Results of Sugar and Snack Tax Contest

November 14, 2011

On October 31, we released our newest report, Overreaching on Obesity: Governments Consider New Taxes on Soda and Candy. As a contest, we asked that our friends try to guess the after-tax price for a basket of goodies that one might purchase at a grocery store in Chicago, Illinois. The correct answer for the after-tax price of the basket of products was $26.10, a 21 percent increase from the price tag of $20.74. The closest guess was just $26.03, from Dan C. Congratulations!

Dan will be receiving a Tax Foundation tote bag with a copy of Facts and Figures, a host of Tax Foundation map postcards, a TF calculator, TF tape measurer, and a $50 gift card to Cheesecake Factory!

After reading this analysis in Cook County, Chicago, I hope I can convince you that attempting to single out winners and losers through the tax code leads to very complex tax collections, as definitions of which products are included in the base of the tax are confusing, and are sometimes different at the state, county and city levels. As we argue in the paper, this problem could be solved if all final sales were taxed equally.

Item Frappuccino® 4 pack Store brand cola 12 pack Store brand lemon lime soda 2 liter Arizona® Green Tea 1 gal Snickers® bars fun size Twix® bars 8 ct. Total
Pre-Tax Price $6.99 $2.99 $0.89 $3.99 $3.89 $1.99 $20.74
Proposed State Soda Excise Tax Total Ounces 38 oz. 144 oz. 68 oz. 128 oz. - -
Soda Excise Tax Owed $0.38 $1.44 $0.68 $1.28 $3.78
State Sales Tax State Sales Tax Rate 1.00% 6.25% 6.25% 6.25% 6.25% 1.00%
State Sales Tax Owed $0.07 $0.19 $0.06 $0.25 $0.24 $0.02 $0.82
County Sales Taxes Home Rule Rate - 1.25% 1.25% 1.25% 1.25% -
Home Rule Owed - $0.04 $0.01 $0.05 $0.05 - $0.15
Regional Trans. Authority Rate 1.25% 1.00% 1.00% 1.00% 1.00% 1.25%
RTA Owed $0.09 $0.03 $0.01 $0.04 $0.04 $0.02 $0.23
City Sales Tax City Sales Tax Rate - 1.25% 1.25% 1.25% 1.25% -
City Sales Tax Owed - $0.04 $0.01 $0.05 $0.05 - $0.15
City Soda Excise Tax Soda Sales Tax Rate - 3% 3% 3% - -
Soda Sales Tax Owed - $0.09 $0.03 $0.12 - - $0.24
Total Tax $0.54 $1.82 $0.79 $1.79 $0.38 $0.04 $5.36
Price After Tax $7.53 $4.81 $1.68 $5.78 $4.27 $2.03 $26.10
Percentage Price Increase 8% 61% 89% 45% 10% 2% 21%

The chart above shows which taxes apply to each product in our basket. On the far left side, we have the proposed Illinois excise tax on sugar-sweetened beverages; the first four products are all included in the definition. Deciding on which products are subject to the proposed legislation is difficult, especially for products like Frappuccino® that have milk in their recipe. Some states that propose these types of taxes make exclusions for products that have any milk at all, others (as in Illinois) require the product to be "primarily" milk, and still others require the product to be entirely milk.

Regardless of the often incomprehensible definitions of a tax base, the main take-away is that the proposed excise taxes on soda that are cropping up throughout the country would drastically raise the price of a lot of these products. From the recent report:

While the proposed soda taxes in many states are levied at a "penny per ounce," it takes some effort to convert this into an easily understandable effective tax rate. Assuming pre-tax prices remain constant, a two liter bottle of store brand soda would be 68 percent more expensive under the new proposed bills. Store brand lemonade drink mix would see a price increase of 132 percent.

The definitional problems do not end with the proposed excise tax. For state-level sales taxes, the tax base definition is just as complex. In Illinois, products are either taxed at the "high rate" of 6.25 percent or the "low rate" of 1 percent; groceries (except alcohol, soft drinks, candy, and food that has been prepared for immediate consumption) are taxed at the low rate.

However, Twix® bars are counter intuitively taxed at the low rate because they have flour in their recipe, which means they are not legally "candy," which is taxed at the high rate. Snickers® have no flour in their recipe, so they are taxed at the high rate. From the statute:

"Candy" means a preparation of sugar, honey, or other natural or artificial sweeteners in combination with chocolate, fruits, nuts or other ingredients or flavorings in the form of bars, drops, or pieces. "Candy" does not include any preparation that contains flour or requires refrigeration.

The Frappuccino® 4 pack, while included in the proposed soda excise tax base, would be excluded from the state-level sales tax high rate. The difference is again how the statutes treat milk. Unlike the proposed excise tax, where milk must be the "primary ingredient," the state sales tax classification dictates that any milk content warrants taxation at a lower rate.

Another important distinction for Illinois' state sales tax is the venue that you buy the product in. The statute spends four and a half pages (start at subsection d) discussing which venues are chosen for higher rates or lower rates. These locational definition disparities also add to the complexity of store-owners calculating their sales tax bill. These definitions lead to a situation where if you buy a bag of chips at a grocery store, you pay the low rate, but if you buy the same bag of chips at a deli across the street, you pay the high rate.

In Cook County, Illinois, there are two county-level sales taxes. One is called the Home Rule County Retailers' Occupation Tax, the other is the Regional Transportation Authority Retailers' Occupation Tax. Both of these taxes collect revenue on the same thing: gross receipts of sales from businesses engaged in the sale of tangible personal property. However, they each tax different products at different rates.

In the Home Rule, products that are considered groceries are not subject to the 1.25 percent tax, but candy, soft drinks and "food which has been prepared for immediate consumption" are subject to it. In the Regional Transportation Authority tax, groceries (which include Frappuccino®s and Twix® bars) are actually taxed at a higher rate than non-groceries.

The city of Chicago also collects a municipal tax called the Home Rule Municipal Retailers' Occupation Tax, which is levied at a 1.25 percent rate on all non-grocery products, using the same base listed in the state-level sales tax.

Lastly, while this was not mentioned in the recent sugar and snack tax report (which only examined state and national-level proposals), the city of Chicago has a 3 percent soda excise tax (Chapter 3-45). This law uses the same definition of soda as in the state sales tax, but adds that the term "soft drink" "shall not be limited to drinks contained in a closed or sealed bottle, can, carton or container." Frappuccino® beverages are excluded from the tax because of their milk content. While tea is generally exempt from the tax, AriZona® Green Tea is subject to the tax in this case because there is sugar added to its recipe.

After running this basket of products through six unique sales and excise tax laws, I hope it is clear that not only does Illinois need to reform its sales tax code to make it more simple, but further that the addition of a new soda excise tax would make the code worse. It took me a long time to track down and analyze all the tax definitions a business owner would have to know to be compliant-and that is just for a small basket of products. I wouldn't wish that experience on anyone who owns a store; they have better things to worry about. 

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