Revisiting the Soda Tax
Yesterday, I applauded a plan by Nashville Democrat Mike Stewart, which would have reduced the sales tax on food by one-percent in favor of a one-cent-per-ounce tax on bottled soft drinks. And I learned more from the comments and from talking to a few others about the issue.
I want to stress that I appreciate feedback from people with very diverse sets of opinions. I do not enclose myself in a partisan bubble, and many of my best friends are either socially liberal, fiscally liberal, or both. And while we disagree on certain issues, there are sometimes places where we can find common ground.
What has become my policy lately is to take the Mark Levin approach to Ron Paul’s followers. Some of the most vocal of his supporters operate outside any noticeable level of logic. It is unfortunate that some of them refuse to acknowledge our political system as legitimate, because I think many Americans are what I’d consider “libertarian light” – economically conservative, and socially indifferent or “liberal.” Unfortunately, anything that isn’t 100% congruent with some libertarian’s opinion is completely incongruent with their entire set of beliefs.
Yesterday, I approved every comment but one. And I reserve that right. Back on the subject at hand…
My main argument is: Government needs revenue to operate its essential responsibilities. At the state level, those are education, public safety, and infrastructure. The Republican Party is not the party of “no taxes,” it is the party of low taxation and responsible stewardship of those taxes (hypothetically).
If we must build schools and provide public safety officials and pave roads, then we must collect taxes. Yes, we must use “force” to extract the earnings of the people and put that revenue into a pot and dole it out to these programs. It’s a messy business.
I argued at some length about the notion of “bottled” soda, which (to my understanding yesterday) didn’t include cans. Liberal blogger Sean Braisted brought to my attention that under TCA 67-4-402, a “bottled’ soda would include anything “closed and sealed in glass, paper, metal, plastic, or any type of container or bottle.” Cans, that means you.
My friend and fellow Tennessean, libertarian George Scoville, raised an interesting point:
The old adage goes: if it ain’t broke, don’t fix it. And this is oftentimes the problem with government. It manufactures a problem, and attempts to solve it, usually creating a bigger problem than previously existed. George more or less asked, why create a solution to a problem if the problem doesn’t exist in the first place?
My contention was that if the soda tax is revenue neutral, then we’re just hitting a different population or reducing the burden on “families.” Well, let’s take a look at that burden.
According to the numbers I could find, the average household spends anywhere from $200 to $400 a month on groceries. In Tennessee, that means anywhere between $20 and $40 a month is paid in taxes on that food. (I used the big round number 10 for the percentage, rather than any variation of 9-and-a-something percent.)
Reducing the sales tax by one percent – 1% – would eliminate between $2 to $4 per month for the average household, or about $24 to $48 per year. What would the average family do with that savings? Probably buy another two-liter at the grocery store. The savings is essentially negligible. So while it feels good to say we’re providing tax relief for hard-working families… it’s probably completely bullshit.
And a major concern for Republicans in instituting a new tax and lowering a tax that already exists is that there’s no guarantee either tax will stay at the agreed upon rate. If Representative Stewart were successful in establishing this new tax, who’s to say the legislature couldn’t raise the sales tax at a later date and raise the soda tax, as well.
As I mentioned yesterday, I categorically reject social engineering through taxation. Arguing that you want to reduce or eliminate a behavior by guaranteeing it as a source of revenue is astronomically stupid on paper. And the argument is dishonest.
What’s better? One tax that yields $X annually or two taxes that yield the same amount? I’d say the former because the ability to raise two taxes over one is frightening to me.
In an ideal world (for me), we could tax all income once at some standard rate. My personal preference is a flat-rate income tax. That way there’s no discrimination based on shopping habits or anything like that.
Did I just completely do a 180 on this issue? Maybe. But after looking at the realities of this tax, it just doesn’t really make a lot of sense.
In politics and in life, sometimes you’re wrong. And the key is to admit you’re wrong and change what is wrong about you. Thanks for sticking around for my soda tax intervention.
I’m going to go grab a Coke now.
4 comments
Good for you – very good analysis. Bottom line: We need to end “social engineering” via the tax code. Our federal tax code is riddled with social engineering, and our state tax code is increasingly headed that way. We need a simple, flat tax that treats all transactions the same. I would favor cutting the sales tax in half and extending it to (almost) everything that is currently exempt. (I would continue to exempt prescription drugs, for example, but not much else.) The Left does have a point when it complains that food, a necessity, is taxed, but we don’t apply the sales tax to some things that wealthy people spend money on (like various professional services and salon services and such). I would prefer a sales tax in which the rate was very low and almost every purchase was subject to the tax. I would agree to a compromise in which the rate was slightly higher and groceries were exempt.
Rep. Stewart’s proposal to increase the tax on soda is motivated by his very real desire to address a real problem – obesity – but if we do this bit of social engineering through the tax code, what is next? Add a penny to the sales tax on Hostess Twinkies, but reduce it a penny on lettuce? Where does it end?
As a matter of policy, I have no problem with government legislating that government-run schools will not be allowed to sell sodas in the vending machines accessible to the children. But I have a HUGE problem with government trying to control the diet of those children when they are with their parents.
And let’s consider what might happen if we extend Rep. Stewart’s tax code social engineering to other important policy issues. What if we added nickel to the gas tax for gasoline pumped into any car that gets less than 20 mpg? After all, we need to raise revenue for roads – and we need to force people to get rid of their gas hog vehicles and buy a Nissan Leaf, right?
You can come up with an endless list of things that you can attempt to socially engineer via the tax code. However, the more you do that, the more problems you create. Such as:
1. Every single item in the tax code which is driven by social engineering creates an item on which you will have special interest groups on both sides raising money and hiring lobbyists – those issues will become endless campaign fodder.
2. You create a tax code whose revenue stream becomes less and less predictable. It is relatively easy for economists to accurately predict the revenue from a broad-based tax, but more difficult to predict revenue from a social-engineering-niche tax. Consider, for example, the cigarette tax increase that we got under Gov. Bredesen. It had two goals: Bring in more money, and reduce smoking. There is an inherent logical conflict there – if the social engineering works, and people smoke less, the tax would bring in less revenue. The reality in Tennessee is, the tax brought in less revenue than was predicted, and increased government costs for enforcement to try to stop people from going across the state line to buy cigarettes (along with gas and groceries) in neighboring states.
Now, consider the unpredictability of the revenue stream if we start using the tax code to socially engineer dozens of things.
Further thoughts: Discussions of “social engineering” via the tax code are generally viewed as encompassing things like the soda tax and the federal tax deduction for home mortgages (because home ownership is consider “good” and worth encouraging). But legislatures often apply the tools of social engineering in the field of “economic development,” by passing laws that give tax breaks to a specific company to entice them to move to the state or open a big plant in the state.
Tennessee has played this game for a couple decades now, and every deal is bigger than the one before and more controversial (and harder to defend on an economic basis). To land Saturn, the state spent about $50 million on road and rail infrastructure to serve the plant and provided up to $20 million for worker training. (Source: “Saturn and State Economic Development” 1987 http://bit.ly/hpH1zG)
Move forward two decades and the state of Tennessee gave VW more than $500 million to build its auto plant in Chattanooga (Source: Chattanooga Times-Free Press, 7/24/08 http://bit.ly/cz7hhx)
In the early 1990s I was a reporter for the Nashville Business Journal. At the time, Kentucky was kicking Tennessee’s butt in the competition for new manufacturing plants. Not the BIG plants like Saturn, etc., but the smaller plants. I started investigating why and the short version is this: the Kentucky legislature had passed changes to its tax code that made the state more attractive to manufacturers in general. One example: The state’s tax code allowed the company that opened a new manufacturing plant in the state to pay for its facility by keeping all of the state income tax revenue collected from its workers. The state of Kentucky was willing to give up that revenue for a few years in order to attract new employers to the state. And it worked – several times I was tracking upcoming new-plant announcements and watched as Tennessee had a city among the “finalists” but the project ended up in Bowling Green or some other city just across the border. We interviewed the decision-makers on those deals and found that while they were very interested in being in Tennessee, the tax code in Kentucky was just so much more attractive in terms of financing their new facility.
The key point is this: Kentucky didn’t use the niche approach of social engineering to attract a single plant – a strategy that results in bidding wars and escalation from $70 million for an auto plant in 1985 to half a billion dollars just two decades later. Instead, Kentucky created an incentive in the tax code that is available to ALL new manufacturers.
Well, at any rate the food tax should be decreased. It is absurd.
In Michigan most food items are tax-free except for prepared food (like McDonalds). They are right now considering removing the tax free status of soda, or pop as it’s known up there.
My only concern with a flat income tax is that it is inherently regressive – it disproportionately affects the poor. Truth is, food taxes of any type are regressive as well. This is because everyone must spend large portions of their income on housing, food, utilities, etc. For the poor, these basic essentials are a larger share of their income – they have less “disposable” income. I’m all for simplifying the tax code – perhaps something like the fair tax. Let’s have everyone pay the same flat percentage on income above a set level – and that set level could only be adjusted based on your metropolitan statistical area and the associated cost of living index, and by a few other factors, such as the number of dependents. Simplify the deductions (mortgage interest and charitable/non-profit deductions are also a form of social engineering) and eliminate the overly progressive tax structure. It would also reduce greatly the amount of expensive tax planning that Americans do, as well as reduce the costs of revenue management (the cost of the taxing authority itself, whether at the state level or the IRS at the federal level).
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