Taxing Soda to Close the Deficit

A bipartisan panel tasked with finding a way to reduce the deficit has latched on to the “Soda Tax.” The problem with sin taxes is this: they are designed to increase the cost of a specific “bad thing,” like smoking, drinking, or in this case, consuming sugary beverages. The aim is to raise revenue, and to dissuade people from partaking of the “bad thing.” The problem comes in when people actually stop buying the taxed thing. Fewer people buying, means less tax revenue raised. This is exactly why sin taxes cannot be depended on to fund anything long term. I’m hard pressed to find an example of a sin tax that actually raised as much revenue as was projected.

From NYTimes.com:

The second bipartisan panel to issue a big deficit report has come out in favor of a tax on soda and other sweetened beverages.

The panel — chaired by former Senator Pete Domenici, a Republican, and Alice Rivlin, a Democrat and former White House budget director — said a soda tax would “help reduce long-term health care spending to treat obesity-related illnesses – including diabetes, heart disease, cancer, and stroke.” The tax would be “an excise tax on the manufacture and importation of beverages sweetened with sugar or high-fructose corn syrup.”

The tax would raise more than $15 billion in 2015, the panel estimated — similar to the amount of savings the government might get from eliminating all earmarks.

We’ve written about a soda tax before here at Economix. The beauty of it is that it falls on the very behavior — the gallon-a-week-per-person national soda habit — that imposes costs on society: namely, higher medical bills. Unlike so many other beverages and foods, Coke and Pepsi have no nutritional benefit, as food researchers often emphasize. Yet per-capita consumption of sugary drinks has nearly tripled in the last 30 years, accounting for about half the total rise in calorie intake over that period.

A big reason Americans are drinking more soda is that it’s so much cheaper than it used to be. The American Heart Association, which has also endorsed a soda tax, notes that children and teenagers are especially price-conscious consumers and are also especially big soda drinkers today.

Recent State Taxing Trends you Should Know About

As numerous state and local government agencies struggle with their budgets, many have taken to new taxes, or tax increases to makeup for lost revenue. Whenever a state is able to collect a decent amount of funds because of a new tax law change, other government agencies are quick to notice and enact a similar tax increase of their own. To help the readers of my blog stay informed on taxes they might have to pay down the road, I have compiled the following list of recent state taxing trends to be aware of.

Cigarette Tax Hikes

Taxes levied on cigarettes and other tobacco products are not new, but recently a handful of states have been increasing their cigarette tax rates. As I explained in this blog entry last month, New York has the highest tax on cigarettes and with recent increases the state levies an estimated $4.35 on every pack. Additionally, other states have been increasing tobacco taxes as an easy source of revenue. South Carolina – a state with a long history of tobacco farming – has even increased the taxes on cigarettes from 7 cents, to 50 cents per pack. The governor vetoed the tax law, but legislators had enough votes to override the veto. As local government agencies continue to look for ways to increase revenue, you can expect to see more cigarette tax increases over the next few years.

Other Sin Taxes

Taxes levied on cigarettes and other tobacco products, commonly referred to as “sin taxes,” also include taxes on other products that legislators consider bad for your health such as alcohol or sugary beverages. In addition to tobacco taxes, you are likely going to see other sin tax increases. The federal government has helped start this trend with their new tanning tax, and the state of NY already considered a soda tax (although lobbyists successfully defeated this new tax).

Amnesty Programs

Although not a new tax increase, local amnesty programs are something you should be aware of. The city of Philadelphia recently executed an unpaid tax amnesty program, where delinquent taxpayers could pay the taxes they owed, and only half of the interest that would normally be due. Philadelphia’s program was extremely successful – estimates predict around $25 million in additional revenue for the city – and because of its success you can bet that other state and local taxing agencies will launch amnesty programs of their own.

Digital, Non-Tangible Property

One of the largest trends in state sales tax laws is likely to be on digital, non-tangible property. Historically, excise taxes are only levied on tangible property, but as the need for tangible products diminishes, local governments are expected to begin charging a tax on electronic transmissions. Therefore, when you go to purchase a game, mobile app, or even an Mp3 on iTunes, you might have to pay a local sales tax. Most states have sales tax laws that were written long before today’s “digital age,” and legislators are looking for ways to generate revenue from digital sales.

The “Amazon Tax”

In 2008 the state of New York implemented an “Amazon Tax,” which targeted out-of-state retailers such as Amazon.com and Overstock.com. Both popular online retailers actually challenged the tax law, but the courts sided with New York. The result was a tax on in-state businesses that show ads linking to a retailer’s site, and has supposedly generated additional revenue for the state. As such, other states including California, Connecticut, Maryland, North Carolina, and Tennessee are considering similar tax laws.

Federal Tan Tax Burns Some Badly but Keeps Everybody in the Dark

From the Wall Street Journal:

When Jeanne Chamberlain turns up at work Thursday, she's going to have to grapple with America's first federal tax on tanning services, a 10% levy designed to help pay for Congress's health-care overhaul.

Ms. Chamberlain runs a video-rental store.

These would normally be unrelated facts, but 20 years ago, Ms. Chamberlain followed a number of her peers in adding tanning services to smooth out the bumps in her Rice Lake, Wis., business. Today, she wants to offer one free tan for every three rentals. Should that freebie be taxed? Ms. Chamberlain doesn't know, and even if she did, she doesn't yet have the software in place to help with the calculations.

It's a universal truth in Washington: There's no such thing as a simple tax. Free tans at video-rental stores might be taxable, but tanning services offered by health clubs mostly aren't, thanks to a late exemption. Ultraviolet tans are taxed. Spray tans aren't. Tanning salons are fretting over how to calculate unlimited memberships that combine taxed and non-taxed tans. Customers, meanwhile, have been racing to cram in tanning sessions to avoid the levy.

"It's just total confusion," said Ted Engen, president of Video Buyers Group in Coon Rapids, Minn., who has encouraged numerous video chains to add tanning services. "How come gyms got to be exempt?...Why don't we have that for the video side?"

When they completed their health bill last year, Senate Democrats searched high and low for new taxes to pay for the legislation. One idea, a tax on cosmetic surgery dubbed the “Botax,” was scotched by lobbying by the American Medical Association. Instead, lawmakers turned to the indoor tanning industry.

Get Tan Today: 10% Tax On Its Way

Getting a bronze glow for the summer -- at least artificially -- is about to get a little more expensive. If you were planning on hitting up the tanning salon in the near future, then you should try to get to the salon before the end of the day. The tanning tax is going to take effect tomorrow, meaning the price you pay for your tan will increase by 10%. For more information on you can check out my blog entry explaining the tanning tax, or read more about this new tax from the article below courtesy of CNN Money.

A 10% tax will be tacked on to indoor tanning bills starting Thursday, as part of the health-care reform President Obama signed into law in March.

According to guidelines from the IRS, the tax will apply to electronic products designed for tanning that use one or more ultraviolet lamps with wavelengths between 200 and 400 nanometers. Other sunless tanning options, such as spray tans, are not subject to the tariff.

The tax is expected to generate $2.7 billion by 2019, according to the Congressional Joint Committee on Taxation.

Tanning salons are charged with collecting the levy and reporting it to the government each quarter. That money will help fund the health-reform package, which carries a price-tag of $940 billion.

NY: Get Ready for $11 a Pack Cigarettes

Yesterday legislators from New York passed a bill that will levy an additional $1.60 in excise taxes on every pack of cigarettes sold in the state. The new tax is scheduled to take effect July 1^st, and will increase the total taxes on a pack of cigarettes to $11. Check out the following CNNMoney.com article on this recent development.

New York City smokers already pay the highest cigarette taxes in the nation, but a new state law will push those taxes even higher this summer.

The state legislature on Monday approved a bill adding an additional state tax of $1.60 to every pack sold, effective July 1. This bill, which was signed by Gov. David Paterson on Monday, will raise the state tax to $4.35 per pack.

New York City smokers pay an additional municipal tax of $1.50 per pack, for a current total tax of $4.25 per pack. That's the highest state-local tax whammy in the country, according to the Campaign for Tobacco-Free Kids. Chicago is the runner-up, at $3.66 per pack.

This new tax increase means that smokers in the city will pay $5.85 per pack in taxes. This drives the average local price up to nearly $11 per pack, according to some estimates.

The tax hike is aimed at generating an additional $440 million in 2010-2011 tax revenue to support healthcare programs.

The bill also requires that taxes to be imposed on cigarettes sold at Indian reservations, including the Shinnecock Indian Nation, which was recently recognized by the federal government.

Soda Tax Uncaps a Fight

Soda taxes are becoming more and more popular among state and local governments. However, as this article on WSJ.com explains, the producers and sellers of sodas and sweetened beverages have increased their efforts to campaign against any new taxes. Check out a snippet of their article below, or for more information on soda taxes you can read this article I posted on my blog last month explaining the pros and cons of soda taxes.

Makers and sellers of soda and other sweet drinks have intensified a fight against proposed taxes on their products, as a growing number of cities and states are weighing the measures to help fill depleted coffers.

A soft-drink bottler offered what it called a $10 million good-will-gesture donation for health and recreation programs in Philadelphia, as city officials there considered a proposal for an excise tax to help plug a budget hole and fight obesity. The tax, proposed by Philadelphia's Democratic Mayor Michael Nutter, would amount to two cents an ounce on soda and other sweet drinks.

Industry officials are also considering trying to organize a referendum in Washington State to repeal a three-year excise tax on carbonated beverages of two cents on every 12 ounces.

The moves come as officials in at least 20 cities and states have proposed new taxes or the removal of tax exemptions on non-alcoholic beverages so far this year. The beverage industry has spent millions of dollars since 2009 on lobbying and advertising against proposed taxes, including a federal tax initially proposed as part of the health-care reform bill.

So far, few such taxes have actually been imposed. The final federal health overhaul didn't include a soft-drink tax. And while several state and city legislators initially expressed enthusiasm for new soda taxes, only Washington State has approved a new excise tax on soda thus far, while Colorado removed a sales-tax exemption.

Extending the Sin Tax to the Tanning Bed

From Miller-McCune.com:

The case against indoor tanning is a strong one: according to the American Academy of Dermatology, indoor tanning before the age of 35 is linked to a 75 percent increase in the risk of developing melanoma, the deadliest form of skin cancer. But the cancer risk hasn’t been bad for business — on an average day, more than 1 million people visit indoor tanning salons, and research conducted in 2008 found an average of 42 tanning salons per city in the United States.

Tanning aside, there are more than 1 million new cases of skin cancer diagnosed every year, and an estimated $300 million is spent annually treating melanoma.

If indoor tanning poses such a substantial health risk, why do people — especially teens — keep doing it?

A recently published report by Catherine E. Mosher of Memorial Sloan-Kettering Cancer Center in New York and Sharon Danoff-Burg of the University of Albany, State University of New York, offers one explanation for the rampant use of tanning beds by people who should know better: For some, indoor tanning could be addictive.

The researchers gave 421 study participants two questionnaires traditionally used to test for alcohol and substance abuse that had been modified to measure tanning addiction. They also assessed participants’ anxiety, depression and substance use.

For the 229 participants guilty of “fake-baking,” the average number of visits made to a tanning salon in the past year was 23. But the scientists found that 90 of these participants met the criteria for tanning addiction on one measure used, and 70 did on another. These “tanaholics” were also more likely to report anxiety and substance use than other study participants.

Online Gambling Tax May Be Jackpot for Congress, Lawmaker Says

A tax on online transactions has already been instituted in several state and local governments, but Congressman Jim McDermott is suggesting the Federal government begin taxing one specific type of online transaction – gambling over the Internet. McDermott said making this bold move could raise as much as $42 billion over a 10 year period. Check out a portion of the BusinessWeek.com story below.

“It’s a human activity that people are going to do and it’s a good place to pick up some dough,” said McDermott, a Washington Democrat, in an interview. “I’ve gotten a thousand ideas pumped at me about what we should do with the money.”

The House Ways and Means Committee tomorrow will consider his proposal, which depends on passage of a separate bill to legalize some Internet gambling and roll back a law designed to block wagering beginning June 1. That bill would let U.S. residents gamble online with companies licensed by the Treasury Department.

Las Vegas-based Harrah’s Entertainment Inc., the world’s biggest casino company, is among companies and groups lobbying Congress to legalize online gambling.

Washington Lawmakers OK $1-Per-Pack Cigarette Tax Hike

From BusinessWeek.com:

The Washington Legislature is adding $1 to the price of a pack of cigarettes.

The House and Senate both passed a higher tobacco tax on Monday night, as lawmakers worked to wrap up their special legislative session.

It's part of the Legislature's plan to raise close to $800 million in revenue for the state budget. The bill now goes to Gov. Chris Gregoire for final approval.

Starting on May 1, the tax of a pack of cigarettes increases to slightly more than $3. Taxes also will be raised on other products, such as cigars and chewing tobacco.

Democrats said the measure would raise money and discourage smoking, while Republicans said it could just drive tobacco purchases to other states or online.

CDC: States Not Putting Cigarette Tax Funds Into Efforts To Curb Smoking

Although, the federal government and over a dozen states have increased taxes on cigarettes, according to the CDC none of that money is going to smoking prevention programs. The CDC made this startling announcement yesterday according to this Reuters report.

Increases in cigarette taxes ranged from 10 cents per pack in North Carolina to $1 in Connecticut, Florida and Rhode Island. The average 2009 increase was 52 cents per pack.

As a result of the tax increases in the 14 states and Washington, D.C., the average state cigarette tax rose from $1.18 per pack in 2008 to $1.34 per pack in 2009, according to CDC.

In a CDC report released Thursday, the agency wrote that "cigarette excise tax increases can be even more effective in reducing tobacco-related death and disease" when used in conjunction with other tobacco-control measures. CDC added, "A 10% increase in the price of cigarettes can reduce consumption by nearly 4% among adults and can have an even greater effect among youths and other price-sensitive groups."

American Heart Association CEO Nancy Brown said that state lawmakers can help improve both public health and state finances by dedicating money from cigarette taxes to tobacco prevention programs, which she noted in some cases can reduce smoking among youth by up to 40%.

Cigarette Tax Bump in 15 States Lifts U.S. Fees to $2.35 a Pack

After cigarette taxes went up in 15 states during the year 2009, it brought the national average to an astounding $2.35 a pack. The average state tax assessed on a pack of cigarettes is $1.34, in addition to the $1.01 federal tax that was also increased last year. As this Bloomberg.com article explains, the various increases have resulted in more than $1 billion in new state and federal tax revenue.

Smoking rates in the U.S. fell about 15 percent in the last decade, though declines slowed in the last five years, according to the Atlanta-based CDC. Thomas Frieden, the agency’s director, has warned that decades of smoking reductions may be ending unless taxes increase and more money is spent on education.

“Increasing cigarette excise taxes is one of the most effective tobacco control policies,” the report’s authors wrote. “Additional increases in cigarette excise taxes and dedication of all resulting revenues to tobacco control and prevention programs at levels recommended by CDC could result in further reductions in smoking.”

Each $1-a-pack increase brings in about $9.1 billion in annual tax revenue, according to the report. A dollar increase, over time, also prevents about 1 million smoking-related deaths and stops 2.3 million children from becoming smokers, the CDC said.

Continue reading at Bloomberg.com…

The Pros and Cons of Soda Taxes

With the recent passage of Obama’s health care reform bill, two topics have been in the news frequently: tax increases and the health of American citizens. One such tax increase is the so called “soda tax” which have been mentioned in Congress multiple times over the past few years; however, they have been unsuccessful in beening passed into law on a national level. With so many myths, and opinions about soda taxes being published online I decided to put together this blog entry explaining both the pros and cons so that my readers could make their own decisions about the possibility of a tax on carbonated beverages.

Pro: Fight Obesity

One of the most prominent arguments for instituting a national soda tax is to provide incentive for Americans to eat and drink healthier products and thus decrease obesity. There are numerous medical associations that have publicly announced their support of taxes on sugary beverages and some have even conducted studies to examine the potential health benefits of such a tax. A study conducted between the years 1985 and 2006, involving over 5,000 patients, showed a direct correlation between higher soda prices and the average daily caloric intake of Americans. Their study found that when the cost of a can of soda increased by 10%, the average patient consumed 7.12% fewer calories per day.

Con: Little Affect on Obesity

For every expert standing behind a soda tax, there is another who opposes it. Although some studies link soda prices with caloric intake, other health experts claim that problems with moderate eating, and lack of physical activity are more to blame for the countries obesity problem than sodas. When discussing the issue Dr Pepper Snapple Group Inc (DPS.N) Chief Executive Larry Young even said "let's put warning labels on sofas, because that's where kids are sitting instead of (being) outside playing.”

Pro: Additional Federal Revenue

There is no denying the fact that the federal government is looking for ways to increase revenue. Currently, there are about a dozen local government agencies – including Kansas, Colorado, and the city of Philadelphia – that have or are likely to begin enforcing soda taxes. The soft drink industry takes in about $110 billion per year in American sales, and whether or not a soda tax will help improve the health of the country, it could generate additional federal revenue. With so much spending going on in Washington, Congress is considering almost anything to generate more revenue.

Con: Recycling Fees

A large reason that many government agencies are hesitant to institute soda taxes is the fear that it might have an effect on the tax levied on the cans, bottles, and glass containers that carbonated beverages are sold in. These taxes are used to promote recycling, not public health, and are not generally that controversial. However, some experts are worried that adding a soda tax, on top of a recycling fee, could cause consumers to question these taxes on recyclable containers.

Pro: Incentives for Soda Company

Even before soda taxes became a popular topic of conversation, PepsiCo and Coca-Cola have both been working on tactics to improve their appeal to the ever growing group of health conscious Americans. However, with soda taxes becoming a reality in dozens of places across the country, the pressure is on for soft drink makers to produce healthier products.

Recently, PepsiCo responded to this new demand by creating a Gatorade beverage with all natural coloring and flavoring to be featured in health stores later this year. The company has also announced long term plans to make all of their products healthier over the next decade. They will reportedly cut the average amount of sugar per serving by 25% and the saturated fat by 15% in all products.

Con: Consumer Rights

Like other “sin” taxes, many Americans are most upset by the idea of using a tax to promote public health. Consumers of carbonated beverages feel like it is their right to indulge in sugary beverages, and the lack of moderation exhibited by some does not mean the government should enforce a tax increase on every American. Additionally, in today’s tough economic times many families are struggling to put food on the table, and any taxes on these family’s grocery bill would surely be unwelcome.

Good Question: Do Sin Taxes Really Work?

Sin taxes – such as those levied on cigarettes and alcohol – are frequently the subject of debate by tax experts because they try to serve two different purposes. First of all, they are a great way to generate revenue, but they also work to discourage certain behaviors. WCCO.com recently published a great piece on whether or not sin taxes actually work. Check out a section of their article below.

Government often uses the tax code to encourage and discourage certain behaviors. And budget times have state and federal governments looking for money. That combination has renewed interest in the idea of new sin taxes on soda and junk food. But do sin taxes work?

"The research around tobacco has shown that large increases on taxes on cigarettes has been the single most effective policy to reduce tobacco use," said Mary Story, a dietitian and public health professor at the University of Minnesota.

Story published a brief analyzing the impact and effectiveness of sin taxes, concluding that a 10 percent increase in sugar-sweetened beverage prices could cut consumption by 8 percent to 10 percent.

Story also wrote that "a few studies have concluded that, in response to changes in relative prices, some consumers will substitute a healthier beverage for an SSB. For example, a study conducted in 2004 found that increases in SSB prices resulted in small increases in consumption of whole and reduced-fat milk, juice, coffee and tea."

However, tracking the success of sin taxes is difficult. Advocates who are against smoking and alcohol abuse point to tax increases as a strong factor in reducing consumption. The American Lung Association says a 10 percent increase in cigarette taxes is strongly correlated with a 7 percent decrease in youth smoking.