When a City Passes a Soda Tax, Who Pays?

Taxes are levied against beverage distributors—but if the costs aren’t passed along to consumers, the policies don’t work.
(Photo: Spencer Platt/Getty Images)
Aug 17, 2016· 2 MIN READ
Willy Blackmore is TakePart’s Food editor.

Two years after highly contested campaigns on both sides of San Francisco Bay, municipal soda tax initiatives are once again driving political debates in the Bay Area. In 2014, Berkeley, California, passed a tax, and a measure narrowly failed in San Francisco, where questions of class and the city’s high cost of living were at the heart of the “no” campaign organized by the industry-backed Coalition for an Affordable City.

Now, with Berkeley’s tax fully implemented and Philadelphia’s city council passing its municipal measure in June, the fight over Oakland’s soda tax proposal is heating up—and the central question of the debate has changed. The American Beverage Association, an industry trade group, has spent $747,267 on a campaign that has focused on the burden that small businesses would face if the measure passes—and on raising doubt over who would be taxed.

“Proponents call it a soda tax, but it’s really a tax on food distributors, including community grocery stores, and their customers,” reads a mailer sent out by the ABA-backed No Oakland Grocery Tax coalition. Ads that have aired on both local television and streaming services such as Hulu show store owners such as Temur Kwajha, owner of a halal market, scooping out walnuts for a customer and pulling long, blistered sheets of flatbread out of the oven—foods that would not be taxed if the measure passes. “The last thing Oakland needs is a tax on groceries,” he says. Soda and sugar-sweetened beverages are neither shown nor mentioned in the spot. The ads, and the insistence on calling the measure a grocery tax, led to a number of Oakland City Council members who support the measure to say last month that they will file a false advertising claim with the Federal Communications Commission and an ethics complaint with the city. (Neither claim has been filed yet.)

So who would be paying the tax? The simple answer is that, as is the case in neighboring Berkeley, beverage distributors would remit the tax to the city. That additional cost, however, would be passed on, as research on the taxes in Berkeley and in Mexico has shown, with consumers paying a higher price for a can of Coke or Sprite. But while taxing distribution companies—“big soda”—is easier to sell, politically, than a tax that voters themselves would pay, the design of taxes like Berkeley’s and the one being considered in Oakland not only assumes that costs will be passed on to consumers—it depends on it. When a Cornell–University of Iowa analysis of the effect of the Berkeley tax on prices found that the cost of soda had increased by half as much as was expected, the Cornell Chronicle reported that “the measure so far has fizzled.” Subsequent studies have found pass-through rates as high as 70 percent.

Unlike sin taxes for cigarettes, which create a disincentive through high prices alone (with around 3 percent of revenue spent on antismoking programs, according to a 2012 study by the Centers for Disease Control and Prevention), the decline in consumption from increased cost is seen as secondary to the public health programs the revenue will pay for in cities like Berkeley. (Philadelphia’s tax is foremost a tool for creating revenue, which is earmarked for funding the city’s universal pre-K program.) The estimated $1.5 million in annual revenue from the soda tax will be spent on nutrition programs in Berkeley Unified schools and on grants for local organizations working on public health issues.

That tax costs would be passed on to consumers was considered a given by the ABA in June, when William Dermody, its vice president of policy, wrote in an email to TakePart, “Taxes get added to the price of any product, that is the way all businesses work. Consumers know that.” But in Oakland, the “no” campaign is casting doubt on how the costs from the tax will be passed on—and the subtext of the “no” ads and mailers is that prices will go up for other, non-sugar-sweetened beverage items. Hence, the grocery tax label.

Jennifer Falbe, a postdoctoral researcher at the University of California, Berkeley, was a coauthor of one of the studies looking at the pass-through of the tax in her city. Now her research group is looking into how retailers are making up for the extra costs distributors are passing on to them. They’ve conducted in-depth interviews with 19 small and large food and beverage retailers in Berkeley, and “we’ve specifically been asking if they’re passing through the cost on beverage,” Falbe said. In those interviews, “not one [retailer] has reported spreading costs to non-beverage items.”