Dennis Farmer: It’s Time For A New, Transparent Look At The Soda Tax

Editor’s note: This guest editorial was written by Dennis Farmer, president of ARBEV, formerly the Arkansas Soft Drink Association. It first appeared in the latest magazine issue of Talk Business Arkansas, which you can read online at this link.

First, a concession: shaking aluminum soft drink cans containing coins inside the marbled halls of the state capitol was not the best public affairs tactic after the outdoor demonstration was rained out. Rumor has it the echoes could be heard late into night in all corners of the fourth floor.

It is important to keep a historical perspective in discussion of the Arkansas soft drink tax. This excise tax on soda, syrups, and powdered drinks was originally levied in December 1992 when the recently ascended Gov. Jim Guy Tucker called a special session to pass a number of taxes to address a projected $110 million budget deficit for Medicaid funding. This tax package included additional goods and products other than soft drinks including home health and personal care services, tobacco products and an increased sales tax on luxury services including lawn care, fitness clubs, fur storage, and more. The intention of the 1992 tax was to fill a budget deficit. Most of the goods and services taxed were not related to Medicaid or the costs incurred by the program.

What occurred in the years following the 1992 passage of the soda tax is troubling. During the 1993 legislative session, a bill was introduced to repeal the soft drink tax. At this time, behind closed doors, the tax was temporarily re-assigned from the general revenue stream to the Medicaid Trust Fund. Then, during a special session in August of 1994, a permanent earmark was placed on the tax funds to go toward the Medicaid Trust Fund. This permanent earmark occurred during the eleventh hour of a referendum campaign asking taxpayers to repeal the soft drink tax. Twenty one years later, it’s quite clear that this earmarking policy was politically motivated as none of the other 1992 taxes besides the soda tax were earmarked for Medicaid.

Additionally troubling is the ambiguous management of the soft drink tax proceeds. The soft drink tax generally raises $48 to $49 million a year, which is directed to the Medicaid Trust Fund. In six separate fiscal years, none of the funds generated by the soft drink tax were used. For each of these years, the DHS budget projections showed that soft drink tax receipts would be utilized. Yet, at the end of the fiscal year 2011, there was a balance of $330 million in soft drink tax proceeds. This balance was reduced to $250 million at the end of 2012. Seldom mentioned are the eight additional taxes that go to the Medicaid fund, totaling $200 million in special tax revenue. There is a strong need to be transparent about the revenues in the Medicaid trust fund.

If the past 21 years have shown us anything, it’s that a soda tax is not successful fiscal policy. The earmarked tax only obstructs rational budgeting decisions.

Over the past several years, approximately 28 other states across the country have introduced beverage taxes like Arkansas. All have eventually failed. Since the Arkansas tax was enacted, Ohio, Mississippi, North Carolina, South Carolina, Louisiana, and Washington have repealed their soda taxes. Maine state legislators passed a soda tax in 2008 that was immediately repealed by voters at the ballot box. In fact, West Virginia is the only other state that taxes soft drinks at the wholesale level.

The belief in Arkansas may be that since the voters upheld the soda tax at the ballot box in 1994, any efforts to remove or reduce the tax should be dismissed. But, that was nearly twenty years ago. Today, the majority of Americans remain opposed to taxing soda and other sweets by more than a 2-to-1 margin, according to an April 2013 national poll by Harris Interactive and HealthDay.

Gov. Tucker may have led voters to believe that this tax is paid by large “international cola companies,” but that is a fallacy. Singling out beverage products for excise tax stifles jobs that the industry could provide in state and hinders economic growth. The soft drink tax is paid by local businesses and from the wallet of the hard working people of Arkansas.

Gov. Beebe found a reasonable way to reduce the sales tax on many food items, as he promised he would during his campaign for office. We believe the same is possible for the hidden soda tax, paid by Arkansas companies and residents, passed under near hysteria and managed with less than full transparency. Just like how shaking cans of soda in the hallway of the state capitol is not the best way to get one’s point across – there is a better way to bring revenue to Arkansas than a regressive excise tax on American made products.