Sweet Benefits of the Soda Tax: Examining Impacts and Implications for Revenue
December 05, 2017
Sugar sweetened beverage taxes, commonly referred to as soda taxes, have been on the rise in American municipal governments as a potential policy solution to both a public health crisis and a revenue shortage . However, in cities like Philadelphia where these sugary beverage taxes have been implemented, they have become a target for the scrutiny of residents and economists alike. Governments that have implemented soda taxes commonly cite how the tax revenue and the tax itself could help tackle obesity, but this claim is still subject to debate.
Since November 2014, when Berkeley, California, became the first U.S. city to pass a tax on artificially sweetened drinks, eight other U.S. cities have followed suit. To date, only one of those cities (Chicago) has voted to repeal the tax . In January of 2017, Philadelphia mayor Jim Kenney’s soda tax, to be levied on distributors, went into effect, taxing nonalcoholic sugar-sweetened and diet beverages at a rate of 1.5 cents/oz .
One of the primary purposes behind governments imposing taxes on artificially sweetened beverages is to curb the consumption of caloric sweeteners by the public, and in turn, remediate health problems related to the overconsumption of these sweeteners.
While the merits of this type of “sin tax” policy are debated, most agree that taxing sugary beverages has the potential to generate a significant amount of revenue for governments . In addition to claiming this Pigovian tax falls disproportionately on poor consumers, critics have also cited statistics indicating the failure of this tax to provide healthy alternatives to soda as evidence of its ineffectiveness . The early evidence suggests that many customers often travel just outside the city to purchased untaxed beverages, taking advantage of a readily available, geographical loophole. .
The tax disproportionately affects low-income households because they are more likely to consume sugar products at high amounts than higher-income households. However, that also means low income households stand to benefit the most with regard to health. As high-income households are less sensitive to price changes, low-income households are more likely to stop consuming soda from an increase in soda prices.
Sugary beverage taxes vary across the United States in their cost per ounce of the tax and the types products that are taxed. While Philadelphia’s tax on sugary beverages is lower than Seattle’s 1.75 cent/oz tax, it is more comprehensive than those of other cities. In addition to soda, Philadelphia’s tax targets fruit-juice based drinks with additives, sports drinks, flavored water, energy drinks, pre-sweetened coffee or tea, and non-alcoholic beverages intended to be mixed into an alcoholic drink. However, as in other US cities, milk, water, pure juice with no added sugar, baby formula, and medical supplements have been exempted .
Case Study: Results in Philadelphia
In its first six months, Philadelphia’s soda tax has raised $39.3 million in revenue and curbed the purchase of taxed beverages within city limits . There has also been an associated uptick in the purchase of bottled water in the city. Major beverage corporations including Coca-Cola, Pepsi, and Canada Dry have reported regional job losses which they attribute to the new tax . Overall, these economic impacts are in line with the predictions of opponents of a soda tax.
Studies indicate that the impacts seen on the surface do not tell the whole story. A 2014 study published in the American Journal of Public Health concluded that soda taxes do not negatively impact employment where implemented, despite appearances. The study goes on to state that increased employment in other sectors of the economy ultimately offset immediate job loss in the taxed industry . Additionally, a 2013 study conducted by researchers from Duke University concluded that while taxing soft drinks reduced the consumption of such products, the resulting product substitution led to an increased intake of sodium and fat in cities with sugary beverage taxes .
The goals of the Philadelphia soda tax are two-fold: to raise revenue for infrastructure investments and to increase overall public health.
Currently, more than two-thirds of Americans are clinically obese or overweight, and numerous medical studies indicate those individuals are at a significantly higher risk of developing cancer, diabetes, heart disease, and other related medical ailments . Additionally, childhood obesity rates are increasing within the nation . According to a study by BMC public health, a tax on soda and related products reduces overall consumption of soda. In addition, the higher the price of soda, the higher the reduction of the consumption of soda.
However, while the consumption of soda goes down, the consumption of substitutes such as fruit juice and whole milk goes up. A review of available literature suggests that soda taxes only lead to a “modest” reduction of weight in a population . At the same time, whole milk and fruit juices offer more vitamins and minerals than sodas, which suggests that the increase in soda prices might lead to other positive health outcomes. Additionally, the inverse relationship between consumption of soda and the tax is conducive to such beneficial health effects. In Philadelphia, diet sodas are included under the umbrella of the beverage tax, but such may not be the case in other cities. A tax exclusive of diets would increase their consumption, since they serve as substitute for regular soft drinks. Diet drink consumption goes up with the increased of prices of regular sodas, and the average body mass index (BMI, or weight relative to height) of a population goes down. However, the consumption of diet drinks increases the risk of developing metabolic syndromes by 34%. The extent to which diet drinks may lead to growth or decline in the overall physical well-being of a population is still unclear.
On balance, it seems that the soda taxes generally increase health outcomes, but there are still ways they could be reformed to raise aggregate health. One possibility is to replace soda taxes with an excise tax on sugar per gram in drinks, as opposed to a flat percentage tax on all drinks above a certain sugar level. Such a tax could provide incentives for companies to reduce the concentration of sugar in their products and cut sugar substitutes, since they are carried directly to shelf prices. For instance, Berkeley, CA implemented such a tax in March of 2015, with a tax of $0.01 per oz of sugar consumed. For Berkeley, the number of sugar-sweetened beverages consumed within its borders decreased by 21% in the first year of implementation alone . Not only could the tax reduce the city’s average per capita consumption of sugar, but it could also create a new means to raise revenue, as the current tax idea relies solely the taxation of soda. The taxes could then be redirected to other means to reduce societal obesity.
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