Peter Shawn Taylor: Soda taxes fall flat for everybody but the tax collectors

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Newfoundland and Labrador will soon be the first province in Canada to levy a dedicated tax on sugar-sweetened beverages, with a 20 cents per litre tax set to take effect in September of next year. Will it be a success? That depends on how you define soda tax success.

Peter Shawn Taylor: Soda taxes fall flat for everybody but the tax collectors
© Provided by Financial Post Newfoundland and Labrador will soon be the first province in Canada to levy a dedicated tax on sugar-sweetened beverages, with a 20 cents per litre tax set to take effect in September of next year.

There are two potential effects of a soda tax — one related to the health of the citizenry, the other to the health of the treasury. According to ample real-world evidence, the effect on the first is negligible, while the effect on the second can be substantial.

The Newfoundland and Labrador government has gone to great lengths to claim its new tax is solely a public health initiative. Yet it is impossible to overlook the fiscal backstory. With the highest debt-to-GDP ratio and lowest-rated provincial bonds in Canada, Newfoundland and Labrador is in dire financial shape. The province needs cash, and soda taxes deliver.

First let’s consider the health impacts. For a soda tax to improve public health, a specific chain of relationships must hold. Of particular note, higher soda prices must lead to a reduction in demand, and not be offset by increased consumption of other equally caloric goods. Plus, the reduction in demand must lead to a quantifiable improvement in obesity or health measures. For a variety of confounding factors related to biology, marketing and consumer behaviour, however, these links generally fail.

Consider Mexico, which introduced a one peso per litre soda tax in 2014. Despite claims from many vocal supporters that this impuesto al refresco is having a “significant impact” on the national waistline, evidence suggests otherwise.

While soda purchases did fall substantially in the first year of the tax, sales quickly rebounded; in 2019 sugar-sweetened cola sales were higher than in 2014. Consumer behaviour (partly as a result of poor local water supplies) has negated the desired effect of the tax. And national obesity figures continue to rise.

Canada offers similar countervailing evidence, despite its lack of a soda tax. In 2017 the Heart & Stroke Foundation claimed a 20 per cent tax on sugary drinks nationwide would have an immediate and measurable impact on the health and weight of Canadians and it made absurdly precise claims about how many lives would be saved and how many cases of particular diseases averted.

Yet according to Statistics Canada, we are already experiencing a substantial drop in per capita soda purchases due to changing consumer preferences completely unrelated to any tax. Soda sales have plummeted from 106 litres per person in 2004 to 53 litres in 2020 — a far greater drop than the Heart and Stroke Foundation’s tax plan ever could have achieved. And over this time “body mass index” measurements for Canadians have steadily grown.

To sum up: soft drink consumption has dropped substantially in Canada over the past two decades. Meanwhile, obesity rates continue to rise. Given the obvious lack of a relationship between these two factors, why would a soda tax make any difference?

Of course, soda taxes can have a big impact when it comes to government revenue. With Mexico’s tax consistently exceeding budget expectations, the government has lately taken to raising the rate annually to maximize the tax grab. What was once a one peso per litre soda tax is now up to 1.26 pesos. It has thus become another reliable government “sin tax” like tobacco and alcohol, to be torqued whenever necessary. No doubt Newfoundland and Labrador’s soda consumers can look forward to similar hikes in future as the province attempts to rectify its grim budget situation.

And despite the efficiency with which soda taxes generate revenue, they should be considered very bad tax policy. This is because the burden of a soft drink tax falls most heavily on low-income families. According to a 2020 study on a proposed Canadian soda tax in the academic journal Economics and Human Biology, “The lowest income quintile would pay the higher proportion of income in tax, implying that the tax is regressive.” Making food and drink more expensive for poor Canadians is the worst possible approach, especially in these equity-obsessed times.

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Finally, soda taxes are highly unpopular. Following public consultations about a soda tax in the Northwest Territories in 2019, the idea was shelved when polling showed 60 per cent of the population opposed the idea. In Chicago, a one cent per ounce soda tax lasted a mere month in 2017 before massive public outrage forced its removal. This year Norway abolished a special excise tax on soft drinks amid a wholesale reduction in consumption taxes aimed at quelling public anger at over-taxation and cross-border shopping.

If success is defined as making the poorest Canadians pay for the excesses of government while doing nothing to improve anyone’s health, then sure, Newfoundland and Labrador’s soda tax is likely to be a roaring success. Not popular or useful. But successful.

Peter Shawn Taylor is 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” published by the Canadian Taxpayers Federation. Available at www.taxpayer.com

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