Plan For An Excise Tax On Sugar-Sweetened Beverages Raises Questions

Mar 18, 2015

Backers of the sugar sweetened beverage tax argue that one of the major benefits of their plan will be to reduce obesity in Vermont. They say this will happen because the tax will significantly increase the cost of these products and that consumers will look for less expensive and healthier alternatives.

But there are questions whether this taxing mechanism will actually change behavior.

Under this proposal, a 2-cent-per-ounce tax would be levied on all sugar sweetened beverages. So a 20-ounce soda would have a 40-cent tax. At the heart of the debate is a decision by supporters of the plan to use what's known as an excise tax to raise roughly $35 million in new revenue. What's an excise tax ?

Mary Peterson, Vermont's tax commissioner, says excise taxes are imposed at the wholesale level – before the product reaches its retail destination. This is in contrast to the sales tax, which is paid when consumers purchase a product.

"You don't see it on your bill,” Peterson says. “Generally you'll see the price that you paid, the sales tax added to it on the bottom line. Excise taxes generally don't show up on the bill."

Jim Harrison is the executive director of the Vermont Retail and Grocers Association, a group that strongly opposes the sugar sweetened beverage tax. He says it's likely that some retailers will chose not to raise the price of these beverages, but instead will spread the cost of the tax to many other products in their store.

Excise taxes are imposed at the wholesale level, before the product reaches its retail destination. This is in contrast to the sales tax, which is paid when consumers purchase a product.

"We do know that the tax will be hidden. It will be buried somewhere in the cost of products, and what retailers or different merchants do will really depend on what their marketing strategy is,” Harrison says.

Anthony Iarrapino is the director of the Alliance for a Healthier Vermont, a coalition of more than 30 consumer and health groups supporting the tax. He thinks most retailers will add the tax to the price of these beverages.

"We think what the example of the tobacco tax shows is that the price will be passed on, because that's actually what makes economic sense for retailers to do,” Iarrapino says, “and that consumers who are most price sensitive – particularly youth – will react to that higher price and shift their buying behaviors to healthier products." 

In the case of tobacco, Tax Commissioner Peterson says wholesalers have to purchase special tax stamps from the state and affix them to the tobacco products. This proves the excise tax has been paid.

"It's a highly controlled substance. There's regulation on the federal level, regulation at the state level, there's Department of Liquor Control enforcement and typically on other products coming into Vermont we don't have that level of control,” Peterson says.

Proponents say the tax will significantly increase the cost of sugar-sweetened beverages, and that consumers will look for less expensive and healthier alternatives. But some are skeptical that this taxing mechanism will actually change behavior.

Harrison, the lobbyist for the Retail and Grocers Association, says this system is totally impractical for sugar-sweetened beverages.

“It is much different,” Harrison says. “I don't think we're going to put stickers on each beverage item if we are we've really escalated the cost of administrating this." 

Anthony Iarrapino doesn't disagree with this analysis, but he thinks most retailers will pass the tax along to consumers if the Legislature specifically calls for this to happen.

"Even if they don't like a law that has a public health purpose, they're going to follow that law and try to effectuate that public health purpose regardless of whether they're expecting to get caught if they violate it,” Iarrapino says.

The House Ways and Means committee is expected to vote on this legislation in the next week.