Abacus: Legacy of the Soda Tax
Peter Dazeley
The United States has been facing an obesity crisis for almost 20 years. 11-14% of adults in the US have diabetes and many of these cases can be allegedly attributed to soda consumption. Further than diabetes, America’s obsession with soft drinks is reportedly responsible for increased rates of heart disease, gout, obesity and mortality. Not only are these effects on personal health alarming, the downstream healthcare costs created by the soda industry are astounding. Obesity related Medicare and Medicaid expenditures alone create an almost $60 Billion bill for taxpayers a year.
In the rare case that a good creates third party costs upon its consumption, that product is known as a negative externality . Often, when a market failure like this exists, it is corrected by the government with a tax which makes the price of the good more equivalent to and representative of the costs to society that it creates. In the most extreme cases, these taxes are placed on goods at such a rate that the intention is to deter consumption entirely, not just make things more equitable. When this is the case, the tax is known as an excise tax or a sin tax. Examples of an excise tax would be those placed on cigarettes, the lottery or alcohol. While soda does not have the same negative connotation that many of these taxed goods carry with them, the negative health benefits are just as alarming as the more traditional vices. Precisely because of that fact, in the last ten years many localities around the country have been pushing to place sin taxes on soda.
The idea of taxing soda itself is nothing new, states such as Alabama, Arkansas, Tennessee, Virginia, Washington and New York all tax the sugary beverage industry in some form or another. Arkansas for example has a 1.5% flat tax on candy and soda that it uses to help fund its Medicaid program. These flat rate taxes have been in place for some time now, but recently many cities have gone beyond this in levying their soda taxes.
Berkeley, California and Philadelphia, Pennsylvania are two of the most prominent cities that impose a soda tax. Effective since early 2015, the soda tax in Berkeley takes the approach of taxing soda by one cent per fluid ounce. The tax itself is paid by distributors (i.e.. delivery of syrup to restaurants, delivery of canned or bottled drinks to retail outlets etc.) but is reflected in the price consumers pay as firms try to make up the cost of the tax by passing the buck down to customers. This reallocation of the tax burden resulted in an increase in the price of soda for consumers of around .69 cents per ounce on average. Just three years after the implementation of the tax, sugary drink consumption was decreased more than 50%. In Philadelphia, a similar approach was taken, taxing sugary beverages by 1.5 cents per ounce in an effort to fund education initiatives with familiar results. The volume of sweetened beverages sold in the city fell 38.9 percent. While these taxes were without a doubt successful in achieving their stated goals, understanding both why these results have not translated into more sweeping policy out of the incubator of these localities and the criticism leveled at the approach regardless of the outcomes is important in evaluating lessons learned from these experiments.
One of the largest critiques of the soda tax is its regressive nature. When taxing a good at a fixed amount per ounce, the resulting price increase is one that affects low- and moderate-income households more than others, as the extra spending represents a larger percentage of their total income. While this sort of tax is inherently regressive, and there is no room to argue the merits of that critique, many would note that upon successful implementation of the tax, much of those costs would be made up through revenues and the social health market corrections that could save money on Medicare programs. Another commonly noted criticism is how the tax often leads to layoffs within the soda industry, which according to studies done by both the American Beverage Association (ABA) and independent researchers has been hit hard by these particular taxes.
More than any of these though, the most vocal opponents of the tax have been quick to stir up anti-tax, small government sentiment, in particular the ABA. In New York, where the soda debate picked up lots of traction following former mayor Mike Bloomberg’s efforts to instill an outright ban on soda portions larger than 16oz as early as 2013, a familiar one cent per ounce was proposed in 2016. The bill was fought to its death by the soda industry before it even got a vote. By 2017 alone, at arguably the height of the soda tax’s time on the agenda, the ABA had spent almost 19 million dollars on their lobbying effort nationally. Most of this effort was focused on an appeal to freedom of choice and a general disdain for taxes. Regardless of the many health risks associated with soda, for many, it is not the government's place to decide what we can and cannot consume. Further, many who think along those lines would also note that the tax does not generate substantial revenues for the government (the only purpose of a tax in the eyes of some). This massive lobbying effort had its biggest victory when the state of California banned soda taxes outright in 2018.
The effectiveness of the soda tax was undeniable, consumption fell, and revenues were moved to healthcare and education efforts. However, taxes and other economic policies that burden consumers, along with one of the most powerful interest groups in the nation, face more challenges than just achieving their stated goals. While on its face, the legacy of the soda tax is one of forgotten potential, it speaks more to the complex nature of public policy and its tendencies to correct markets by placing burdens on the weak instead of the powerful. When that balance is upended, the soda tax shows exactly how industry players respond. Obesity is not going anywhere and unfortunately, soda seems like it is here to stay. Before excise taxes such as those put on alcohol or cigarettes are seen as a valid option for soda, public opinion on the beverage and cola’s place in society has to be reformed. The soda taxes of the mid 2010’s were a good place to start.
