Evaluating Soda Tax Proposals in West Virginia
March 25, 2017
Those who enjoy the occasional—or, if you’re like me, more than occasional—soda have probably noticed the outline of West Virginia etched into the top of many cans. Although these days the outline is often replaced by an inkjet-printed “WV1” on the base of the can, these markings—known as tax stamps or tax crowns—reference an existing tax West Virginia imposes on soda, at the rate of one cent per 16.9 ounces or fraction thereof. The revenue, about $15 million a year, is earmarked for the medical school at West Virginia University, and has been since 1951.
And that’s not the only tax West Virginia imposes on soda. The Mountain State also taxes soft drink syrup at 80 cents per gallon and dry mixtures at 1 cent per ounce. A typical soda fountain mixes water and syrup at a 5 to 1 ratio, so the syrup tax adds a little more than a tenth of a cent per ounce to the cost of fountain drinks.
Under two pending revenue proposals, that would be just the beginning.
Coping with a projected $450 million budget shortfall, newly elected Governor Jim Justice (D) has introduced three budget proposals: a cuts-only budget he clearly disfavors, plus two revenue-raising proposals, the more recent of which includes an increase in the cigarette tax (last hiked a year ago) and a new one cent per ounce soda tax, designed to raise $85 million a year. Meanwhile, a Senate plan to overhaul the tax code with a broad-based consumption tax also proposes increasing the current tax on 16.9 ounce equivalents from one to five cents, and the syrup tax from 80 cents to $4 per gallon, which would purportedly raise about $75 million.
West Virginia was an early adopter of soft drink taxes. Only three states—South Carolina (1925), Tennessee (1937), and Louisiana (1938)—did so earlier, and two of these states have since repealed their taxes. Now, West Virginia could lead in this dubious category again should it become the first state to adopt a per-ounce excise tax on sugar-sweetened beverages.
A penny per ounce adds up. That’s 67.6 cents per two-liter bottle or $2.88 on a 24-pack of soda cans. After the city of Philadelphia adopted a 1.5 cent per ounce soda tax a few months ago, soda sales are reportedly off by as much as 50 percent, with predictable consequences. PepsiCo is laying off 80 to 100 area employees, a ShopRite franchisee with six Philadelphia locations anticipates laying off as many as 300 workers, and free refills are disappearing at some restaurants as their costs mount.
One reason for Philadelphia’s crisis is the ease of cross-border shopping. While not every consumer will be price-sensitive enough to purchase soda outside the city, and convenience does count for something (witness the fact that 20-ounce bottles often cost more than their 2-liter counterparts, and that bottled soda sells at higher prices in convenience stores than in larger grocery stores), it’s relatively easy for motivated purchasers to stock up on cases of soda elsewhere. That’s certainly the case when a tax is only imposed in one city, and it’s an important concern in West Virginia as well, where 28 of the state’s 55 counties border another state.
Soda taxes are regressive; there’s no getting around that. As a general rule, soda consumption is higher among young people, low-income earners, racial and ethnic minorities, and those without a college education. In West Virginia specifically, soft drink consumption is higher than average and would have a significant impact on many taxpayers.
For the Senate, such a tax increase appears to be thought of exclusively as a revenue-raiser; this may also be the primary motivation of the governor’s proposal, since it is part of a package designed to close the current budget shortfall. Governor Justice suggested, however, that positive health outcomes might also be a consideration, observing, “Gosh knows, it would have been great if I’d drank a few cans less of sweet soda pop.” Whether that’s true or not, Americans like their sweet soda pop, and West Virginians are no exception.
About 47 percent of West Virginians with a high school education or less consume soda at least once per day, compared to 26 percent of West Virginians with a college degree. Nearly 64 percent of 18-24-year-olds drink soda at least once a day, and the same can be said about 57 percent of 25-34-year-olds and 48 percent of 35-54-year-olds. Eighty percent of all West Virginians consume soda, and 45 percent consume soft drinks more than once a day, compared to 31 percent nationwide.
Soda consumption has been declining for years, and recently hit a 30-year low. Part of this decline reflects a shift toward other sugar-sweetened beverages which would also be captured by a soda tax, but it is also the case that Americans are consuming fewer soft drinks overall. This suggests that soda tax revenue would erode over time. That should be no surprise to West Virginia policymakers, since the existing tax has lost about half of its peak inflation-adjusted value over time.
My colleagues have repeatedly pointed out that taxes on sugar-sweetened beverages are regressive, encourage cross-border shopping, and lead to unintended economic consequences. Whether understood as a “sin tax” on one category (of many possible ones) of caloric intake or simply as a revenue-raiser, taxes on soft drinks miss the mark.
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