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Eric Davis: Beverage tax would hurt the poor

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Posted on April 2, 2015 |
By Eric Davis



Legislative committees are considering whether to impose a 2-cent-per-ounce tax on sugar-sweetened beverages. In my opinion, this tax will raise less revenue than its proponents expect and will adversely affect low-income households and small retailers.

Lawmakers are considering a beverage tax in order to increase payments to health care providers whose patients are covered by Medicaid. Because Medicaid payment rates are low, providers shift their costs to patients covered by employer and individual insurance policies.

Gov. Shumlin proposed an employer payroll tax of 0.7 percent to raise revenue to compensate the Medicaid providers. The governor argued that businesses that provide insurance coverage for their employees would come out even. The premiums they would pay would go down in response to the revenue raised by the payroll tax.

Many organizations representing the business community oppose the payroll tax. They say it would be especially burdensome on small businesses that currently provide no health insurance to their employees. Business interests are also concerned that although the payroll tax would start at less than 1 percent, future legislatures will be tempted to increase it as they search for ways to balance the budget.

The sugar-sweetened beverage tax had previously been proposed, both in Vermont and elsewhere, as a response to obesity. Because of opposition to the payroll tax, the beverage tax became more interesting as a revenue source to increase the Medicaid payments to providers.

The tax under consideration in Montpelier would add 24 cents to the price of a 12-ounce can of soda sold in Vermont, or $2.88 per case of a dozen cans. Economists' research has consistently shown that consumption taxes must be set at extremely high levels to have a significant effect on the consumption of a product.

The only product now taxed at such a level is cigarettes, where federal and state taxes of between $3.00 and $4.00 a pack exceed half the price of the underlying product. High cigarette taxes do reduce consumption, but an equivalent tax on soda would probably be 5 to 6 cents an ounce, or $7.20 to $8.64 per case.

Economic studies have regularly found that consumption taxes disproportionately affect low-income consumers, who spend a higher proportion of their income on groceries than high-income consumers. If possible, consumers will respond to consumption taxes by shifting their purchases to lower-taxed sources. In the case of Vermont households living reasonably close to a state line, this means buying soda in New Hampshire, Massachusetts or New York.

The idea of saving $12 or so on four cases of soda would be enough to encourage many individuals to drive out-of-state, not just to purchase soda, but to make other purchases as well. So it is no surprise that organizations representing Vermont retailers are very concerned about the impact of the beverage tax on owners of convenience stores and other small businesses located near the state's borders.

The Medicaid cost-shift is indeed a serious problem. Increasing payments to physicians and other providers who see Medicaid patients should be a priority, especially for providers located in those regions of the state where Medicaid patients make up a substantial share of the population. Ideally, providers should receive the same fees for all patients, whether they are covered by employer insurance, Vermont Health Connect, Medicare or Medicaid.

As I have previously noted, 90 percent of the income gains in Vermont since 2009 have been concentrated among the top 5 percent of households, those with annual incomes of roughly $175,000 and up. A small increase in the income tax on these households would be a better way of addressing the Medicaid cost-shift than a beverage tax that would adversely affect low-income Vermonters and small business owners.

Eric L. Davis is professor emeritus of political science at Middlebury College.

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