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.

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.

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.