A national soda tax is a bad idea that deserves to fizzle out

According to legend, the Philadelphia Experiment was a 1943 scientific effort to make a U.S. Navy ship in the city’s harbor disappear.

A new study by economists from Cal-Berkeley, The University of Pennsylvania and New York University contends the federal government should build on a modern-day experiment that was pioneered in Philadelphia, copied in other big cities and is under consideration in states such as Connecticut.

Specifically, they suggest a national tax on sugar-sweetened beverages would be a net positive to the U.S. economy. According to their mathematical models, a tax of 1 to 2.1 cents per ounce would be ideal.

But the results from Philadelphia’s city-level soda tax should worry anyone contemplating an equivalent national program. After considering a 3-cents-per-ounce tax on sugary drinks, the city ultimately imposed a 1.5-cents-per-ounce levy in June 2016.

Within a few months, consumers complained about increased prices, the local Pepsi distributor laid off dozens of workers, and the local Coca-Cola bottler reported a 32-percent decline in sales.

Meanwhile, revenues generated by the tax fell far short of projections. Sound public policy would not result in higher prices for consumers, job losses, lower sales and disappointing tax revenues.

Under the economists’ proposed national soda tax, a typical 12-ounce can of Coke or Pepsi would cost an additional 20-25 cents. That may seem like a palatable amount to many readers, but only if one naively overlooks that the federal government has an unquenchable thirst for revenue.

Briefly revisiting history is instructive. In 1950, a worker and her employer each contributed 1.5 percent of the worker’s salary to Social Security. This tax rate reached 3 percent each by 1960, 4.8 percent each by 1970 and 6.13 percent each by 1980.

If a national soda tax is enacted at 1.5 cents per ounce — the rate Philadelphia chose — history tells us the rate will increase substantially over time. The collateral damage associated with a 50-cents-or-more surcharge on a can of soda across the various players in the beverage supply chain — producers, bottlers, retailers and consumers — simply requires extrapolating Philadelphia’s results to the national level. 

Soda taxes are also regressive. Poor people spend a higher percentage of their funds on food and beverages than middle-class and wealthy citizens. In 2017, the average American drank 39.25 gallons of soft drinks.

A two-cents-per-ounce tax on 39.25 gallons would cost the average American just over $100 per year. Well-to-do Americans could absorb this expense, but it would represent an unreasonable burden on the poor.

Moreover, many poor Americans would be on the hook for much more than $100 because the poor tend to buy more soda than their wealthier counterparts.

Philadelphia Mayor Jim Kenney defends the tax’s effects on his city’s poor by pointing out that the city is spending the money on programs such as new pre-kindergarten programs that benefit the poor.

This paternalistic, rhetorical twist appears to be unconvincing; Philadelphia Councilwoman María Quiñones-Sánchez estimates that in her urban district “95 percent of the residents hate” the tax.

Beyond lacking fairness, a soda tax also lacks logic. Proponents of sin taxes point to their value as behavior modification techniques — if a harmful item costs more, people will buy it less, and taxes make the item cost more.

Data show that Philadelphians have cut their consumption of sugary beverages, but this mirrors trends that were already underway when the tax was enacted.

An increasing emphasis on healthier lifestyles led sugary beverage consumption nationwide to drop from 45.5 gallons per person in 2010 to 39.25 in 2017 — a 13.7-percent reduction in seven years. With demand already falling, the moral justification for a soda tax evaporates.

A second hole in logic is that sugary beverages are not widely-regarded as worse than other forms of junk food. Why single out beverages and allow cupcakes, cannolis and Big Macs to escape the taxman’s wrath?

Today, Navy ships have nothing to fear in Philadelphia, but a modern Philadelphia Experiment is making economic activity disappear. There is no reason to believe a federal-level effort would fare any better. A national soda tax is an idea that deserves to fizzle out. 

David Ketchen is a professor and Harbert Eminent scholar in the Raymond J. Harbert College of Business at Auburn University. In 2018, he received Auburn University’s Southeastern Conference Faculty Achievement Award as well as its Creative Research and Scholarship Award.