Members of the District of Columbia Council are considering a new excise tax on sugar sweetened beverages (SSB). The excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. would be levied at a rate of 1.5 cents per ounce of taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. able beverage, defined to include all drinks with “any form of natural common sweetener.” The bill exempts beverages where milk is the primary ingredient, along with medical products and infant formula. Councilwoman Brianne Nadeau (D), the bill sponsor, argues that the action is necessary to curb obesity-related disease in the District.
Obesity is a major driver of preventable disease and health-care costs in the United States, and prevention is an honorable goal. But the question remains: are high excise taxes on select products the best way to achieve this aim?
The D.C. proposal plays into a much larger discussion about non-communicable diseases (NCD) which is going on at the national level, as well as the international level, where there is a push for governments around the world to implement policies intended to combat obesity and NCDs. The World Health Organization (WHO) has recently published a primer on so-called “health taxes,” a subset of what are more commonly known as sin taxes.
According to the primer, health taxes are win-wins that can simultaneously increase public health and raise revenue. However, the District’s proposal must confront the reality that these aims are irreconcilable, as successful reductions in consumption necessarily lower revenues. In fact, the current proposal is identical to Philadelphia’s SSB tax that was designed primarily to raise revenue. If decreasing sugar consumption is the target, taxing based on sugar content might offer a better path.
Regardless of whether the bill is a revenue tool or a health initiative, it is flawed tax policy. The D.C. proposal appropriates about 60 percent of the revenue (forecasted at $20 million annually) to health and education initiatives, but governments should not rely on revenue from narrow bases to fund long-term priorities. First, narrow bases tend to result in volatile revenue, as can be observed with tax revenues from tobacco. Second, excise taxes, both in general and on beverages, are regressive taxA regressive tax is one where the average tax burden decreases with income. Low-income taxpayers pay a disproportionate share of the tax burden, while middle- and high-income taxpayers shoulder a relatively small tax burden. es. That means low-income Americans pay a disproportionate share of their disposable income in excise taxes relative to high earners. We have previously estimated that 47 percent of a national SSB excise tax of one cent per ounce would be paid by households earning less than $50,000.
Philadelphia implemented a tax on beverages in 2017 and has collected $193.8 million in its first three fiscal years. The city implemented the tax to raise money for education programs, but the revenue in the first year was about 15 percent lower than projected. Philadelphia is one of seven cities in the U.S. levying taxes on sugary drinks.
A recent academic paper about the SSB tax in Philadelphia found that demand decreased by 46 percent in taxed areas. Even though cross-border shopping offset the decrease by more than half, this result could be interpreted as a moderate success. However, due to the regressive nature of the tax, a disproportionate share of that burden fell on those least able to bear it.
Other research published about Philadelphia’s 1.5 cent per ounce tax further emphasizes its regressive effects. Local businesses in Philadelphia, which cater to low-income customers, were able to pass on more of the tax to consumers than businesses in affluent areas. This happens because residents in low-income communities do not have the option of shopping outside the city limits to avoid the tax. In effect, affluent Philadelphians still have access to untaxed goods, whereas low-income citizens end up paying the additional tax. One can expect a very similar outcome in D.C., a city with hundreds of thousands of daily commuters from Maryland and Virginia.
Some proponents argue that regressivity is not an issue provided the revenue is returned to the communities in the form of public education initiatives and eat healthy subsidies. In Philadelphia, less than a third of the revenue has been spent on these types of programs, and 69.5 percent has been allocated to the general fund.
Furthermore, research suggests that SSBs are ineffective at reducing overall caloric intake. According to the research on the effects of the Philadelphia SSB tax, no significant reduction in calorie and sugar intake was detected. Similar results were found in relation to a SSB tax in Berkeley. There are several possible explanations for this. Consumers may simply purchase sugary drinks out of town, or they might substitute sugary drinks with sugary foods or other high-calorie options. Some research even indicates substitution towards alcoholic beverages.
In conclusion, excise taxes on sugar sweetened beverages fail to raise the expected revenue, are highly regressive, and neither significantly decrease sugar nor calorie intake.
The District Council would be better served by a focus on public education and awareness rather than trying to dictate behavior through the tax code. If revenue is needed for crucial government programs, the Council should fund them through broad-based taxes with low rates.
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