Case Analysis of the Soda Tax Issue

July 31, 2011

Summary of the Soda Tax Issue

The issue of the soda tax in its present form has been on the political radar for the last few years. This tax has been proposed on the States and even some municipalities level, as well as widely discussed by the Congress as one of the fiscal measures to offset, at least somewhat, the multi-billion cost of the Health Care Reform under the Obama administration. It is worth mentioning that for the States and local governments this issue of levying the “Sugar Tax” on carbonated drinks has become a hot issue on their agenda only recently when their budgets got severely hit by the economic slowdown and recession of the last few years.


There were the attempts to impose the “Sugar Tax” in the past, but they were based on different premises from today’s widely used rationale. In the past they were explicitly aiming to raise government cash inflows for particular needs of the country and were most often referred to as either “sin taxes” or “luxury taxes”. One of those successful attempts to impose the “Sugar Tax” was in 1919 and was essentially a war levy to help provide much needed additional funds during the World War I for the Federal Government. The second such attempt was in 1932 and was designed to help fill the government coffers during the Great Depression. Neither of these instances of instilling the “Sugar Tax” succeeded  at their stated goals. The revenue from the tax was not big enough to be worth upholding in the face of opposition from consumers, vendors, and manufacturers. Both of these attempts were repealed within no more than three years.

Apparently the proponents of the excessive government taxation in general, and the local lawmakers looking for additional ways to mend budgetary shortfalls have learned their lessons from the past. Now they are trying to ride the trend of the consumers becoming more concerned with the “public good”, and specifically engaging a very sensitive health issue of the “obesity epidemic” that has overcome this country.  This new disguise for the infamous taxation policies has had moderate to little success so far, but because the States and local budgets are projected to suffer even higher deficits in the coming years, we can expect that the tax proponents will become more aggressive in pursuing their agenda.

We, as a company have to take a very well-balanced stance on the issue and develop an adequate proactive response, including contingency plans, because a plethora of potential actions fueled by diverse groups, starting with health advocates groups, public health and government officials, some researchers and consumers, can have very negative effects on our business. If the “Sugar Tax” is implemented at its most unfavorable for us terms we can expect very serious financial repercussions. These negative effects could stem from the increased costs in compliance, increased indirect taxes, which all would lead to the increase of the cost of our products, and costs associated with potential legal actions against the company. The increased cost of the products will most definitely result in reduced demand for our products and therefore will bring about significant impact on our revenues and profitability. It may also have potentially negative impact on our reputation and undermine the public trust.

While the public health issues in relations to our products is of paramount importance for the company, we are strongly opposed to the imposition of the “Sugar Taxes” on our products for the following reasons:

  • First and foremost, while we are aware and concerned about the obesity problem tied with the excessive calories intake in the US, there is no conclusive evidence to single out the sugar-containing beverages as the only, and even the main source of this calories over-consumption.
  • There are two distinctive groups acting as the main proponents of the “sugar tax”. Even though they seem to be united because of the common goal, their motives are quite different, if not outright opposite.
    • The first group is represented by health advocates and public health government officials. Supported by the research published by Duffey et al. in Archives of Internal Medicine in March 2010 they argue that for the tax to be an ”effective mechanisms to steer US adults toward a more healthful diet and help reduce long-termweight gain” it has to be at about 18% or an equivalent of one cent per ounce of drink. This research is building on stipulations of another research by Dr. Kelly Brownwell et al which was published in The New England Journal of Medicine in October 2009. (http://content.nejm.org/cgi/content/full/NEJMhpr0905723)
    •  The second group comprises the local and federal lawmakers who are primarily driven by fiscal considerations of increasing the tax revenue to cover for the budget shortfalls from other sources. Even though they may use health considerations in their rhetoric, this is not their actual motive. If the tax were imposed at the suggested level of about 18% they would not be able to collect the projected tax revenue due to significant reduction in consumption.
  • Therefore this apparent conflict of interests is bound to produce ineffective policies for the public benefit. The low taxes would not raise enough money, and high taxes would discourage consumption. As economists Roy and Gladys Blakey observed: “The two results are not likely to be achieved in the same bill, because if the rates are high enough to accomplish the latter, not as much revenue will be produced as if the rates were lower.”
  • There is rather strong possibility that if the high taxes reduce consumption of sweetened soda, the demand will just shift towards other foods containing sugar and the health effect of the proposed legislation will not be achieved.  Therefore the total consumer surplus will be negatively affected without positive consequences for the consumer health.
  • The consumers are strongly opposed to taxing soft drinks as is demonstrated by the results of the latest survey from Harris Interactive. According to it “Over half of Americans (56%) are opposed to this tax going into effect with two in five (42%) being strongly opposed. [Only] Three in ten (31%) support this tax being imposed.”

(http://www.harrisinteractive.com/NewsRoom/HarrisPolls/tabid/447/mid/1508/articleId/402/ctl/ReadCustom%20Default/Default.aspx)

  •  The economic consequences of high “Sugar Tax” and reduced demand will most definitely materialize in reduction of production and associated with it layoffs within the industry as well as decrease in manufacturing orders from suppliers and vendors. This will lead to decrease in income taxes and increase in unemployment benefits as the most immediate and obvious result. This could be devastating not only for the beverage industry community, but many other tangent industries.
  • The issue of overweight and obesity is a complex problem which requires systematic and well-conceived approach. Singling out the soda drinks for increased taxation as the only culprit is not going to solve this problem. In fact, it is likely to bring about many other problems that we have touched upon in our review. The obesity and other health related issues connected to overconsumption of calories need to be addressed through consumer education, lifestyle changing solutions, such as exercise, sports involvement, etc.  The Coca Cola Company is ready to contribute to these causes through the appropriate available channels and programs, as well as invest in R&D for alternative foods and beverages providing more nutritional benefit to the consumers. This will provide the more appropriate ways of dealing with health-related issues of overconsumption without resorting to forceful administrative coercion and reducing the consumer welfare.

http://www.taxhistory.org/thp/readings.nsf/ArtWeb/186B22AE29FA8E15852575CA00439846?OpenDocument