In 2010, Colorado repealed the exemption for soft drinks and candy from sales tax, making soft drinks and candy subject to the 2.9 percent retail sales tax. Soft drinks and candy were previously exempt because they fell under the general food exemption. Food is exempt from sales tax in many states because of the regressive nature of the sales tax. The definition of soft drinks and candy is an important part of the new law because it does not include products made with flour (like Kit Kats for example). A comprehensive method to analyze this revenue source uses the criteria efficiency, adequacy, sustainability and feasibility.
Efficiency is average. While the Colorado initiative to repeal the exemption for soft drinks and candy is considered an extension of the state sales tax, a number of factors limit the loss of market efficiency. First, because soft drinks and candy are generally inexpensive goods, they will be less elastic than relatively expensive goods. Second, due to the broad scope of soft drinks and candy products, the incidence of consumers switching to substitutes in mass will be unlikely, especially with increases in price at a minimum. Finally, as soft drinks and candy are cheap goods, border issues, such as consumers heading out of state to purchase soft drinks and candy, should prove negligible.
Equity is low. General sales taxes, such as Colorado’s 2.9 percent sales tax, impose burdens on consumers in proportion to their amount of consumption making sales taxes highly regressive. From a benefits received principal, the burden of the tax will fall only on those who purchase soft drinks and candy.
Adequacy is generally high. A 2010 Colorado legislative forecast estimated that the repeal of the soft drink and candy sales tax exemption would generate an average of 18 million dollars a year for the State of Colorado. A sales tax, which is anchored to the price of the good, naturally responds to fluctuations in the market. This helps the tax politically, as there is less need for additional tax increases. There also is not a large change in consumption due to the tax.
Political feasibility and administrative feasibility are generally high. Unlike other tax increases in CO, the repeal of an exemption does not require voter approval. In addition, it is not highly visible to consumers because of the relatively small amount of money an individual would spend on soft drinks and candy. However, some do call it the Sweet Tooth Tax which is catchy. The costs associated with collecting sale tax are low. However, the fact the law excludes products with flour in the definition of candy could cause confusion.