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Wednesday, May 14, 2014

Extras on Excise: Debate Over Soft Drink Tax Continues to Fizz in States

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Soft drinks have been linked to ills such as diabetes, high blood pressure and obesity.  To combat this, states like California and Illinois are considering legislation that would impose taxes on sugar-sweetened beverages, including soft drinks.   But special levies on soda fall flat with critics of these measures, who argue that taxing soft drink consumption has little impact on obesity rates and disproportionately affects lower income individuals. 

The California bill, introduced in 2013, would impose a $0.01 per ounce tax on sugar-sweetened beverages, generating about $1.8 billion in additional revenue, which would go towards funding prevention programs that promote physical activity and improve the quality of school lunches.  Similar legislation introduced in the Illinois General Assembly (SB 3524) earlier this year would produce an estimated $600 million for prevention, wellness, and Medicaid services.  

This past April, the California Senate passed SB 1000, requiring sugary beverages to carry the following warning label: STATE OF CALIFORNIA SAFETY WARNING: Drinking beverages with added sugar(s) contributes to obesity, diabetes, and tooth decay.

Four states currently impose an excise tax on soda:  

  • Arkansas ($0.21 cents per gallon of bottled/canned soft drink product; $2 per gallon of soft drink syrup)
  • Tennessee (1.9 percent of gross receipts on manufacturing, producing, or importing soft drinks)  
  • Virginia (the tax ranges from $50 on gross receipts of $100,000 or less, to $33,000 on gross receipts over $50 million)  
  • West Virginia ($0.01 per 16.9 fluid ounces or half liter of bottled soft drink, $0.80 per gallon of soft drink syrup; $0.01 per ounce of dry mixture used to make soft drinks).

Twenty-three jurisdictions tax soft drinks at the normal sales tax rate, even in those states where “grocery” items are exempted from normal sales tax or taxed at a reduced rate.  And, depending on the state’s definition of “sugary beverage,” items like sports drinks, energy drinks, and flavored water also may be subject to the excise tax.  

Why tax sugary beverages?  Studies have shown that increased consumption of sugary beverages directly relates to weight gain and obesity.  States want to combat this problem and reduce rising health care costs associated with treating medical conditions caused by being overweight, which include an increased risk of developing heart disease, diabetes, stroke, and hypertension.  The theory is that a “soda tax” will dissuade consumers from purchasing soft drinks.  People would then drink less of them, leading to lower obesity rates and health care costs.  States are also able to use the revenue from sugary beverage taxes to fund health programs aimed at education, prevention, and wellness programs to further combat obesity.  

Critics argue that taxing sugary beverages will not have much effect on obesity rates.  Sugar-sweetened beverages only account for about 6 percent of caloric consumption, so there are other sources of those extra calories people consume every day—consumers can simply substitute other products for soda.  A Northwestern University study found that most obese people actually drink diet soda, which does not contain sugar, so a sugary beverage tax would have no beneficial effect on those individuals.  Additionally, economists argue that sugary beverage taxes would disproportionately affect lower income individuals.  

While some states have repealed their sugary beverage taxes (Louisiana, Maine, South Carolina, and Washington, to name a few), and others have been unsuccessful in passing legislation, the push to tax soft drinks is stronger than ever.  In 2009, Congress considered a federal excise tax on soda of $0.03 per 12 ounces to help fund the Patient Protection and Affordable Care Act.  In 2011, 14 states considered legislation implementing excise taxes on soda.  According to one report from the Tax Foundation, these taxes could raise the price of sugary beverages anywhere from 68 to 264 percent.  

The California and Illinois bills are just the latest in a long list of attempts to enact taxes on sugary beverages.  No matter what the legislature calls them—“soda taxes,” “soft drink taxes” or “sugar-sweetened beverage taxes”—the discussion about excise taxes on soft drinks is here to stay (at least for a while).  Only time will tell if such legislation will be successful.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Do you think your state will enact a “soda tax”? 

For more information about this and other state tax issues, sign up for a free trial of the Bloomberg BNA Premier State Tax Library. 

Follow us on Twitter: @BBNAtax 

 

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