The Economics of “Soda Taxes”

Sugary beverages manufactured by companies such as Coca-Cola and Pepsi are colloquially called &#soda;147” in the United States. Americans consume soda in large quantities. This consumption can be attributed to the fact that soda is easily and cheaply available. The low cost and easy availability are considered to be one of the main reasons why Americans have high rates of obesity and lifestyle diseases such as hypertension, diabetes and even cancer.

The link between high consumption of soda and the increase in health care costs is direct and has been reported by several investigative agencies. It is for this reason that some provinces in America have started levying a soda tax. In simple words, a soda tax is only levied on beverages which have more than a certain specified content of sugar. California was the first state to levy a soda tax in America. However, Philadelphia has one of the steepest rates of this tax.

On the global front, many countries like Denmark, Barbados and the United Kingdom have successfully applied soda taxes. America is amongst the new entrant in the club. Since soda companies such as Coca-Cola and Pepsi are based in the United States, there is a lot of lobbying which is being done in order to repeal these taxes. This has led to a debate breaking out in the United States upon the advantages and disadvantages of a soda tax. In this article, we will have a closer look at these advantages and disadvantages.

Advantages of Soda Tax

The advantages of the soda tax have been listed below.

  • Reduced Health Care Costs: It is a proven fact that if people consume fewer sugary drinks, they will have less risk of developing any lifestyle disease. Taxes raise the prices of sugary products. Hence, they incentivize people to eat healthier foods. In many developed countries, the government has to bear the health care costs. Hence, more unhealthy people mean that the government has to face more expenses. By levying soda tax, the government ensures that there will be fewer expenses in the future. Hence, it makes financial sense to levy such a tax.
  • Increased Allocation to Nutrition Costs: In many developed countries there is a direct correlation between the levy of soda taxes and the increase in spending on nutrition costs. This means that the government collects money from people who buy soda and gives it to those who buy healthy food. This is in line with the government’s objective of making healthy food the more economically viable alternative.
  • Reformulation: In many countries, the sales of soda companies saw a severe decline after the soda taxes were introduced. Since the business was impacted, these companies were forced to reformulate the products and remove excess sugar. The newly created products were not really healthy. However, they were causing considerably less damage to the public health. Hence, the governments in these nations and provinces have been able to successfully alter corporate behavior with economic incentives. Companies have become more socially responsible thanks to the soda tax.

Disadvantages

The soda companies have been lobbying hard to get the soda taxes repealed. They have been stating many disadvantages of these taxes. Some of the most prominent ones are listed below.

  • Forcibly Influencing Consumption Patterns: The soda companies are of the opinion that consumption of any kind of food is a personal choice. This is one area of life, where there should not be any government interference. These companies have been alleging that by forcing customers to choose certain kinds of products over others, the government is infringing on their constitutional rights.
  • Damaging Local Business: Consumers who stay in the border areas of these provinces simply tend to go to another state or country to buy the soda that they need. Hence, the argument presented by the soda companies is that the tax is not actually doing any good. The consumption is still continuing, and the damage to health is still being done. However, by implementing the soda tax, the state is just reducing its own revenues and that of the local businesses. They believe that there are no winners as a result of this tax. However, there are significant losses that local businesses have to bear.
  • No Parity in Sin Taxes: The additional levy of soda tax does not mean that sin taxes are increased further. Hence, in many states, the price of soda becomes somewhat close to the price of alcohol. The end result is that many people who were going to buy soda end up buying alcohol instead! Hence, there is a damage done to public health. The soda companies, therefore, state that alcohol prices should also be raised further by taxation. If that is not possible, then the soda taxes should also be repealed.
  • Impacts Poor People: Sodas tend to be consumed more by people in the lower income group. Hence, when these taxes are levied, the lower income group is the most adversely affected. Hence the allegation that the soda tax is actually a regressive tax which takes from the poor and gives to the rich. However, the government has refuted this allegation saying that their objective behind levying these taxes is to ensure that the consumption of soda amongst lower income groups is drastically reduced.

To sum it up, many governments all over the world have woken up to the ill effects of consuming sugary drinks. The soda companies are likely to see more action being taken to prevent excessive consumption of sugar.


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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.


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