Soda Tax, Not So Sweet

The city of Philadelphia made history on June 16 when the city council approved a measure to tax sweetened drinks, colloquially known as a “soda tax,” becoming the third U.S. city to enact such a rule. The measure, which won’t take effect until 2017, will tax distributors ¢1.5 per ounce on all sugary or artificially sweetened drinks. This works out to ¢18 per can, $2.16 per 12 pack and $1.02 per 2-liter bottle.

This is not the first time a major U.S. city has tried to go after the sale of sweetened beverages, but it is only the third time one has been successful. Chicago has been taxing sodas at a rate of 3% for years. In 2014, Berkeley, California, was the first city to pass a per ounce tax on sugary drinks. Prior to the passage of the Berkeley tax, similar measures had been brought up forty times in cities across the country, only to be defeated each time.

Most famously, former New York City mayor Michael Bloomberg championed a proposal that would have banned the sale of large sized sodas in the city. The measure failed when New York’s supreme court ruled that the city’s board of health lacked the authority to issue such a ban. Polls showed that 57 percent of New Yorkers were opposed to the rule, as they did not believe the city should decide what size sodas should be available.

Due to the rarity of soda taxes, it is hard to know how they affect soda consumption. There was a decline in soda consumption in Berkeley after the tax, but consumption was already declining, so economists have had trouble quantifying the effect of the tax. The best data comes from Mexico, which started taxing sodas at the beginning of 2014 at a rate of one peso (about five cents) per liter (or approximately 10 percent of the pre-tax price). The tax was levied on distributors, but it was consumers that bore the burden, as the price of drinks rose proportionally to the tax. Economic data showed that in the year after the tax went into effect, soda consumption declined by approximately six percent for the year, and that the rate of decline was accelerating.

Mexico levied this tax as an effort to combat a growing obesity rate that may have been partially fueled by soda consumption – the country was the largest consumer of soda on a per capita basis in 2011. Health advocates have long championed the idea of taxing sweetened drinks as a measure to improve public health, arguing that soda consumption has played a part in the increasing growth rates of diabetes and obesity.

Many of the proposed taxes on sweetened drinks that failed to pass would have ultimately funded public health initiatives, but one of the major distinctions of the Philadelphia measure is that it was not passed as a public health initiative. Rather, the mayor and the city council argued that taxing sweetened drinks was being done as a way for the city to fund a universal prekindergarten program, as the tax is expected to generate over $91 million per year.

While there may be some advantages to a soda tax, there are also disadvantages. One of the most prominent arguments against implementing a soda tax is that it is a regressive tax, meaning that it will have a greater effect on those with lower income. Studies have shown that 32 percent of people with an annual household income of less than $25,000 consume soda, as opposed to the 16.1 percent of people making over $75,000. Furthermore, the tax is flat, meaning that it does not scale based on levels of income. Those who make less will pay more, as a percentage of their income, than those who have make more. The regressive nature of these taxes has caused numerous progressive politicians and economists to oppose them.

There are other potential unintended consequences that could negate some of the effect of the tax, or further pass the burden on to lower-income Philadelphians. For example, wealthier residents might simply buy soda outside of the city to avoid extra costs or out of spite for an unpopular tax. Another argument, made by the American Beverage Association as well as labor unions, is that these taxes will reduce consumption and in turn, jobs will be lost as bottling plants produce and ship less soda. Another argument is that the tax may not be passed onto consumers, but rather absorbed by vendors who do not alter their price for fear of losing business to stores outside of Philadelphia. In this case, prices would not go up for consumers and consequently would not affect their behavior. There is also the philosophical question of whether government should or should not influence consumer behavior through taxes.

It will be interesting to see if Philadelphia is a sign of things to come, or merely a flash in the pan. We may know soon, as other cities such as San Francisco and Denver will be voting on whether to levy similar taxes later this year.

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