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Research & Commentary: The Failure of Sugary-Drink Taxes

May 16, 2017

In this Research & Commentary, Matthew Glans examines the effects of sugary drinks taxes and argues they are both disruptive to the economy and highly regressive.

In 2016, Philadelphia was the first major city to enact a so-called “sin tax” on sugary drinks. It imposed a 1.5-cent-per-ounce tax on sugary beverages, including “diet” soda and other drinks using sugar alternatives. Proponents of the tax said it would provide increased funding for pre-kindergarten, community schools, and recreation centers. Large cities with a tax on sugary drinks include Philadelphia, Seattle, San Francisco, and Oakland. On July 1, Cook County, Illinois, the second-most populous county in the United States, will implement a 1-cent-per-ounce tax on sugary drinks.

Philadelphia’s experience with its soda tax should serve as a cautionary tale for state and local governments. While the tax charged may appear small, John Buhl of the Tax Foundation points out that thanks to the new levy, a 12-pack of flavored sports drinks is more expensive than a 12-pack of beer.

In less than one year, Philadelphia city officials have watched as numerous companies have planned to lay off workers because of sharp declines in sales related to the soda tax. These 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.

According to Bloomberg, some Philadelphia soda distributors have generated far less sales revenue than expected because fewer soft drinks have been purchased; some companies have reported decreased sales of nearly 50 percent since the tax went into effect on January 1. One major beverage company in the region, PepsiCo, recently announced layoffs related specifically to the Philadelphia tax.

Bloomberg also found local grocery and convenience stores have been impacted. The CEO of Brown’s Super Stores, which operates local ShopRite and Fresh Grocer locations, reported a 15 percent decline in 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.

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 whole milk, other sweetened drinks or even beer.

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 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.”

Scott Drenkard of the Tax Foundation estimated in 2012 that a 10 percent soda tax could burden high-income families by only as much as $24.29 annually, double the rate of poor families ($47.38).

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.
 

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.”

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.” 

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

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Article Tags
Taxes
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