California Delays Sugary-Beverage Tax

California Delays Sugary-Beverage Tax

California Assembly Bill 138, containing a 2 cent/fluid ounce tax on ‘sugar-sweetened drinks’ was put on hold until next year, a victory for beverage producers. The bill was proposed in attempt to abate sugar consumption and tackle the obesity epidemic.

Proposed Tax Would Significantly Increase Beverage Prices

The soft drink industry has spent $11.8 million in the past two years in California alone to block taxes and health label requirements, in part to protect immediate sales but also to avoid a precedent for other states to follow suit. The price implications for sugary drinks would be far from negligible if the bill were ever to be passed; Uncle Sam would take 40 cents per standard 20 Fl. Oz. bottle, and $1.35 per two-liter bottle of soda. Sugary syrups would also be taxed, clipping fast-food chains and chomping into margins of restaurants who provide free drink refills.

Beverage Taxes Have Yielded Mixed Results

Bill 138 isn’t a novel concept, as several major cities have passed ‘soda taxes’ in recent years, including Seattle, Chicago and Philadelphia. Philly became the first US city to pass a soda tax back in 2016.  Philadelphia Mayor Kenney hailed it a success, generating $90 million in tax revenue in 2016 to be used to combat obesity and childcare-related causes within the city. However, nearly two years on, a Stanford University study argues the tax may not have achieved its goals, stating that they did not “detect a significant reduction in calorie and sugar intake”. The 1.5 cent per fluid ounce tax increased prices by 34%, and reduced demand by 46%, although a significant proportion of residents simply purchased the same drinks from stores just outside city limits; “Compared to the decrease of 51,000 ounces of taxed beverages at the average store in Philadelphia, we find an even larger increase of 61,000 ounces (per store) in stores up to 2 miles away”. It’s important to note that aggregate demand for soda in Philadelphia still declined be 22%. Additionally, as low-income families consume more soda, the tax burden dis-proportionally affected the poor.

Chicago’s soda tax was repealed in just 2 months, under legal pressure and industry scrutiny.

Berkeley, California’s 2015 sugar tax that saw more encouraging results, citing a 21% decline in sugary drink consumption in 2015, and a 52% decline in 2016

It’s unclear if the results of California’s bill will more closely resemble that of Philadelphia and Chicago or of Berkeley; it’s on a far larger scale with a far larger physical boundary than any previous example.

Growth Opportunities For New Beverage Sub-Verticals

If the bill were ever to be passed, it would represent an opportunity for the growing sub-vertical of unsweetened teas, waters and sparkling waters, which would watch the their less-healthy competitors’ price advantage evaporate overnight. Brands like LaCroix and Sound have already grown exponentially in past years, and if a major beverage market like California were to finally pull the trigger on Assembly Bill 138, their continued growth would be assured.

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