Is a New Battle Brewing Over Soda Taxes?

As more cities start taxing sugary beverages, the industry may turn to new allies to block them.
by | January 2017
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The price of a soft drink may be rising soon in a city near you. Two years ago, there were no independent excise taxes on sugary drinks in any locality in the country. Now, there are several. Most recently, four were approved at the polls this past November, and one was passed just two days after the election in Cook County, Ill., home to Chicago and more than 5 million people. The county now taxes soda at a penny an ounce.

Other localities are bound to take a look as well. “We’re going to see it everywhere,” says Joe Henchman, vice president of state projects at the nonpartisan Tax Foundation. “Not a week goes by that I don’t see an official somewhere in the country proposing it for their jurisdiction.”

There are two main benefits to the idea. The first, obviously, is revenue. A penny an ounce can add up quickly, given the amount of soda that people drink. Cook County is expecting to collect $221 million by next year, enough to balance its budget.

The second benefit: Soda taxes are sold as a way of discouraging consumption, particularly in light of research showing that high levels of sugar intake, particularly in liquid form, can cause obesity and diabetes. Dentists also warn against sugary drinks -- a leading cause of tooth decay.

There is some evidence that taxing these drinks cuts down on their use. The World Health Organization has concluded that “appropriately designed taxes on sugar-sweetened beverages” will cut consumption, especially if they raise retail prices by 20 percent or more. An early study in Berkeley, Calif., where voters approved a soda tax in 2014, showed that consumption of sugary drinks dropped there by 21 percent, compared with a 4 percent drop in other cities, while water consumption saw a spike.

Raising the price of soda by taxing it more is the most “viable and practical” way to reduce its consumption, says John Arnold, a former hedge fund manager who has campaigned for these measures. Arnold and his fellow billionaire, former New York Mayor Michael Bloomberg, were the primary financial backers of this past year’s initiatives. Their money was more than matched by the American Beverage Association and its members. But the industry’s message -- that soda taxes are punitive and less effective at reducing consumption than information campaigns -- ultimately proved unconvincing to most voters.

Assuming that the idea of soda taxes continues to gain traction, the industry might turn to other allies to block them. New taxes imposed at the local level could be wiped out by tax-despising state legislatures, which have shown little hesitation in recent years when it comes to preempting liberal economic policy ideas, such as minimum-wage increases. “Many state lawmakers are watching the growth of discriminatory taxes, on beverages and hotels for example, and are concerned with the aggressive approach utilized by certain local units of government,” says Jonathan Williams of the conservative American Legislative Exchange Council. “If this growth in discriminatory taxation at the local level persists, I think it is quite possible efforts will emerge at the state level to address these threats to taxpayers.”

That remains to be seen. The ink’s not dry on most of the new local laws. But there are going to be more of them. It’s possible that sodas will simply join the category of unhealthful items, such as cigarettes and alcohol, that people are willing to see taxed at a higher rate than other goods. “We’ve received a number of calls since Election Day from other communities that have interest in pursuing this,” Arnold says. “It has to be a decision that’s led by the community, but once a city or state decides they want to pursue this, we’re very willing to help them with resources.”