Why a Tax on Soda is Unhealthy

by Dr Keli'i Akina, Ph.D., Grassroot Institute, August 5, 2017

Hawaii has no soda tax. But that's not for lack of trying.

Ever since the coordinated nationwide push for taxes on sodas and sweetened drinks began a few years ago, the possibility of a soda tax has been very real in the Aloha State. In the 2011 and 2013 legislative session, then-Gov. Neil Abercrombie made a serious effort to impose such a tax, though the measures eventually failed.

But they haven't gone away either. During the 2017 session, there were multiple resolutions and bills (in both the House and Senate) aimed at requiring people who buy sweetened drinks to pay a special tax. Though usually called a soda tax, the proposed levy usually not just sodas but also juices, sports drinks and any other drink with sugar in it. Sometimes, the proposals even included diet drinks.

The rationale for soda taxes is always related to "fighting obesity" in some way, but make no mistake, this is ultimately a way for the state to increase its revenue.

Which makes Philadelphia's experience an important lesson for any Hawaii lawmakers still itching to tax sodas.

According to a study from the Tax Foundation, Philadelphia's soda tax has been a dismal failure. The tax, which went into effect on January 1 of this year, is 1.5 cents per ounce — about 24 times the tax on alcoholic beverages. Some of the support for the tax is because of the programs it is supposed to fund, notably early childhood education. Unfortunately, only 49 percent of the tax revenues go to pre-kindergarten education. What's more, revenues are far below expectations. And that's threatening the future of those programs.

Most economists will tell you that consumption taxes decrease consumer spending on the taxed item or activity. And that's exactly what happened in Philadelphia. With steep soda taxes significantly increasing the cost of soda, consumers have drifted toward alcohol, cut soda consumption, or travel outside the city to buy soda without the tax. The fact that people travel to avoid the tax underlines another unattractive facet of the surcharge: It's regressive. Not only does it have the hardest impact on those least able to afford it, but that same group is also least likely to be able to leave the city to avoid it.

Philadelphia's original estimates were that the city would make $46.2 million on the tax by the end of the 2017 fiscal year (in June). Instead, it raised only $39.4 million. Some local distributors have seen their sales of soda decrease by 50 percent in just a few months. The Pepsi and Coca-Cola companies have announced local layoffs due to decreased soda sales. The city is even facing a lawsuit over the tax.

In other words, the tax operated exactly like economists would have predicted: It discouraged people from buying the taxed item, and in doing so, has threatened the sustainability of the programs that it was intended to help in the first place.

There is a lesson in here for the Hawaii Legislature, which often looks to tax surcharges to raise money for everything from education to elder care. Regressive consumption taxes are not a viable way to fund government programs. Rely on them and all you'll have is an angry citizenry and less revenue than you hoped for. In short, you can't outsmart economic reality.