Soda Taxes Hit a Sweet Spot

AP Photo/Matt Rourke

Mayor Jim Kenney signs into law a 1.5 cent-per-ounce tax on sugary and diet beverages at City Hall in Philadelphia, Monday, June 20, 2016. The tax will be levied on distributors and is set to take effect January 1, 2017. 

The question is very much what further taxes will be the least unpopular?” Alexander Hamilton wrote to James Madison more than 200 years ago. In 2016, the answer is a “soda tax.” Last week, Philadelphia’s City Council passed a tax on sodas and other sweetened drinks, making the City of Brotherly Love the first major American city to institute a levy on a broad range of sugared beverages. Berkeley, California, voters approved a similar tax in 2014.

Soda taxes have been touted as one way to nudge residents into healthier choices. However, local and state leaders are beginning to view sugar-sweetened beverages the same way they see the consumption of alcohol, tobacco, and cigarettes: Lifestyle choices that can be taxed to fund government. “That’s the game you are always trying to figure out, how to fund basic services,” says Tracy Gordon, an Urban Institute State and Local Finance Initiative senior fellow. 

The soda tax also is a revenue generator that provokes fewer voters. In most local jurisdictions, the property tax is the major source of revenue, comprising about 50 percent of the funds that municipalities raise directly, according to Gordon. But property taxes have a major drawback: They are wildly unpopular, particularly after a major economic thunderclap like the Great Recession. Enter a new generation of “sin taxes” on goods like soda and marijuana that that affect a subset of consumers. Many people can accept heavy taxes on these goods, particularly if they themselves don’t partake or can cut back their consumption.

Soda tax opponents like to point out that soda taxes are regressive; that is, the tax burden falls disproportionately on low-income people who are major consumers of soda and other sweetened drinks. Most health-care experts take a different view: Decreased consumption is a good thing since low-income people tend to have higher rates of obesity, heart disease, diabetes, hypertension, and other diseases that excessive sugar consumption can trigger.

How the tax plays out in Philadelphia offers an indication of where soda tax levies are headed in major metro areas. The 1.5-cent per fluid ounce tax is a bit of a misnomer, since the tax will be levied on a diverse assortment of non-alcoholic, naturally and artificially sweetened drinks like diet sodas, sports and energy drinks, and pre-sweetened coffees and teas. Baby formula and beverages that contain more 50 percent fresh fruits, vegetables, or milk will be excluded. The tax will be levied on beverage distributors who are more than likely to pass the costs on to consumers.

The city council went for the tax largely because Philadelphia Mayor Jim Kenney reworked the optics. His predecessor Michael Nutter stressed the public health benefits and twice failed to pass it. Instead, Kenney, who was elected last year, pledged to use the soda tax revenues for specific purposes, including pre-kindergarten and community school programs as well as parks, recreation, and libraries. Businesses that sold healthier drinks would receive a tax credit. Contrast that success to a plan for a 7 percent property tax hike over five years that one city council member proposed and withdrew shortly before the council approved the soda tax measure on a 13 to 4 vote. Philadelphia has had four property tax hikes since 2011.

Kenney’s success signals that a well-argued case for taxation based on funding popular programs can withstand an industry juggernaut. Heavyweights like the American Beverage Association labeled the measure a “grocery tax” and spent $5 million in its unsuccessful bid to derail it. (The group plans to sue the city to block the tax.) Supporters of the tax had their own bigfoot: former New York Mayor Michael Bloomberg, who unsuccessfully pushed for a Big Apple soda tax in 2012. He largely bankrolled their nearly $2 million advertising campaign.

Voters will consider soda taxes in San Francisco, Oakland, and Albany, California, this November. The Berkeley soda tax delivered more than $700,000 in new revenues in the first six months after it went into effect. The Philadelphia tax is estimated to bring in more than $90 million dollars annually. Reaching that benchmark will be a major test for the city, however, particularly with soda consumption already declining and soda taxes depressing consumption even more. The tax goes into effect on January 1, 2017.

To get the biggest bang for the soda tax buck, municipal officials should rethink the levy to shift both consumer behavior and industry practices, says Donald Marron, who directs economic policy initiatives at the Urban Institute and co-authored an Urban Institute and Brookings Institution Tax Policy Center study on taxing unhealthy foods. “If people want to go down this route, they ought to think about ways to design the tax so that high sugar drinks face more taxes than lower sugar drinks,” Marron says. “The beauty of a tax that is calibrated in some way to sugar content is at least it begins to give businesses an incentive to change their behavior, too.”

It’s hard to deny the appeal that a least-unpopular tax option that boosts revenues—like a soda tax—can have for cash-poor municipalities. Nonetheless, the debate over the soda tax hides a bigger problem: The ongoing struggle by cities and towns to fund civic necessities without riling up residents who, in turn, complain about paying higher taxes for a shorter menu of basic, and sometimes shoddy services, and who fail to that grasp that local governments cannot provide first-class programs or amenities on the paltry revenues that they currently take in.

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