As the tax reform debate begins to heat up, businesses and investors are beginning to pay closer attention to the House GOP Tax Reform Blueprint, a tax plan released last June by Speaker Paul Ryan and House Ways and...
- The Tax Policy Blog
- The Opening Salvo of 2016's Soda Tax Battle
The Opening Salvo of 2016's Soda Tax Battle
Soda taxes are poised to be on the agenda in many cities in 2016, an effort spearheaded by former New York City Mayor Michael Bloomberg. After a long string of rejections—including in New York City itself, where the city that never sleeps refused to sacrifice its caffeine fix—advocates of a tax on sugary beverages finally secured a victory in Berkeley in 2014, a success which advocates hope to parlay into efforts in as many as a dozen cities in 2016.
Thus far, however, proponents are meeting stiff resistance. A penny-per-ounce excise stalled out in Chicago earlier this year. San Francisco rejected a soft drink tax the same day that Berkeley residents embraced one. A referendum may yet land on the ballot in Davis, California—as Berkeley goes, so goes… Davis?—but the city council has postponed a planned ballot measure from June to November of next year due to strenuous opposition. Still, city leaders’ intention of placing a soft drink tax on the ballot next November marks the opening salvo in the anticipated soda tax wars of 2016.
An excise of one cent an ounce—twelve cents a can, 68 cents per two liter bottle, or $2.88 per 24-pack—is emerging as the game plan in cities considering such a tax. Four states already impose excise taxes on soft drinks, albeit at much lower rates; Berkeley’s excise is imposed at more than six times the rate of Arkansas’ tax, previously the nation’s highest.
The following table provides estimates of the taxes levied on a 12 ounce can of soda and a two liter bottle, respectively. For the sake of these estimates, a can of soda is assumed to retail for ~33 cents ($8 for a 24-pack) and a 2 liter bottle for $1.50. Any pyramiding effects of the Tennessee and Virginia gross receipts taxes are ignored.
|JURISDICTION||TAX LEVIED||PER CAN||PER 2 LITER|
|Arkansas||21 cents per gallon||1.97 cents||11.1 cents|
|Tennessee||1.9% of gross receipts||0.63 cents||2.85 cents|
|Virginia||GRT with 0.15% max rate*||0.05 cents||0.23 cents|
|West Virginia||1 cent per 16.9 fl. oz.||1 cent||4 cents|
|Berkeley, CA||1 cent per fl. oz.||12 cents||68 cents|
* Wholesaler or distributor liability in Virginia is based on tax tables; however, 0.15 percent represents the highest effective rate possible under these tables, from a $1,500 levy on gross receipts of $1-3 million.
Voters appear wary of soda taxes that can exceed a third of the retail price—and with good reason. Although such taxes are often presented as a public health measure, neither intentions nor effects tend to be that straightforward, as illustrated by the fact that the Davis soda tax was considered as one of a menu of options that also included a higher hotel tax and a new parcel tax. Some proponents of the Davis tax may wish to reduce soft drink consumption, and this may have been relevant to city council deliberations, but the motive force was much simpler: city leaders are looking for more revenue, and soft drinks appeared ripe for a new tax. They may not, however, be a stable source of revenue.
The tension between public health benefits and revenue generation is a perennial issue with so-called “sin taxes,” because should the tax prove effective in reducing consumption, the tax base is eroded, reducing revenue. (Even without soft drink-specific excises, consumption has been declining for a decade.) It is axiomatic that what you tax, you get less of—but “sin taxes” assume, and hope for, significant elasticity of demand at the rates at which they are imposed.
Absent such an assumption, such taxes would be particularly hard to justify. Taxes on soft drinks tend to be regressive, falling more heavily on lower-income individuals. Moreover, where some taxes may be regressive as a percentage of income (that is, wealthier individuals pay more in nominal terms, but the tax burden represents a smaller share of their income than it does for lower-income payers), a soft drink tax is likely to be regressive in both nominal and real terms, as studies indicate a reverse correlation between soft drink consumption and income levels. If soda taxes are not intended to change consumption patterns, they simply represent a punitive tax that tends to fall more heavily on the less socioeconomically advantaged. If they are intended to reduce consumption, then success will be marked by declining local revenue.
And then there’s the possibility that they simply won’t work. Studies of the effects of excise taxes on soft drink consumption have reached conflicting results, but there is a distinct possibility that not only is the reduction in soda consumption modest, but that it is offset by increased consumption of other high-calorie drinks (substitutionary goods, in economic terms). If that is the case, or if the disincentive to the consumption is limited, then again one ends up with a regressive tax with scant justification.
State and local governments are understandably concerned about the rise in obesity, and soda taxes are often portrayed as one arrow in the quiver for encouraging better nutrition and improving health outcomes. Taxes, however, can be a very inefficient way to achieve a public health outcome, and the problem begins with definitions. These taxes are typically levied on “sugar-sweetened beverages,” “high calorie, sugary drinks” or similar classifications of beverages—definitions which can capture energy drinks, many fruit juices (100 percent fruit juice is typically exempted), or even category-spanning drinks like frozen coffee beverages. Typically, baby formula, weight loss beverages, coffee, tea, and 100 percent fruit juice products are exempt, even if they contain added sugar. Diet sodas may or may not be exempt.
In other words, soft drink taxes fall on some sugary drinks but not others. More to the point, even to the extent that they are intended to address the problem of obesity, they do so only incidentally. Clearly, a tax on obesity itself would be resoundingly rejected—as it should be—but if obesity imposes externalities which society wishes to internalize, taxing soft drinks (and energy drinks) consumed by those in peak physical fitness and those with diet-related health issues alike lacks much precision.
A neutral tax structure would not single out soft drinks for unique treatment. Although the push in 2016 is for targeted excise taxes, some states actually go in the opposite direction, exempting soft drinks from the sales tax base. While an ideal sales tax would feature broad bases and low rates, in practice, states often carve away at the base. Most states exempt groceries from the sales tax base, and of those, eleven define soda as groceries, including them in the exemption.
When an activity has clearly defined externalities, taxes which attempt to internalize these costs can make sense, and may pass the benefits test. For instance, motor fuel taxes attempt to capture externalities associated with driving on public roads—congestion and wear-and-tear—and do so in a reasonably targeted manner. Other taxes, while not benefits test-driven, may also seek to capture societal costs created by a specific activity. With sin taxes on soda, however, soft drink consumers may feel the more sinn’d against than sinning.
Get Email Updates from the Tax Foundation
Join the Tax Foundation's fight for sound tax policy Go
About the Tax Policy Blog
The Tax Policy Blog is the official blog of the Tax Foundation, a non-partisan, non-profit research organization that has monitored tax policy at the federal, state and local levels since 1937. Our economists welcome your feedback. If you would like to send an e-mail to the author of a blog post, please click on that person's name to locate his or her e-mail address or visit our staff page here.