Davis, California Soda Tax Idea Fizzles Out

Published March 21, 2016

Lawmakers in Davis, California abandoned plans to ask voters to approve higher excise taxes on sweetened beverages and recreational marijuana, choosing to table discussions on the proposed sin taxes to a later date.

The Davis City Council (DCC) had been considering placing a ballot question to increase the cost of soda, energy drinks, and sweetened tea by 1 cent per ounce of sugar or “added caloric sweetener” on the June 2016 ballot, but DCC determined the issue should be opened up for public discussion before DCC would make a decision.

The initial proposal planned to give the proceeds from the excise tax to health-related government programs.

‘Little Impact’

Sherzod Abdukadirov, a research fellow in the Regulatory Studies Program at the Mercatus Center at George Mason University, says “soda taxes” are mostly feel-good measures.

“The real problem with soda taxes is their ineffectiveness,” Abdukadirov said. “Numerous studies examined the impact of soda taxes and found that they have little impact on consumer purchasing behavior. This means that few consumers reduced their soda consumption in response to taxes.”

Abdukadirov says soda taxes may harm public health.

“Using soda taxes as a revenue mechanism to finance health programs has major downsides,” Abdukadirov said. “Sales taxes are highly regressive; they hurt the poorest consumers the most. In addition, by taxing low-income consumers, local governments effectively reduce their incomes. This leaves low-income consumers with less money to spend on other health-improving activities, such as visiting a doctor or purchasing medication. Thus, the tax may actually have a negative impact on their health.”

Substituting Goods

William Shughart II, research director at the Independent Institute, says Davis lawmakers did the right thing, even if they did it for the wrong reasons.

“The incidence of any tax—that is, where the burden falls—depends on the number of substitutes there are for the taxed good or service,” Shughart said. “The more substitutes available to consumers, the more elastic is the demand for the taxed product and the larger the loss in sales for the sellers as customers shift to untaxed or lesser taxed alternatives. I doubt that Davis’s policymakers ever heard of demand elasticity, but they were on the right track in refusing to impose a soda tax there.”

Complicated Effects

Shughart says excise taxes encourage tax avoidance.

“Virtually every state and many local governments include soft drinks in their general sales tax bases,” Shughart said. “Because sales taxes apply broadly to consumers’ purchases—although some states tax food bought to prepare at home at lower rates than other items and exempt purchases of things like prescription drugs, newspapers, and books—most of the tax gets shifted forward to consumers in the form of higher prices.

“A standard principle of public finance is that a tax rarely sticks where it lands,” Shughart said.

Dustin Siggins ([email protected]) writes from Washington, DC.