Extras on Excise: Can Soda Taxes Quench States’ Thirst for Funding?

Soda TaxSoda taxes have been trending this year, as lawmakers in several states look for ways to cope with budget deficits and address public health concerns. Piggybacking off the flurry of soda tax legislation enacted across the nation over the past couple years in a number of California cities, Boulder, Colo., Cook County, Ill., and Philadelphia, legislators in Connecticut, West Virginia, Santa Fe, N.M., and Seattle are considering whether a new tax on sugary beverages can generate some extra revenue for their jurisdictions. 

In Connecticut, H.B. 7314 proposes a $0.01 per ounce tax on nonalcoholic beverages that contain added caloric sweeteners. Revenue collected from this bill would be used to fund early childhood and health outreach programs. Milk, creamer with added sugar, 100 percent fruit juice, infant formula, electrolyte solution, meal replacement and sole-source nutritional beverages would be exempt.

West Virginia Gov. Jim Justice’s (D) revised budget plan included a proposal that would have imposed an additional $0.01 per ounce tax on soft drinks to raise $85 million annually. Under this proposal, a 2-liter bottle of soda would cost approximately $0.68 cents more, and a 12-pack of soda would cost about $1.44 more. However, the Governor’s proposed soda tax fell flat with legislators and was not included in the provisional budget plan. Currently, West Virginia already imposes a $0.01 tax per 16.9 fluid ounces on bottled soft drinks, which benefits the West Virginia University School of Medicine. The state also imposes a tax on soft drink syrup at $0.80 per gallon and a tax on dry mixture used for making soft drinks at $0.01 per ounce.  

While the Governor’s proposal may have fizzed out, the West Virginia Legislature has introduced three bills to increase the soda tax. S.B. 335 would increase the current tax on soft drinks from $0.01 to $0.05 per 16.9 fluid ounces and the tax on soft drink syrup from $0.80 to $4.00 per gallon. H.B. 3085 would change the soda tax to a $0.01 tax per ounce (instead of per 16.9 ounces) on soft drinks, and H.B. 3045 would impose a $0.02 per ounce tax.

In Santa Fe, Mayor Javier Gonzales and Councilor Peter Ives introduced an ordinance creating a $0.02 per ounce tax on sugar-sweetened beverages to fund early childhood education programs within the city. Santa Fe residents will be able to vote on this initiative on May 2, 2017 (but Pre-K for Santa Fe, which supports the proposed tax, will not be giving out free tacos to voters as originally planned). 

In Washington, Seattle Mayor Ed Murray (D) proposed a $0.02 per ounce tax on distributors of sugary beverages. The proposed tax is estimated to raise $16 million annually for education programs aimed at reducing the achievement gap between minority and white students. Products subject to the tax would include sugary beverages such as soda, fruit drinks, bottled sweetened teas, coffee and energy and sports drinks. One hundred percent fruit juice, store brewed coffee, infant formula and medicine would be exempt. Diet beverages would also be nontaxable.

The impact of soda taxes as a mechanism to improve public health is still being determined, but jurisdictions with the new taxes have already felt the impact. Philadelphia’s new soda tax that became effective in January has reduced sugar-sweetened beverage sales within city limits. Some local distributors have reported up to a 50 percent sales decline since tax collection began, as reported by Jennifer Kaplan in the Daily Tax Report: State (subscription required).

Litigation has also stemmed from Philadelphia’s soda tax. The American Beverage Association, along with several retailers, filed a lawsuit in September 2016 against the city, arguing that the beverage tax is essentially a double tax on consumers because distributors have passed along the tax increase to consumers at the register in addition to sales taxes. The city argues that the tax is not a sales tax because it is levied on retailers. Currently, this case is on appeal at the Commonwealth Court. 

It may be too soon to determine if soda taxes will be a revenue-raiser and discourage soda consumption, at least in states and municipalities that impose or may impose a tax on sugar-sweetened beverages in the future. 

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Should states and municipalities implement a soda tax to raise revenue and reduce soda consumption?

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