sindustry
http://heartland.org/policy-documents/sin-taxes-size-growth-and-creation-sindustry
Adam Hoffer of the Mercatus Center explores three criticisms of sin taxes. First, the taxation of selected goods as a source of general budget revenue contradicts the standard Pigouvian social welfare argument. Second, the economic burden of sin taxes falls disproportionately on lower-income households. Third, the expanding number of goods being taxed in this way results in unproductive preventive and defensive lobbying by the affected industries.  

The Economics of Sin Taxes
http://www.acton.org/pub/religion-liberty/volume-4-number-2/economics-sin-taxes
James Sadowsky considers sin taxes, how they affect the products they are imposed on, and the public’s recent backlash against such taxes.

 

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this subject, visit Budget & Tax News at https://www.heartland.org/publications-resources/newsletters/budget-tax-news, The Heartland Institute’s website at http://heartland.org, and PolicyBot, Heartland’s free online research database at www.policybot.org.

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Taxes Government Spending
Author
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance. In 2012, Glans was named senior policy analyst.
mglans@heartland.org @HeartlandGR