Social Engineering

The Sticky Facts on Soda Taxes: Why They Don’t Work (And No One Likes Them)

Peter Shawn Taylor
November 16, 2021
Taxes in Western countries were traditionally meant to raise money for necessary government expenditures. They weren’t supposed to shape individual behaviour, let alone attempt to turn taxpayers into better human beings. Free-market economists later added the principle that taxes should seek to minimize damage and distortion to both the economy and taxpayers. So what should we make of a new tax that is essentially moralistic in purpose, damaging to those least able to afford it and likely doomed to failure? Peter Shawn Taylor delves into debt-ridden Newfoundland and Labrador’s plan for a new tax on sugary beverages, and the formidable array of international evidence that argues against it.
Social Engineering

The Sticky Facts on Soda Taxes: Why They Don’t Work (And No One Likes Them)

Peter Shawn Taylor
November 16, 2021
Taxes in Western countries were traditionally meant to raise money for necessary government expenditures. They weren’t supposed to shape individual behaviour, let alone attempt to turn taxpayers into better human beings. Free-market economists later added the principle that taxes should seek to minimize damage and distortion to both the economy and taxpayers. So what should we make of a new tax that is essentially moralistic in purpose, damaging to those least able to afford it and likely doomed to failure? Peter Shawn Taylor delves into debt-ridden Newfoundland and Labrador’s plan for a new tax on sugary beverages, and the formidable array of international evidence that argues against it.
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The Rock is in a hard place, financially speaking. At 51 percent of GDP, Newfoundland and Labrador has the highest provincial debt in Canada. Its current $1.5 billion budget deficit is proportionately the country’s second-highest. And its bonds are the lowest-rated by credit rating agencies, meaning it must pay higher interest rates than any other province to finance all that debt. With options limited, it appears the plan is to tax itself back to prosperity.

A Canadian first: Newfoundland and Labrador’s Deputy Premier and Minister of Finance Siobhan Coady claims her innovation of a 20¢ per litre tax on “sugar sweetened beverages” is solely a public health move, although it is difficult to overlook the province’s dire financial straits; pictured below, St. John’s harbour. (Sources: (top) The Canadian Press/Paul Daly; (bottom) Shutterstock)

The 2021 budget unveiled by provincial finance minister Siobhan Coady earlier this year leaned heavily on new taxes to keep the ship afloat. Most of these measures will be familiar to hard-pressed Canadian taxpayers. There were new personal income tax brackets for high-income earners as well as the usual boost to cigarette taxes. And the groundwork was laid for higher taxes on everything else, with the budget proposing to “evaluate increases to the harmonized sales tax.” But Coady also broke new ground in Canadian taxation by announcing plans for the country’s first soda pop tax, set to take effect next September.

This new tax will apply to “sugar sweetened beverages” including soft drinks, energy drinks, pre-packaged milkshakes and fruit-flavoured drinks, but not sparkling waters, 100 percent fruit juices, infant formula or other medical beverages. It is to be set at 20¢ per litre. In her public statements, Coady is adamant that the new tax has nothing to do with the revenue crisis at the provincial treasury. “The focus of this proposed legislation is on encouraging residents to make healthier choices – without the added sugar,” she said last month when introducing the necessary amendments to provincial tax law. She then explicitly compared the new tax to other traditional “sin” taxes on alcohol and tobacco, which are also meant to improve the moral habits of residents.

Not everyone is buying Coady’s efforts at distancing her soda tax from the province’s financial crisis. “Newfoundland is dealing with a massive debt and deficit,” says economist Sylvain Charlebois, senior director of the agri-food analytics lab at Halifax’s Dalhousie University and a frequent commentator on Canadian food policy. “It is hard not to think about the fiscal cliff the government is facing when considering why the province is bringing in a soda tax. It is more of a tax grab than anything else.”

While similar policies have been adopted in 43 other countries, this is the first time a Canadian jurisdiction has attempted to control the non-alcoholic beverage habits of consumers with a specific, volume-based tax. Earlier this year, British Columbia removed a long-standing provincial sales tax exemption for “soda beverages,” similarly touting the move as a major health intervention. But all that means is that pop is now treated the same as most other purchased items. The Northwest Territories also proposed a soda tax in its 2017 budget, but eventually dropped the idea. As a result, Newfoundland and Labrador will be alone in Canada when it joins countries including France, Belgium, Great Britain, Mexico, South Africa, Saudi Arabia, Peru and Morocco, as well as U.S. cities such as Seattle, Philadelphia and San Francisco, in slapping a tax on sugary beverages of the fizzy or flat variety.

An explosion of interest: At last count, 43 countries around the world impose a special tax on sugary beverages. (Source: “Sugar-sweetened beverage taxes: Lessons to date and the future of taxation” by Barry M. Popkin and Shu Wen Ng in PLOS Medicine, Jan. 2021)

The Health Imperative

Newfoundland and Labrador’s trendsetting soda tax has been celebrated in public health circles as a crucial blow struck against the rising scourge of obesity. But if we are to take Coady at her word that the province’s latest impost is meant to improve the health of Newfoundlanders, it is reasonable to put such a claim to the test.

Confounding behaviour: According to food policy expert Sylvain Charlebois of Dalhousie University, academic research often shows that when taxes are raised on certain sugary products, consumers compensate by consuming more of other, untaxed but equally caloric items.

For a soda tax to have a positive effect on public health, a specific chain of relationships must hold. Of crucial importance: when the price of pop is increased by the tax, consumers must not shift their purchases to other, equally caloric but untaxed products. If a soda tax is to be judged a public health success, it must therefore produce a noticeable improvement in health metrics such body mass index measurements (BMI: a measure of relative weight and height used to estimate obesity) or recorded new cases of diabetes and other related ailments.

Based on evidence from the many jurisdictions around the world already imposing taxes on sugary beverages, this seems entirely unrealistic. The reason is compensating consumer behaviour. According to research by Jason Fletcher of Yale University’s School of Public Health, “Any reduction in soft drink consumption has been offset by the consumption of other calories.” A 2014 field study of 100 American households amusingly found that a 10 percent hike in soda prices led to a noticeable growth in beer purchases – hardly the outcome hoped for by advocates.

Consumers have a frustrating habit of finding ways around attempts to control their diet via fiscal measures, as Charlebois observes in an interview. “Some studies suggest if you charge more for some sugary products like soda, people will just go elsewhere to get their sugar fix,” he says. “The end result is that people are not really making healthier choices.” There is no reason to believe experience in Canada will be any different.

Mexican Slurp-off

Internationally, the soda tax that attracts the most attention as a tool to combat obesity is Mexico’s impuesto al fresco, a 1 peso-per-litre tax on sugar-sweetened beverages unveiled in January 2014. The policy has been widely hailed as having a “significant impact” on national beverage habits and health. Research funded by the Bloomberg Philanthropies, a stridently pro-soda-tax advocacy group funded by billionaire Michael Bloomberg who, as mayor of New York City, tried to ban large soft drink servings, declared the tax a success after it led to a 6 percent drop in soda sales in its first year.

The facts, however, are more complicated. While soda sales in Mexico did decline during the tax’s first few years, it now appears there has been no permanent shift in the country’s long-standing love affair with sugary pop. Mexicans drink more soda per capita than any other country, partly for cultural reasons and partly because their local water sources are notoriously untrustworthy. (The same factor plagues Newfoundland and Labrador, incidentally.) The tax hasn’t changed that. “Consumers have more or less reverted to their previous tendencies,” says Catherine Krol, a beverage analyst with market research firm Euromonitor, in an interview from Chicago.

Big soda fans: Mexicans are the largest per capita consumers of soft drinks in the world, and while a 1 peso per litre soda tax initially lowered consumption nationwide when it was introduced in 2014, sales have since bounced back.

While low-calorie beverages enjoyed a “slight uptick” in the years following the tax’s imposition, Krol says the bigger story is that the status quo has ultimately prevailed. “[Mexican consumers] prefer the taste of full-flavoured, full-calorie carbonate products,” she says. Euromonitor’s market data backs her up. After falling from 12.3 billion litres to 10.8 billion litres in the tax’s first year, sales of Mexico’s crucial sugar-sweetened cola category rebounded to 11.2 billion litres by 2019, just before Covid-19 hammered sales in Mexico by shutting down soccer games and other public events. Other countries experienced a similar pandemic-related curve in demand.

Of even greater significance than the bounce-back in soda demand is the tax’s overall effect on the health of Mexicans. In a word, nada. While some tax supporters claimed it would produce a substantial weight loss of two to four pounds per person across the entire country, the facts suggest otherwise. The BMI for Mexican males rose steadily from 2013, before the tax was imposed, to 2016, the most recent year available. The figures for women also went up. The rate of morbid obesity nearly doubled between 2000 and 2018.

Not only has the Mexican soda tax failed to shift consumer preferences in any substantial way, but it has clearly had no impact on baseline health measures. Such a finding is supported by Canadian data, even though we’ve never had a soda tax. In 2017 the Heart & Stroke Foundation released research purporting to prove that a nationwide 20 percent tax on soft drinks would trigger various immediate and measurable improvements in Canadian health. (Newfoundland and Labrador’s 20¢ per litre tax works out to an average 16 percent tax.) The report went on to make many suspiciously grand predictions to bolster its case, including that the policy would save 13,206 lives and avoid 215,846 cases of diabetes, 61,230 cases of heart disease and 21,777 cases of cancer. Plus, the average BMI for Canadian men and women was predicted to drop by 1.5 percent.

Fantastical claims: While public health organizations argue soda taxes will produce noticeable health gains, evidence that Canadian soda consumption has already fallen by half since 2004 with no sign of any health improvements suggests these assertions are without merit; on right, data from a 2017 Heart & Stroke Foundation-funded report claiming a nationwide soda tax would prevent 215,846 cases of diabetes, 61,230 cases of heart disease and 21,777 cases of cancer in Canada by 2041.

It seems utterly fantastical. According to the most recent data from Statistics Canada, the amount of soda sold in Canada has actually fallen from 107 litres per person in 2004 to 53 litres in 2020, a far larger decrease than the Heart & Stroke Foundations’ tax scheme could ever hope to achieve. And throughout this time the average BMI for Canadian men and women has continued its relentless climb. The same trajectories can be discerned for rates of obesity and overweightness.

If soft drink consumption can fall by half over a 15-year period while obesity continues to grow, the only reasonable conclusion is that there’s no discernible relationship between these two factors. And if that’s the case, why would a soda tax make any difference?

Fattening Up the Treasury

There is, however, one area in which soda taxes do appear to have a sizeable impact. Despite Coady’s attempts to keep the “focus” of Newfoundland and Labrador’s new soda tax on its purported health benefits, it is likely to have a much bigger effect on provincial finances. Her budget estimates it will yield $8.7 million in its first year, or more than half what the province’s income tax bracket changes are expected to generate. Don’t be surprised if it yields a lot more.

Punishing the poor: Ample academic evidence proves taxes on food or drink are extremely regressive, hitting lower-income Canadians the hardest. (Source: Shutterstock)

Such was the case in Mexico, where the soda tax has proven to be a surprisingly resilient source of government revenue. In its first year, the tax earned 18.3 billion pesos, or one-third more than originally projected. Last year, it was up to 28.9 billion pesos – a cool Cdn$1.8 billion at the current exchange rate. Part of the reason for this impressive gain is that Mexico’s federal government has taken to imposing annual rate increases; what began as a 1-peso-per-litre tax is now up to 1.26 pesos. “Revenue has been tough to find for the [Mexican] government, which is why we are seeing the increases in the tax rate,” explains market researcher Krol.

But while a soda tax may improve government finances, it still remains remarkably bad public policy. The most obvious flaw is its regressive nature. By necessity, low-income families spend a greater proportion of their income on food and drink, and anything that makes such necessities more expensive will hit them harder than others. A study into a proposed 20 percent Canada-wide soda tax published last year in the academic journal Economics and Human Biology found that, “The lowest income quintile would pay the higher proportion of income in tax, implying that the tax is regressive.” The paper also estimated that such a tax would raise $1.4 billion for Ottawa. Of course any plan to make food and drink more expensive for poor Canadians – especially in this time of rampant food price inflation – should be considered a terrible idea, regardless of how much it might earn the treasury.

Evidence is “weak”: At the request of the New Zealand government, the independent New Zealand Institute of Economic Research investigated the international body of knowledge on sugar and soda taxes, and concluded such a policy would not pass a rigorous cost/benefit analysis.

Soda taxes present numerous other flaws, including unintended consequences for businesses. When the city of Philadelphia imposed a US1.5¢-per-ounce soda tax in 2017 (including on diet soda), urban food stores suffered an immediate and substantial decline in sales as footloose shoppers fled to suburban centres where the tax did not apply. As a direct result of the soda tax, at least one grocery store in a low-income downtown neighbourhood was forced to close its doors, denying poor Philadelphians (many of whom do not own cars) access to healthy and nutritious food. It seems an utterly perverse outcome.

And when the New Zealand government asked the independent New Zealand Institute of Economic Research to conduct a rigorous analysis of all international evidence on sugar and soda taxes, the institute concluded that “We have yet to see any clear evidence that imposing a sugar tax would meet a comprehensive cost-benefit test.” Further, support for any improvement in health outcomes arising from a tax was declared “weak.” Curiously enough, New Zealand’s government initially refused to release the report; it was only made public following a Freedom of Information request by an economics-minded blogger.

Soda Tax Rage

Of further importance to Coady and other politicians thinking of foisting a soda tax on their constituents is the fact these measures tend to be extremely unpopular. When the Northwest Territories abandoned its plan to tax soft drinks in 2019, the underlying reason was an outpouring of complaints raised during a series of consultation meetings, plus a government poll showing 60 percent of those surveyed thought it was a bad idea. “Just plain stupid…[and] another tax grab” former Tuktoyaktuk Mayor Merven Gruben told the CBC.

When Chicago tried to slap a soda tax on its residents in 2017, the policy lasted a mere month before an outpouring of public anger forced city hall into retreat. As The Economist observed, the tax wasn’t fooling anyone. “From the very start the one-cent-per-ounce levy on sweetened soft drinks was massively unpopular; policymakers claimed it was introduced to protect public health, but its main purpose was to plug a US$1.8 billion hole in the budget.” And this year even tax-loving Norway abolished a special excise tax on soft drinks as it struggled to quell public complaints about over-taxation and its impact on cross-border shopping. Despite their ability to squeeze extra revenue out of reluctant taxpayers, soda taxes do not appear to be a winning political strategy.

Leave my pop alone: The Northwest Territories government dropped plans for a soda tax in 2019 after public consultations revealed 60 percent of respondents opposed the idea and 69 percent thought it would not reduce soda consumption.

Finally, there is the risk of where this policy impulse to control diet by fiscal means might lead. “What I am most concerned about with a soda tax is that it opens up the possibility of taxing other food products that may also be perceived by government as undesirable. And that opens up a Pandora’s Box of concerns,” says food policy expert Charlebois.“Because it represents the emergence of a moral state that seeks to dictate what is good and what is not-so-good for you. We should dread such a moralistic state that uses sin taxes to punish consumption.”

Of course, the moralistic state Charlebois dreads has been rampant for years. The question is whether further predations can be kept at bay. Or whether, as with soda taxes, this urge will continue to seek new ways to control what we eat and drink and how we live our lives.

Peter Shawn Taylor is senior features editor of C2C Journal and author of the ebook Pop Goes the Tax: Why soda taxes won’t stop obesity, but will take a big gulp out of your wallet, recently published by the Canadian Taxpayers Federation.

Source of main image: AP Photo/Jeff Chiu.

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