A "soda tax" is generally considered to be a per ounce excise tax on drinks sweetened with sugar. While often called a soda tax, these sugar sweetened beverage taxes also apply to iced teas, fruit drinks, sports drinks, and most other drinks with added sugar (with specific exemptions).
Six localities levy this type of tax, while Philadelphia levies a per volume soda tax on all sweetened drinks (i.e., Philadelphia, unlike the other six localities, also taxes diet soda). Additionally, the District of Columbia levies a special sales tax rate on purchases of soft drinks.
No state currently levels this type of soda tax. However, Arkansas and West Virginia have levied a per gallon excise tax on soft drinks for decades. These taxes raise millions of dollars annually for each state, but because the tax rates are low and not meant to discourage consumption, they are generally not lumped in with the soda taxes levied by the eight localities. Additionally, Virginia and Tennessee are sometimes included on lists of states with soda taxes, but these states levy gross receipts taxes on wholesalers who sell bottles of soda, and the revenue from these taxes goes to recycling programs.
Soda taxes are sometimes called a corrective or "sin tax" because, unlike a general sales tax, they are used in part to discourage the purchase of soda because the choice to consume it has costs both to the user and to other people (such as increased health care costs). State and local governments tax alcohol, cigarettes, and marijuana in a similar way.
- How much revenue do local governments raise from soda taxes?
- How much do soda tax rates differ?
- What are other options for taxing soda?
- What are the objections to taxing soda?
- Further reading
No state currently has an excise tax on sugar-sweetened beverages. Instead, soda taxes are levied locally in Boulder, Colorado; the District of Columbia; Philadelphia, Pennsylvania; Seattle, Washington; and four California cities: Albany, Berkeley, Oakland, and San Francisco. (The Navajo Nation also imposes a tax on "junk food," including sweetened beverages and snacks high in salt, saturated fat, and sugar.)
Annual soda tax revenue ranges from roughly $1.5 million in Berkeley to around $75 million in Philadelphia—but this range is almost entirely a function of each city's population. Soda taxes typically account for about 1 percent of each of these city's general fund revenue.
Revenue from the District of Columbia's tax is included in its overall tally of general sales tax revenue. When the tax was enacted, the District estimated the special sales tax rate on soft drinks would raise $3 million annually (well below 1 percent of the District’s revenues).
With the exception of the District of Columbia's special sales tax rate (8 percent, instead of its 6 percent general sales tax rate), all current soda taxes are based on a drink's volume. Tax rates are 1 cent per ounce in all four California jurisdictions, 1.5 cents per ounce in Philadelphia, 1.75 cents per ounce in Seattle, and 2 cents per ounce in Boulder. For concentrates (i.e., fountain soda), the tax is typically applied to the maximum volume the syrup can produce.
As with state alcohol taxes, distributors or wholesalers remit the per ounce tax when they deliver products to retailers. The expectation is that much or all of the tax on soda is then passed on to customers in the form of higher retail prices. The District's special sales tax is paid directly by the consumer and remitted by the retailer.
Each jurisdiction exempts some beverages from its tax, including alcoholic beverages, infant formula, and drinks for medical purposes (not including sports and energy drinks). The tax bases in the District of Columbia and Philadelphia are notably larger than the tax bases in the other jurisdictions because they include any beverage with real or artificial sweeteners. As such, the District of Columbia and Philadelphia are the only jurisdictions that tax diet sodas. In the other six localities, a drink is only taxed if the sweetener adds calories. Further, some jurisdictions only tax drinks if the drink surpasses a calorie minimum (e.g., 2 calories per ounce in Berkeley).
Cook County, Illinois (which includes Chicago), passed a 1 cent per ounce soda tax in November 2016. However, that tax was in effect for only a few months before the county board reversed itself and repealed it in October 2017.
Arizona and Michigan preemptively blocked local governments from enacting soda taxes. California, despite already having four local soda taxes, passed legislation in June 2018 banning any new locality from establishing a tax for 12 years.
Washington voters also approved a ban on local soda taxes in November 2018. The ban does not affect Seattle’s soda tax, though. Oregon voters rejected a similar ballot initiative that would have preemptively blocked local soda taxes.
In 2021, state-level soda taxes were proposed by legislators or supported by governors in several states—including Hawaii, Rhode Island, and West Virginia—but no state has enacted a soda tax as of May 2021. Further, the District of Columbia considered switching from its current special sales tax rate to a per ounce excise tax in 2021, but the legislation failed.
All per unit soda taxes in the United States are based on an eligible drink’s volume and not its sugar content. That is, an eight-ounce drink with two teaspoons of sugar (e.g., iced tea) is taxed the same rate as an eight-ounce drink with seven teaspoons of sugar (e.g., soda). This tax is simple and allows distributors to collect a set amount based on sales. It also works well if the government’s primary goal is raising tax revenue. Notably, Philadelphia’s tax, which taxes all sweetened beverages including diet drinks, is specifically designed to generate revenue: the tax was sold as a means for funding education programs and not primarily for improving health outcomes.
However, if the primary goal of the tax is improving public health by reducing sugar consumption, governments should consider taxing a beverage's sugar content. Taxing sugar content could encourage consumers to choose lower-sugar options and possibly encourage manufacturers, distributors, and retailers to stock and market more healthy options. The government could tax each unit of sugar or create a tiered system—similar to the different tax rates on liquor, wine, and beer. Taxes in Hungary, South Africa, and the United Kingdom are based on sugar content.
Alternatively, as in the District of Columbia, a state or locality could levy a selective sales tax on soda purchases. Additionally, some states that exempt groceries from their general sales tax specifically do no exempt soda from their tax.
Soda taxes tend to be regressive because lower-income consumers spend a larger share of their income on the products than higher-income consumers. Further, families with lower incomes typically spend more of their income on groceries—specifically, on products like sugar-sweetened beverages. However, policymakers could soften the regressivity of the tax by using the revenue for targeted tax relief (e.g., the earned income tax credit) or spending it on programs aimed at lower-income communities.
Also, while sugar is consistently identified as contributing to obesity, it is not the only factor. And the health effects and medical costs of obesity are not uniform. Some consumers with no risk of harm or medical cost will pay the tax. Meanwhile, others may substitute equally or more unhealthy options (such as alcohol) to avoid the tax.
Are States Betting on Sin? The Murky Future of State Taxation
Lucy Dadayan (2019)
Critical Value Podcast: #46 Sin Taxes Are Sweeping the States!
Richard C. Auxier and Lucy Dadayan (2020)
Philadelphia’s Soda Tax Shouldn’t Take Kids Out of the Classroom
Richard C. Auxier and John Iselin (2018)
The Pros and Cons of Taxing Sweetened Beverages Based on Sugar Content
Norton Francis, Donald Marron, and Kim S. Rueben (2016)
Building a Better Soda Tax
Donald Marron (2016)
How Should Governments Use Revenue from Corrective Taxes?
Adele C. Morris and Donald Marron (2016)
Should We Tax Internalities Like Externalities?
Donald Marron (2015)