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What happened when America put a national tax on soda

| Saturday, April 8, 2017, 11:54 p.m.
Soda taxes are much in the news of late, as lawmakers from Washington to West Virginia debate the newly popular policy tool as a means of ramping up revenue and cutting soda consumption.
Luke Sharrett/Bloomberg
Soda taxes are much in the news of late, as lawmakers from Washington to West Virginia debate the newly popular policy tool as a means of ramping up revenue and cutting soda consumption.

Contrary to the claims of advocates, America's first soda tax was not a success.

Soda taxes are much in the news of late, as lawmakers from Washington to West Virginia debate the newly popular policy tool as a means of ramping up revenue and cutting soda consumption.

But all the hype leaves out some important context: Congress passed a national soda tax 100 years ago. And — although the motivation then was very different than it is now — the measure proved both ineffective and unpopular.

The first soda taxes had nothing to do with health. Congress levied a nationwide tax on soda-makers during World War I, hoping to raise funds for the war effort. In the next year's revenue act, Congress also approved a measure that directly taxed soda consumers.

The taxes were short-lived and quickly forgotten. But a century later, they may serve as an instructive example of the impact such measures can have on government revenue. That's lately become a talking point among soda-tax proponents, who have hyped the measure's revenue potential to bolster their argument that the taxes serve a public good.

In West Virginia, which is currently considering a one-cent-per-ounce soda tax, Gov. Jim Justice has explicitly pitched the measure as a way to fill the state's $500 million budget deficit. In Philadelphia, Mayor Jim Kenney has defended his city's soda tax by citing the $12.3 million it raised in two months for public parks and pre-K programs.

These leaders are betting, whether they know it or not, that their experience will defy history's.

“It was almost inconsequential as a revenue-raiser - it made hardly any money,” said Ajay K. Mehrotra, the executive director of the American Bar Foundation and a professor of legal history at Northwestern University. “And I don't think the states passing those taxes now will make much money, either.”

The World War I soda taxes are far from a perfect proxy for today's efforts, Mehrotra cautions. For starters, they were utterly unconcerned about health and had one, narrower purpose: The U.S. joined World War I in April 1917, and the government needed novel ways to add to its war chest.

Congress most famously achieved that through bond sales and massive increases in income tax rates, which had only become law in 1913. But in October 1917, still looking for money, Congress also passed a slate of taxes on consumer products, from yachts and phonographs to footballs and candy.

When it came to taxing soda, soft-drink manufacturers were the initial targets: Companies like Coca-Cola paid a cent-per-gallon tax on bottled soft drinks, and a five- to 20-cent per gallon tax on soda ingredients, like syrup and carbonic gas.

A year later, after the war had ended, Congress scrapped that strategy for a dual manufacturing/retail tax that charged manufacturers a 10 percent tax on bottled soda sales, and charged consumers a penny for every 10 cents bought.

The measure was unpopular at the time. Editorial cartoonists regularly spoofed the taxes. Industry representatives - including John Candler, brother of Coca-Cola founder Asa - testified they would result in plant closures and layoffs.

“Much confusion and complaint is being caused by the new war tax on soft drinks,” the Richmond Daily Register reported in 1919. On top of those concerns, none of the “minor luxury” taxes, soda included, ever made much money.

According to the tax historian Joseph J. Thorndike, soda taxes raised only $58 million at their peak, or $789 million adjusted for inflation. Writing in the American Economic Review shortly after the second round of soda taxes passed, the economists Roy and Gladys Blakey slammed them as “most annoying measures” that wouldn't be effective.

“The tax is not high enough to discourage wasteful or unnecessary consumption,” they wrote, “nor will it bring in much revenue.”

Modern soda taxes are, of course, often designed to do both. There's no doubt that the primary motivation of soda taxes is to decrease the amount of sugar-sweetened beverages that consumers drink. But as advocates and local government officials face off against industry in the fight for public sentiment, soda-tax supporters have increasingly begun to invoke revenue (and the programs it funds) in their arguments.

Nowhere has that been more obvious than in Philadelphia, which is currently in the midst of a lawsuit over its soda tax. The tax — 1.5 cents per ounce of sugar-sweetened beverage — was pitched to voters by Kenney as a necessary measure to fund early-childhood education.

When the tax passed, in June 2016, the mayor described it as a “historic investment in our neighborhoods and in our education system.” Eight months later, when a court agreed to hear an industry lawsuit against the tax, the city responded by telling press the suit would delay a planned rebuild of the city's parks, libraries and community centers.

In a statement, Kenney called it “repugnant that the multi-billion-dollar soda industry would try to take away these educational and community programs from the hundreds of thousands of Philadelphians who need them.”

But for students of history, the failure of the World War I soda taxes may dampen that argument, as may the fact that the soda taxes were repealed shortly after the war, even though the country still faced record debt.

In 1921, a new Republican Congress rolled back many of the country's World War I-era tax policies, as well as other changes that gave power to the central government. (“I believe there should be eliminated from the bill all the harassing, nagging taxes,” wrote Sen. Reed Smoot, a Republican.) Thorndike, the tax historian, sees this as evidence of a core flaw in the soda tax: They're too political, he wrote in 2009, and thus can't provide a “resilient fiscal foundation.”

But Mehrotra, of Northwestern, said he wouldn't be so quick to draw conclusions from the century-old soda tax. Both the policy and public health climates have changed radically since it went into - and out of - effect.

“As a historian, I caution people to be careful about the use of history,” he said. “History can teach us a lot of things. But sometimes it doesn't.”

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