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Examination of Taxation on Sugar-Sweetened Beverages Alex Smith University of North Georgia, [email protected]

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Examination of Taxation on Sugar-Sweetened Beverages Alex Smith University of North Georgia, Acsmith11@Me.Com University of North Georgia Nighthawks Open Institutional Repository Honors Theses Honors Program Spring 2018 Examination of Taxation on Sugar-Sweetened Beverages Alex Smith University of North Georgia, [email protected] Follow this and additional works at: https://digitalcommons.northgeorgia.edu/honors_theses Part of the Accounting Commons Recommended Citation Smith, Alex, "Examination of Taxation on Sugar-Sweetened Beverages" (2018). Honors Theses. 32. https://digitalcommons.northgeorgia.edu/honors_theses/32 This Honors Thesis is brought to you for free and open access by the Honors Program at Nighthawks Open Institutional Repository. It has been accepted for inclusion in Honors Theses by an authorized administrator of Nighthawks Open Institutional Repository. Examination of Taxation on Sugar-Sweetened Beverages A Thesis Submitted to The Faculty of the University of North Georgia In Partial Fulfillment Of the Requirements for the Degree Bachelor of Business Administration in Accounting With Honors Alex Smith Spring 2018 Examination of the Taxation on Sugar-Sweetened Beverages 2 Acknowledgements I would like to thank Dr. Ellen Best for her support and insight throughout my research. I would like to thank Dr. Stephen Smith for agreeing to serve on my committee and providing support during my research. I would like to thank Dr. Poff for his guidance in the early development of my literature review. I would also like to thank Dr. Parker for agreeing to serve on my thesis committee Examination of the Taxation on Sugar-Sweetened Beverages 3 Contents 1. Introduction 2. Sin Tax 3. Sugar-Sweetened Beverage Tax Overview 4. Sugar-Sweetened Beverage Tax Response 5. Current Research on Sugar-Sweetened Beverage Tax 6. Conclusion Examination of the Taxation on Sugar-Sweetened Beverages 4 Introduction The trend of taxation on sugar-sweetened beverages (SSBs) has grown substantially in the past few years. This research is designed to examine different questions to different aspects of the SSB tax to get a better understanding of the effectiveness of the tax. Since the SSB tax is a sin tax, it is necessary to research some of the challenges that were imposed on prior sin taxes and to determine if the sin taxes work. I will also relate the specific challenges that the sin taxes faced and how they could relate to the SSB tax implementation. I also look into the health effects of SSB consumption and how they contribute to factors like obesity and diabetes. This prior research helped answer the question of whether SSB consumption is associated with obesity and diabetes. If it is determined that there is no association, then there is no need for a SSB tax. Next, I look at prior research to understand if whether the SSB tax helps reduce the costs of healthcare or if the economic costs of the tax are too great to justify. My research then took me into how the soda industry has reacted to the trend of the SSB tax and how their actions could be successful. Next, looking at studies over the media’s coverage of the SSB on both local and national news, I was able to draw conclusions about what pro-tax messages and anti-tax messages were prevalent. While the SSB taxation is relatively new, it is necessary to study the early results of the SSB taxes that are in place. These studies help answer two very important questions pertaining to my research. The first question was how effective the SSB taxes Examination of the Taxation on Sugar-Sweetened Beverages 5 are in reducing SSB consumption, which is their primary purpose. The second question is how the SSB taxes flow from the distributors to the retailers. Sin Tax Since the sugar-sweetened beverage tax is a “sin” tax in that it was proposed to deter a certain behavior, it is important to research “sin” taxes for historical context. It is also important to understand The public and policy makers view the sin tax, how the industries that were affected responded, and to understand the impact the sin taxes had on the “sin” that they were intended to deter. A sin tax is an excise tax that is levied by a local or state government on the sale of a product that has undesirable associations. Typically, the consumer is not aware of how much the tax is since it is embedded in the cost of the product. In a study in the Canadian Tax Journal, Boadway (2016) looked at the efficacy of sin taxes on both tobacco and alcohol from various viewpoints. The first approach is the “public health approach” which is the view of the tax on tobacco and alcohol and how it can improve public health (Boadway, 2016). The public health approach is the taxing policy of the government to encourage healthy behavior. The negative health effects of tobacco were widely known; therefore, there is a strong case for the public health approach for the tobacco tax (Boadway, 2016). The public health approach for alcohol is more complicated than it is for tobacco but more relevant in relation to the SSB tax. This is because the policy implementers for an alcohol tax want to discourage heavy consumption or abuse of alcohol but not hurt the Examination of the Taxation on Sugar-Sweetened Beverages 6 alcohol industry’s sales to moderate drinkers (Boadway, 2016). Boadway (2016) also suggests that there is not enough research to clearly determine whether a significant tax on alcohol would change drinking habits. The way that alcohol is viewed in the public health approach is helpful because like the alcohol tax, the SSB tax policy is also used to deter heavy consumption of SSBs without hindering moderate consumption. Boadway (2016) also views tobacco and alcohol using the economic approach, which looks at the externalities that the uses of tobacco and alcohol have on society while also considering the revenues that would come from a tax on tobacco and alcohol. This approach that focuses on externalities rather than social costs like the public health approach results in a far lower optimal tax rate. The authors’ last approach mentioned is the political economy approach, which is how well policy makers are able to sell tobacco and alcohol taxes to the public. Boadway suggests that these sin taxes are easier to sell to the public than income or sales taxes because most people realize the negative outcomes that tobacco and alcohol produce (Boadway, 2016). To understand any challenges that the SSB tax may have in the future, it was important to research the loopholes used against the tobacco tax and how the SSB tax could mitigate those loopholes. Pomeranz (2014) discusses how SSB tax policy makers should learn from how tobacco tax policymakers enacted laws to try and stop tobacco companies and retailers from avoiding the tobacco tax. The first law mentioned was the minimum price law, which required the retailer to increase the price of tobacco in the form of a minimum percentage markup. The minimum price laws didn’t have a Examination of the Taxation on Sugar-Sweetened Beverages 7 significant effect in states where the tobacco tax rates were very low, and the laws were ineffective when trade discounts were used. Pomeranz also points out that there is research showing that some states do not enforce the minimum price laws so they have been largely ineffective. However, Pomeranz suggests that for the SSB tax policy, the SSB industries have enough products that do not qualify as SSBs that they can shift the cost of the tax to other products making the tax largely ineffective. To combat this cost shifting, Pomeranz states that a minimum price law on SSBs would help avoid the industries shifting the tax to other products (Pomeranz 2014). The other policy that Pomeranz (2014) details is a law that forbids retailers price discounting to get the taxed product down to pretax level. The City of Rhode Island enacted a law that prohibited retailers from accepting discounts on tobacco (Pomeranz, 2014). Policy makers for taxation on SSBs might consider a law prohibiting discounts so that the tax is effective in increasing the price. An article in the Canadian Tax Journal analyzed the effect a decreased cigarette tax rate had on the consumption of cigarettes (Sen & Fatima, 2011). In 1994, the Canadian government reduced cigarette tax rates by 45-60% in five provinces in response to tobacco smuggling (Sen & Fatima, 2011). However, the other five provinces in Canada did not have such a significant decrease (Sen & Fatima, 2011). Sen and Fatima (2011) used this natural experiment to examine the effect the tax rate had on the daily smoking in Canada by gender and by age group. The study found that there was a correlation in a decreased tax rate and higher daily smoking (Sen & Fatima, 2011). The group that had Examination of the Taxation on Sugar-Sweetened Beverages 8 the highest correlation was teen males followed closely by older males, which were ages 45-50 (Sen & Fatima, 2011). The Centers for Disease Control and Prevention (CDC) performed a study that found that tobacco taxes in America decreased teenage smoking by almost ten percent from 1991 to 2011 (Wetter & Hodge, 2016). The World Health Organization cited the tobacco tax as the most significant deterrent against teenage tobacco use (Wetter & Hodge, 2016). It is important to understand the tax elasticity in sin taxes across different demographics since a sugar-sweetened beverage tax wouldn’t have the same impact across all demographics. It is imperative to understand whether sin taxes are effective in preventing the “sin” targeted. It is clear from my research that these targeted taxes can potentially change the public’s undesirable behavior. Sugar-Sweetened Beverage Taxation Overview Going into depth into how the taxation on SSBs affects health in America, I examined the changes in the SSB taxation.
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