Sweet Intervention Turns Sour For Taxpayers

The New York Times warns us that soda taxes are gaining wider acceptance and “your bottle may be next.” Just how on earth did drinking soda become a sin, to be taxed wantonly, joining the likes of cigarettes and booze?

It is as Ludwig von Mises explained: one intervention leads to another. The first intervention began with the Sugar Act of 1934, a piece of Great Depression legislation putting the government in charge of sugar policy, because sugar beets and sugarcane were deemed basic commodities.

The History of Sugar Intervention

After sugar was rationed during WWII, The Sugar Act officially expired in 1974. However, Gerald Ford needed votes in Louisiana, so he tripled sugar import taxes. President Carter later developed a direct payment program for sugar farmers and then President Reagan reintroduced country-by-country import quotas to boost prices.

Small drink makers will be put out of business, Pepsi and Coca-Cola will get bigger, while local governments get a fiscal sugar high.

George H.W. Bush approved the Food, Agriculture and Trade Act of 1990 that included marketing allotments and assessments on sugar. Six years later President Clinton signed the Federal Agriculture Improvement and Reform Act. The loan rate for beet sugar was frozen at 22.9 cents and the raw cane sugar loan rate at 18 cents.

George W. Bush vetoed the Farm Bill but congress overrode his veto. The Farm Bill made sugar policy more complicated. Loan rates were pushed upwards. An Overall Allotment Quantity and Tariff Rate Quotas were established.

With this program sugar processors borrow from the USDA at sugar’s current price. If the price rises they sell, “earn” a profit, and pay the loan back. If the price goes down, they send the sweetener to the government to pay back the loan. Not exactly entrepreneurship. This is one of the convoluted ways the U.S. government supports the sugar industry.

In 1982, political entrepreneur Archer Daniels Midland (ADM) successfully lobbied Congress to put quotas on sugar imports. The result being, as Mark J. Perry writes, “American consumers and U.S. sugar-using businesses…have been forced to pay more than twice the world price of sugar on average since 1982.”

ADM is a corn producer, enjoying federal subsidies for its crop and in turn its products, so what dog does it have in the sugar fight? Max Raskin explained, “when the price of a good is raised, all other things being equal, people cut back on their consumption, and (depending on the elasticity of demand) they look for substitutes. High fructose corn syrup (HFCS), which is made from cornstarch (which ADM produces) is such a substitute.”

U.S. consumption of HFCS peaked at 37.5 lb per person in 1999, an amazing statistic since only 1.7 metric tons of it was produced in all of 1979. The average American consumed approximately 27.1 lb of HFCS in 2012. This decrease in domestic consumption of HFCS resulted in a push in exporting of the product. The United States exported approximately 1.47 million metric tons of fructose in 2012, a 1,450 percent increase since 1995.

HFCS is thought to cause obesity, Type-2 diabetes and, metabolic disorders, making the products produced with it, like most soda pop in America, a perfect thing to tax. The New York Times quotes the godfather of the idea,

“There’s a momentum with these taxes that will be hard for the industry to stop,” said Kelly D. Brownell, the dean of the Sanford School of Public Policy at Duke University, who was met with some ridicule when he first proposed a “sin tax” on junk food in 1994. “I expect a year or two from now that the taxes will be widespread.”

The Problem with Soda Taxes

Prior to election day only Berkeley, California and Philadelphia imposed taxes on soft drinks. And while Republicans celebrated on election night, San Francisco, Oakland and Albany, California as well as Boulder, Colorado, approved ballot measures in favor of soda taxes. A few days later, a soft-drink tax was approved for all of Cook County, Illinois including Chicago.

Santa Fe, New Mexico is also considering a tax, because, as City Councilor Peter Ives told the Santa Fe New Mexican, “Santa Fe does not have the power to tax either alcohol or tobacco products, and that’s one reason it is taking aim at sodas, sweetened teas and other drinks with sugar.”

A soda-drink tax is what Murray Rothbard referred to as a partial excise tax, a sales tax levied on some, but not all, commodities, penalizing certain lines of business. For that reason, the American Beverage Association spent $38 million campaigning against the ballot measures, but to no avail. Meanwhile, billionaire busybodies Michael Bloomberg and John Arnold financed the pro-tax initiatives, they claim for people’s health reasons, but the taxes seem to be more for the fiscal health of local governments.

Anahad O’Connor and Margot Sanger-Kat write for the Times that,

"...soda taxes have emerged as a bountiful revenue source for cash-strapped local governments to fund early childhood education, public safety and deficit reduction. Soda tax advocates say they believe more cities will now consider their own taxes on sweetened beverages to combat obesity and to finance local programs."

While many people believe that consumers will ultimately pay the tax, Rothbard explains that the tax cannot be pushed forward, but instead will be shifted backward for employees and suppliers to absorb. Plus, “the tax exerts pressure on nonspecific factors and entrepreneurs to leave the taxed industry and enter other, non-taxed industries.”

Beverage giants Coca Cola and Pepsi have already shifted into the water and fruit drink businesses. But, to their advantage, the tax will serve to decrease supply, raise prices, and keep smaller competitors out of the business.

Rothbard explains,

"...the excise tax also has the same general effect as all other taxes, viz., that the pattern of market demands is distorted from private to government or government-subsidized wants by the amount of the tax intake."

In a pure capitalist economy there might be hundreds of producers of soft drinks catering to what consumers really want--in most cases low-priced drinks made with cane sugar rather than HFCS. Instead, the industry is dominated by two firms, with but a few tiny drink producers.

Peter van Stolk, CEO of boutique soft drink maker Jones Soda, changed from HFCS to cane sugar in 2007 at considerable expense to the company, “because it tastes better and they [consumers] feel better about it because it’s pure; it’s sugar. They know what it is.”

Mises wrote in Bureaucracy,

"Economic interventionism is a self-defeating policy. The individual measures that it applies do not achieve the results sought. They bring about a state of affairs, which—from the viewpoint of its advocates themselves—is much more undesirable than the previous state they intended to alter."

The new soda-drink taxes, while targeting high fructose corn syrup, will also hit cane sugar drink makers, that can least afford it. For instance a Jones Soda sells 12 oz. for $2 online, while Pepsi, made with tariff protected and government subsidized HFCS, goes for 89 cents per 12 ounces.

The obvious result will be that the very people the pop-taxers claim to want to help with the tax, low-income youth, will consume the least expensive, and least healthy, product. Small drink makers will be put out of business, Pepsi and Coca-Cola will get bigger, while local governments get a fiscal sugar high.