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Vermont Considers Soda Tax

3 min readBy: Scott Drenkard

Last week I testified before the Vermont Ways & Means and Health Care Committees with regard to H. 234, a bill that would create a penny per ounce 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. on sugar-sweetened beverages. In 2011, I authored a large study on sugar and snack taxes, and in 2012 I wrote a smaller piece on how two California cities might be affected if they instituted a similar tax to the one Vermont is considering. The citizens of Richmond and El Monte, California ultimately resoundingly voted down the soda taxA soda tax is an excise tax on sugary drinks. Most soda taxes apply a flat rate per ounce of a sugar-sweetened beverage. on their November 2012 ballot. In Richmond, 67 percent of voters voted no, and in El Monte 77 percent of voters did.

So why? There are four primary reasons why soda taxes are poor tax policy:

Regressivity: A 2006 study found that a 10 percent 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. on fatty foods would harm high-income individuals to the tune of $24.29, whereas low-income families had a burden almost double: $47.38. This effect would be amplified by the proposal in Vermont, which is a $1.28 per gallon tax, which equates to between 24 and 132 percent depending on the product it is levied on.

Ineffectiveness: While the law of demand states that increasing the price of a product will make people buy less of it, economic actors don’t behave in a vacuum. Several studies show that people just substitute calories from other sources when soda is taxed. A 2012 study showed that taxing soda leads many people to switch from soda to beer more often, and this behavior change results in an increase of 1,930 calories consumed per month for those people. Bear in mind that Vermont currently only taxes beer at 27 cents per gallon, and the proposed soda tax would be almost five times as high at $1.28. The highest tax on beer is $1.17 in Tennessee.

The ExternalityAn externality, in economics terms, is a side effect or consequence of an activity that is not reflected in the cost of that activity, and not primarily borne by those directly involved in said activity. Externalities can be caused by either production or consumption of a good or service and can be positive or negative. Argument is a Myth: This one is a bit complex, but it is really the proper way to think about excise tax policy. Economists sometimes support taxes on products if their consumption creates side-effects (externalities) on the rest of society. The thought is that if you tax a product at exactly the size of its externality, then the externality cost will be embedded in the price of the product and market actors will consider it when deciding to purchase the product (lengthier discussion of this concept here). Soda tax advocates make the case that since obese people have higher healthcare costs, taxpayers and anyone who shares an insurance pool with obese individuals are paying in part for their healthcare costs, and this is an externality problem that needs to be addressed with tax policy.

This argument is entirely unsatisfactory because the externality in question here is not sugar-sweetened beverages, it is actually healthcare costs. What’s more, this healthcare cost spillover is actually by design in government programs like Medicare and Medicaid. By definition, those programs rely on general tax dollars to fund healthcare spending. It’s unreasonable to call for additional government intervention to solve problems primarily created by government programs, and these externality problems could be better addressed through adjusting the structure of those programs.

Nutrition Has Many Inputs: Ultimately, soda is just one source of calories in an overall diet (the literature suggests just 7 percent), and it is entirely possible to have the occasional (or even regular) soda and not become obese. But an excise tax on soda is a blanket policy that would affect all soda drinkers regardless of weight. Ultimately, the tax code is far too blunt and instrument to be used to address something as complex as nutrition choices.

According to the Huffington Post, the bill was defeated in committee because of a medical emergency of one of the committee members.

More on Vermont here.

Follow Scott Drenkard on Twitter @ScottDrenkard.