Tuesday, March 29, 2011

Is a Soda Tax Politically Feasible?

Back in 2009, the two largest “Big Soda” beverage producers in the united states – the Coca-Cola Company and Pepsi Co – and the American Beverage Association (ABA) – an organization that lobbies on behalf of beverage companies – spent an unprecedented $37.5 million on lobbying members of congress to kill a proposed national sales tax on soft drinks that would, in part, help to cover costs associated with healthcare reform. Americans might not perceive beverage companies as having the same political influence on par with big oil and pharma, but make no mistake, these companies are also powerful and just as committed to protecting their corporate interests. Having lost the fight for a soda tax in congress, health advocates are now taking the battle to individual states. In doing so, they should turn to Arkansas to learn from the states experience in passing and preserving a soda tax.

As early as 1992, Arkansas passed a soda tax that the beverage lobby and state chamber of commerce said would kill business in the state. The tax added an additional 2 cents per 12 ounces of soda, a negligible amount, especially when compared to what is being proposed these days. The beverage companies, however, would have none of it, fearing less that the action would directly hit profits, and more that if it proved successful, copy cat legislation would be proposed in state legislatures across the country. In an effort to squelch the newly passed bill, “Big Soda” poured substantial resources into a voter referendum campaign to repeal the law in 1994, but to no avail. Voters rejected the proposition to repeal the tax by a healthy margin of 55-to-45 percent. In 1997, “Big Soda” tried once again to repeal the law, this time through the state’s legislature, and was again unsuccessful.

Why was there so much support for this tax in a state that is not known for having liberal tax policies or producing progressive legislation? The reason that the tax was able to pass the legislature and then withstand numerous attempts at its repeal was due, in large part, to how the revenue was allocated. Money generated by the soda tax was earmarked as an additional funding source for the state’s hugely popular Medicaid program. Tying the soda tax – something that has the potential of being politically unpopular because it's a tax, but more so, because it's a tax on a highly visible good – to a popular social program, greatly enhanced the political feasibility it needed to become law and withstand repeal.

Furthermore, in an effort to have the Arkansas law repealed in 1997, the Arkansas Hospitality Association argued that the tax would impair profit margins for businesses operating in the state, resulting in a loss of business to adjacent states. U.S. labor statistics, however, tell a different story. It showed that “employment in the food and drink services sector increased by 6 percent in the two years after the soda tax was adopted, the highest increase since the Labor Department began collecting the data. From 1992 to 2008 private employment in Arkansas' Food Services and Drinking Places increased by 57.5 percent, twice the rate of total private sector employment in the state."[i]

While there doesn’t seem to be any substantial evidence that the Arkansas soda tax has dissuaded individuals from purchasing high calorie soft drinks, and therefore has done little to influence consumer behavior,[ii] it does prove that taxes on goods with adverse affects are feasible if those revenues are then used to mitigate the negative externalities associated with that particular good.[iii] [iv] If the objective is to reduce soda consumption rather than raise revenue, the Arkansas tax would have to be much higher to have a significant impact.[v] If taxes were increased on an elastic product such as soft drinks, then evidence shows that consumption of that good would decrease substantially, as has been the case with tobacco.[vi]

It is difficult to determine whether a substantially higher tax would be equally as feasible from a political perspective, but it would result in changes to consumer behavior. A review conducted by the Yale University's Rudd Center for Food Policy and Obesity found that for every 10 percent increase in price, soda consumption likely decreases by 8 percent.[vii] The effects are likely higher for heavy users of soft drinks.[viii] Based on November 2008 price increase and volume sales information on Coca Cola and Pepsi sales in the U.S., soda elasticity demand is negative 1.15 meaning that a 10% tax would reduce consumption by 11.5 percent.[ix] Ultimately, the key to increasing the political feasibility of a soda tax is to use statistical evidence showing that a moderate soda tax won’t stifle economic vitality and that revenues are earmarked for popular programs that benefit society.

[i]Dreier, P. a. (2010, April 20). The Soda Tax Wars: Huffpost Food. Retrieved April 29, 2011, from huffingtonpost: http://www.huffingtonpost.com/peter-dreier/the-soda-tax-wars_b_544898.html?page=3

[ii] Smith, D. (2009, Septemaber 03). Will the Soda Tax Go National: Arkansas Times. Retrieved April 29, 2011, from Arkansas Times: http://www.arktimes.com/arkansas/will-the-soda-pop-tax-go-national/Content?oid=949896

[iii] Center on Budget and Policy Priorities. (2009, May 27). Tax - Federal: Center on Budget and Policy. Retrieved April 29, 2011, from Center on Budget and Policy: http://www.cbpp.org/cms/index.cfm?fa=view&id=2830

[iv] Stobbe, M. (2010, April 1). HuffPost Denver: The Huffington Post. Retrieved April 29, 2011, from The Huffington Post Web site: http://www.huffingtonpost.com/2010/04/01/colorado-soda-tax-study-s_n_521481.html

[v] CBS News. (2010, April 1). Health: CBS News. Retrieved April 29, 2011, from CBSNews.com: http://www.cbsnews.com/stories/2010/04/01/health/main6353297.shtml

[vi] World Health Organization. (2009). Tobacco Free Initiative (TFI): World Health Organization. Retrieved April 29, 2011, from World Health Organization Web site: http://www.who.int/tobacco/mpower/2009/gtcr_download/en/index.html

[vii] Andreyeva, T., Long, M. W., and Brownell, K. D. (2008). The impact of food prices on consumption: A systematic review of research on price elasticity of demand for food.

[viii] Gustavsen, G. W., and Rickertsen, K. (2005). Public policies and the demand for carbonated soft drinks. Working paper prepared for presentation at the XIth Congress of the European Association of Agricultural Economists, Copenhagen, Denmark, August 24-27, 2005.

[ix] Beverage Digest, November 21, 2008, pp 3-4.

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