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IMA Tax Policy Blog

Soda Taxes: Decreasing Consumption or Increasing Revenue?

By Morgan Scarboro, The Tax Foundation . . .

With the recent implementation of new soda taxes at the city and county level, questions of why and how to enact them have become popular for discussion. Yesterday, the Tax Policy Center published a research report that explores the most efficient way to enact soda taxes based on politicians’ priorities. In the report, they do not argue whether soda taxes are good or bad policy, but assume that the government has already enacted sweetened beverage taxes and consider the best way to apply them.

Tax Policy Center is correct that politicians necessarily face tradeoffs with soda taxes — they must focus their main policy priority on either increasing revenue or decreasing sugar consumption, and it is impossible to do both of those things simultaneously. For the goal of increasing revenue, taxing by the volume of the beverage is the correct choice. To decrease sugar consumption, a tax based on the amount of added sugar in a beverage is the better alternative.

However, politicians often tout soda taxes as a way to both decrease sugar consumption and raise revenue, often for important and popular initiatives like education or healthcare. The problem with this approach is that supporters are essentially advocating using a declining revenue source (from reduced consumption) to fund an important public service.

Additionally, the goal of decreasing sugar consumption is often advanced as a means to curb obesity or diabetes. According to a 2010 study, however, cutting out soda is not as impactful on obesity as one might think. Researchers estimate that raising the soda tax to 58 percent would decrease mean Body Mass Index in the U.S. by 0.16 points. For a 6-foot-tall person, this is the equivalent of less than a pound.

Lastly, soda taxes are regressive. Not only would low-income people pay a larger percentage of their income in soda taxes, but they would pay more in real dollars as well, in part because low-income people drink more soda than higher-income earners.

Tax Policy Center is correct about administration of current or assumed soda taxes. However, in the conversation about soda taxes, it’s important to acknowledge their regressive nature, overall ineffectiveness in improving public health, and unstable revenue stream for important public ventures. Combined, these attributes of soda tax proposals make for poor tax policy. States and localities would be better off not implementing them.

Read our comprehensive report on soda taxes here.