Sin tax saga: Seattle soda tax raising more money than expected, raising questions about how money is spent.

Seattle’s controversial soda tax has produced another unintended consequence: The tax is producing much more revenue than anticipated, leading to a spat over how the windfall should be spent. The Seattle Times reports,

The City Council passed a law Monday to reserve all money from Seattle’s soda tax in a special fund, defying vehement opposition by Mayor Jenny Durkan who intends to issue a rare veto of a measure she says will necessitate funding cuts…

Disagreement over how to allocate the money from the 1.75 cents-per-ounce tax on the distribution of sugar-sweetened beverages has led to an unusually open power struggle between Seattle’s branches of government.

The council’s new law ensures the soda-tax revenue will be spent only to add and expand healthful-food, education and early-childhood programs, separate from whatever baseline money such programs may receive from the city’s general fund…

When Durkan drew up this year’s budget, she used about $6 million in proceeds from the tax to support the general fund, which pays for everything from cops to homeless services.

The mayor wants to maintain the deal another year; the council wants to dedicate the money to promote healthful living. Council members say the intent of the tax was to cut consumption of sugary beverages to combat obesity. They didn’t originally set up a dedicated fund, though. The new ordinance corrects what they might consider an oversight. 

As the ST story makes clear, the city isn’t exactly without resources.

The amount of money at stake is modest in the context of the $1 billion-plus allocated annually from the general fund, and the debate isn’t new. Council members raised concernsabout Durkan’s maneuver last year, though they didn’t immediately undo it because they didn’t want to make cuts elsewhere.

The Seattle Times editorial board weighs in on the issue.

It is especially important that dollars are directed to efficient, effective and outcomes-focused efforts with the greatest chance of encouraging healthy behaviors without requiring forever funding. To that end, the advisory board has recommended greater investment in community-led approaches, in one-time infrastructure such as water bottle filling stations and kitchen facilities, and public awareness campaigns.

Perhaps it was inevitable that the $22 million in revenues would become the focus of a tug of war, but Seattle’s soda tax is unlike other funding sources: If it is working, revenues should shrink. Maybe not all at once; maybe never to $0, but significantly enough.

ST columnist Danny Westneat writes that “something sure seems off” with the soda tax experiment. And he reports that other cities with similar taxes are also noting that consumption does not appear to be much affected and is even growing in some instances. He concludes,

When this tax passed I felt it was worth trying, because it’s true that too much sugar is a bane of public health. But by definition and by its main purpose, this tax should erode over time. If the revenues don’t start dropping, at least relative to population growth, then it just isn’t working. If it keeps going up, then it’s a harmful policy fail.

That seems like something worth fighting about. Instead at City Hall they’re squabbling only over what to do with the spoils.

We mentioned the revenue spat is another unintended consequence of the soda tax. The first was the successful initiative to preempt such taxes in other communities, overwhelmingly passed by the voters last fall. (Our other posts on soda taxes and preemption are here, here, here, and here.)

The Tax Foundation last year assessed the performance of soda taxes, finding them “Not a Sensible Solution to Combat Obesity.” While the Seattle experience so far suggests consumption has not been reduced, even where the taxes succeed in dampening demand, the larger policy goal has been thwarted.

Proponents of soda tax increases frequently note that tax hikes do usually lead to soda consumption decreases, but of course, this is just in accordance with the law of demand (when prices rise, quantity demanded falls). However, it is erroneous to infer that healthier consumer decisions and lower rates of obesity are the natural results of reduced soda consumption because of higher soda taxes. In fact, many studies suggest otherwise.

National Health and Nutrition Examination Survey data indicates that when individuals reduce soda consumption due to soda tax increases, they fully offset the calories they would have consumed from soda with calories consumed elsewhere, rendering soda taxes ineffective in terms of caloric reduction.

TF analyst Katherine Loughead concludes,

Rather than manipulating tax codes to influence behavior, a better solution would be to address public health issues directly and comprehensively—through evidenced-based public education and awareness—while leaving the tax code to do what it is designed to do: generate a stable and transparent source of revenue to fund government services.

Makes sense … and reduces the chances of political fights over windfall revenues.