Over the past few years, the imposition of excise taxes has increasingly become a means for government authorities to control and influence the behavior of consumers and producers — with a secondary goal of raising revenue. More directly, as the Organisation for Economic Co-operation and Development (OECD) noted in 2016: “a number of excise duties have been adjusted with a view to discouraging certain behaviors considered harmful, especially for health reasons.”1 While health reasons are often cited for the imposition or increase of an excise tax, the environment is just as much a concern in excise tax imposition.
The US Congressional Budget Office, in discussing increasing excise taxes on tobacco, noted that “the first broad step in assessing the budgetary impact of a policy to promote health is determining the ultimate impact on consumer behavior.”2 The questions that arise is whether or not excise tax has become the “invisible hand” of the government for consumer behavior and whether the resulting impact is effective in its stated and underlying objectives.
Perhaps the most recent phenomenon in excise taxation across the globe is the imposition of taxes on sugary beverages. The driving force behind most jurisdictions that have passed laws in this area is to reduce the consumption of “unhealthy” beverages through a deterrent of high costs. Taxes are imposed on the manufacturers or distributors of the product and ultimately passed to the end consumer.
While a number of countries across the globe have implemented or are considering so-called “soda taxes,” the experience in the US has been quite interesting, highlighting certain potential downsides for governments in adopting these measures. Cook County (the home of Chicago, Illinois) deployed a sugary beverage tax in 2016 in order to reduce consumption of “unhealthy beverages” and increase revenue for the county. On 11 October 2017, less than one year after going into effect, the Cook County Board of Commissioners repealed the tax, effective 1 December 2017. Some of the reasons for repeal included the increased tax burden on low-income families, an uneven application of the law (sweetened coffees made by hand were excluded, for example) and people turning to neighboring counties to purchase sugary beverages. As a consequence, they also were purchasing their groceries in those places — thus reducing the intake from other taxes for Cook County.
This highlights one of the possible unintended impacts of soda taxes: the reduction of overall revenue to the jurisdiction under a soda tax. The recent taxation in Seattle led to consumers leaving the city limits to purchase groceries in areas where the sugary-beverage excise tax does not apply, therefore reducing purchases made in Seattle and impacting the sales-tax revenue for the city. Another potential consequence of the tax was highlighted in a 2012 Cornell University study, which suggested that proliferating sugary-beverage taxes could lead to increased alcohol consumption, thereby swapping one health concern for another.
However, other jurisdictions have reported more favorable outcomes. For example, in Mexico, in the two years following its soda tax introduction in 2014, the consumption of sugary drinks dropped by almost 8% on average and consumers turned to healthier alternatives (e.g., water and milk). Similarly positive results have been reported in Hungary, which introduced a sugar tax in 2011. Other countries have similar plans to tax sugar products; examples include Ireland, the Philippines, South Africa and the United Kingdom (UK). The UK tax is due to enter into force in April 2018 with two rates of tax: one for soft drinks with more than 5 grams of sugar per 100 milliliters and a higher rate for drinks with more than 8 grams per 100 milliliters. In anticipation of the tax, many producers of affected drinks have already decided to switch to alternative, untaxed ingredients or to change their formulas to avoid the tax. While the long-term future of soda taxes is uncertain, the trend toward government taxation for behavior modification is likely to continue.