Skip Navigation

Research & Commentary: Soda Taxes Continue to Fall Flat

October 20, 2017

In this Research & Commentary, Matthew Glans examines the failure of Philadelphia and Cook County's soda taxes and why such a tax is unlikely to raise the revenue supporters expect.

Despite several high-profile failures, numerous cities are still considering the creation of a soda, or “surgery drink,” tax. Soda taxes in Philadelphia and Cook County, Illinois have brought national attention and widespread criticism to the tax policy idea in recent months.

In Philadelphia, the unpopular tax, which went into effect January 2017, has generated far less revenue than expected. According to a new report from the Tax Foundation, Philadelphia expected to receive $46.2 million in soda tax revenue from the tax in the first half of 2017, but the actual total revenue received was 15 percent lower than the estimate (about $39.5 million).

The Tax Foundation study also found the revenue generated by the new tax was not being used as the policy’s sponsors claimed it would. While the tax was promoted as a vehicle to raise funds for pre-kindergarten education, only 49 percent of the soda tax revenues have been sent to local pre-K programs.

The results were similar in Cook County, where beverage sales have decreased dramatically since August 2016. The Can the Tax Coalition, a group opposed to the Cook County soda tax, conducted a study examining the effect of the tax on beverage sales in 32 Cook County stores. The report found between August 2016 and August 2017, 75 percent of the stores studied experienced a beverage sales decline of 20 percent or more; 40 percent experienced a 30 percent or greater decline; and 15 percent saw beverage sales decline by 40 percent or more.

Opposition to the Cook County tax hike was so strong and politically toxic that the Cook County Board voted in October to end the tax at the end of 2017.

It has never been proven sugary drink 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 other sweetened drinks, or even beer.

Some of advocates of sugary drink taxes say they are an important source of revenue. 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.

Like nearly all sin taxes, soda taxes impact lower-income families more than any other group. In a paper published in 2009, Ryan Vinelli of Yeshiva University argued a soda tax may be the most regressive tax used today. “If it 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 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.

Sin taxes encourage unsustainable increases in government spending while placing an excessive burden on lower-income taxpayers. The failures of the Philadelphia and Cook County soda taxes should discourage other cities from following their lead.

To ensure cities don’t enact these burdensome levies, state legislatures could follow the lead of Michigan, which recently approved a proposal that states localities “shall not impose an excise tax on, or enact, enforce, or administer any ordinance, regulation, resolution, policy, rule, or directive imposing a tax or fee on, the manufacture, distribution, wholesale, or retail sale of food for immediate consumption or nonimmediate consumption, except as otherwise provided by federal law or a law of this state.”

Instead of creating or 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.

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

Soda Tax Experiment Failing in Philadelphia Amid Consumer Angst and Revenue Shortfalls
https://www.heartland.org/publications-resources/publications/soda-tax-experiment-failing-in-philadelphia-amid-consumer-angst-and-revenue-shortfalls
In this article, Courtney Shupert and Scott Drenkard of the Tax Foundation examine Philadelphia’s soda tax and discuss how the tax rollout continues to create problems for the city, as collection amounts have been far less than projected. 

Soda Taxes: A Failed Experiment that Needs to End
https://cei.org/content/soda-taxes-failed-experiment-needs-end
Arguments for soda taxes rely on the assumption a small price increase will encourage people to consume fewer sodas and that reduced soda consumption will lead to an overall reduction in calorie consumption, and thus weight. This paper by Michelle Minton of the Competitive Enterprise Institute makes the case that soda taxes disproportionately affect the poorest members of society and fail to achieve their stated public health and revenue goals.

WSU Research Shows State Food Taxes Drive Shoppers Away
http://www.wichita.edu/thisis/stories/story.asp?si=3073
The Wichita State News examines a new report conducted by the Kansas Public Finance Center at Wichita State University’s Hugo Wall School of Public Affairs. The report examines the effect grocery taxes have on sales and found that Kansas’ sales tax on food harms economic activity, especially in border counties.

Regressive Effects: Causes and Consequences of Selective Consumption Taxation
https://www.mercatus.org/system/files/Hoffer-Selective-Consumption-Taxation.pdf
In this article, Adam Hoffer, Rejeana Gvillo, William F. Shughart II, and Michael D. Thomas of the Mercatus Center at George Mason University provide a systematic analysis of selective consumption tax policies.

The Case Against Soda Taxes
https://taxfoundation.org/case-against-soda-taxes/
John Buhl of the Tax Foundation examines soda taxes and how they are “punitive taxes that are a budget risk not likely to solve America’s health issues. They’re a misguided attempt at solving a multifaceted health problem and will introduce many unintended fiscal consequences.”

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.”                                    

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.

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 and other topics, visit the Budget & Tax News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.

The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state, or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact John Nothdurft, Heartland’s director of government relations, at jnothdurft@heartland.org or 312/377-4000.

Article Tags
Taxes
Sub-topic
Taxes: Sales Tax
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