October 26, 2009
by David Brunori

David Brunori argues against the taxation of sugar-sweetened beverages, stating that such a tax would be not only unfair but would impose a hidden levy that runs counter to the principle of tax system transparency.

David Brunori is the executive vice president of editorial operations for Tax Analysts. The opinions expressed in this article are those of the author and do not necessarily reflect the views of Tax Analysts or its employees.

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President Obama and members of Congress need substantial amounts of new revenue to fund any of the healthcare reform plans being discussed.

There is no shortage of ideas for raising the money, but there is one particularly bad idea being bantered about in Washington — taxing soda.

Actually, many healthcare reform advocates, including an increasing number in the administration, are pushing to tax all beverages sweetened with sugar.

Americans drink a lot of soda, more than 50 gallons per person every year. Soft drinks have increasingly been linked to obesity, tooth decay, bone disease, diabetes, and cancer. For those reasons, soda has become an attractive target for politicians needing revenue. However, there are no sound policy arguments for supporting excise taxes on soft drinks.

Economists have preached for hundreds of years that the only justification for an excise tax is to compensate society for the external costs of using a product. The excise tax revenue should be used to alleviate the harm caused by using the product. But soda tax proponents — in and out of government — want to use the money to pay for expanded healthcare coverage. Sure, soda consumption may lead to health problems, but they are not the health problems a soda tax would alleviate.

Proponents of the soda tax seem to be following the states. State politicians wanting to tax soft drinks have been unable to articulate the external costs for which they are attempting to compensate society.

In fact, over the years excise taxes on soft drinks have been proposed to pay for free lunches in public schools, deficit reduction, road construction, nursing homes, and state university scholarships. Like the federal soda tax ideas, none of the state proposals have anything to do with externalities. When most people drink a soda, there are no costs to society for which they should be singled out for higher taxes.

Michael Jacobson of the Center for Science in the Public Interest testified in support of healthcare reform before the Senate Finance Committee. Jacobson said that soft drinks cause obesity, especially in children, and are an appropriate subject of excise taxation. That is the same argument New York Gov. David Paterson (D) made when he called for a state excise tax on soda. Their argument is that people drink soda and gain weight to the point of obesity, the obesity will cause health problems, and the government will have to spend more taking care of them. Under that logic, Paterson should have been targeting cannolis and cheesecake. Under that logic, maybe we should tax people who sit in front of computer games all day.

Singling out sugar-sweetened beverages is unfair to the manufacturers and consumers of those products. It may be too much to call soda a vice, but if not, why are we singling out this vice? Why not go after the candy bar enthusiasts? The people who eat a quart of ice cream at one sitting? Why are we singling out beverages at all? There are lots of activities that cause cavities, but no one is calling for a tax on parents who do not make their kids brush regularly.

There is an even bigger problem with taxing soft drinks. At the state level, most people do not even know they are paying the tax. That is because the excise tax is usually imposed on the bottlers and distributors of soft drinks — not directly on the consumer. The tax is imposed on the amount of syrup used or on the number of gallons bottled.

The consumers, of course, pay more because of the tax. They just don’t know it. That hidden levy runs contrary to the principle that the tax system should be visible and the burden known.

The secretiveness of the soft drink excise is particularly egregious when one realizes that the tax is very regressive. The poorer you are, the greater percentage of your income will go to the tax. But the poor will not know that.

To be sure, some people truly believe that a tax on sugar-sweetened drinks will lead to lower consumption and better health. However noble that cause might be, social engineering through the tax laws has never been very effective. Every tax policy textbook written in the past 100 years will tell you that tax laws should be written to raise revenue and not to coerce behavior.

There is something more cynical at play. Obama’s healthcare reforms will cost money. If the problem of healthcare is serious, Americans should be willing to pay for reform upfront with higher income taxes. A small percentage increase in income tax rates could pay for reform. Taxing health insurance benefits for the wealthy can address the problem as well. But soda taxes are nothing but cleverly disguised attempts to raise revenue on the backs of low-income citizens. The soda tax will ask the poor to pay for reforms that will benefit the poor. That can’t be the legacy the president wants to leave behind.