Sen. Files seeks 37% soda tax cut, will reduce revenue by $4 million (Updated)

Sen. Jake Files, R-Fort Smith, on Monday (Mar. 2) filed legislation – Senate Bill 725 – to reduce the tax on soft drink syrup by 37%. If passed, it would result in a reduction of $4 million in state funds to the Medicaid Trust Fund, plus the loss of unmatched federal funds, the state budget administrator said.

Files, the lead Senate sponsor and chairman of the Senate Revenue and Tax Committee, said Sunday he expects “at least 40 cosponsors” in the House and Senate. Rep. Laurie Rushing, R-Hot Springs, is the lead House sponsor.

Brandon Sharp, the state budget administrator, said the Department of Finance and Administration is opposed, “simply because it would require additional general revenues which are not contemplated in the governor’s balanced budget.” Gov. Asa Hutchinson supplied a statement to Talk Business & Politics that neither embraced nor shut the door on the possible tax cut.

“Our focus this session has been to lower our top income tax starting with the middle class. There are a number of bills that have been filed to cut additional taxes, beyond what was included in our balanced budget proposal. I look forward to working with the legislature to discuss these bills as we work to craft the final budget for next year,” Hutchinson said.

Soft drink syrup used in fountain drinks is taxed at $2 per gallon. Taxes also are levied on bottled or canned soft drink products and drinks produced by powders or base products at a rate of 21 cents per gallon of finished product. On a 24-can case of soft drinks, the tax is 47 cents, or about 2 cents per can.

Soft drink taxes raised $44 million in fiscal year 2014 and have raised more than $631 million since the beginning of fiscal year 2001, according to the Department of Finance and Administration. Files said the 37% reduction would reduce state funding by about $4 million a year. He said in some years the $4 million wasn’t necessary to meet the Medicaid program’s budget.

“It’s been something that’s been out there and been a tax that we all paid for but almost used just kind of selectively … when they needed some bump,” he said.

Sharp said a reduction of $4 million in state spending for Medicaid would result in a loss of federal matching funds, which are paid at a 70:30 match. Files said he did not expect repealing the syrup tax would reduce federal dollars coming into the state.

“Medicaid is going to be funded for whatever Medicaid needs to be funded for, so I don’t see this being something that there’s going to be a loss of services or loss of federal dollars,” he said.

At one time, the Medicaid Trust Fund had reached $400 million thanks to an infusion from the federal stimulus package, but that amount has dwindled.

“Last I looked, I think we were down to $29 million in the Medicaid Trust Fund as a whole,” Sharp said. “Medicaid spends $60 million a week, so … I wouldn’t call it a surplus. I would call it simply part of what we need to operate the state’s Medicaid program.”

The tax was created during a December 1992 special session called by Gov. Jim Guy Tucker after he was sworn into office following Bill Clinton’s election as President. Its purpose was to ensure Arkansas could continue to fund its share of a 3:1 federal Medicaid match. The tax is the largest contributor to the Medicaid Trust Fund. Voters in 1994 supported keeping the tax during a statewide referendum.

Files said further soft drink tax reductions could result from the task force that will be considering overall Medicaid reforms this year. Soft drink taxes could be reduced gradually, as was done with the grocery tax, with a proposal perhaps ready for consideration by the 2017 session. Files said the soft drink tax is applied to a particular industry that doesn’t receive benefits in return.

“This one from a tax policy standpoint was and is just a simple way to get money,” he said. “And that’s not always bad, but everybody else that pays into the trust fund has some sort of renumeration coming back to them, and they get compensated.”

The bill was proposed and backed by a coalition led by the Arkansas Beverage Association that includes the Arkansas Hospitality Association, Arkansas Grocers and Retail Merchants Association, Arkansas Oil Marketers Association, and the Arkansas Vending Council.

Dennis Farmer, the Arkansas Beverage Association’s president, said West Virginia is the only other state that levies an excise tax on soft drinks. This creates a hardship for Arkansas-based stores and restaurants participating in national promotions, he said. The coalition would like to see the entire tax go away. In the meantime, the 37% reduction would equalize the current rates for fountain drinks and other types of soft drinks. The way it’s set up, Farmer said, fountain drink consumers are taxed for the cup and the ice.

“This is an extra tax that hurts their bottom line,” Farmer said of his members. “It makes it harder to be competitive. It makes the products cost more for the consumer, and it has nothing to do with Medicaid. Everything else that goes in the Medicaid Trust Fund, there is some kind of connection.”

Files said there are a number of taxes where Arkansas is an “island,” and he would like to address those one at a time.

What about soft drink consumption contributing to the state’s obesity problem?

“I think we all are (concerned), but I think at the end of the day, that’s a personal choice as well,” Files said. “There are things that government can do, and just throwing more taxes on, I don’t know that that makes a big deterrent one way or the other on a soft drink. … I don’t think somebody’s going to go, ‘Hey, I’m going to start drinking cokes now because the syrup tax went down.’ I think they’re going to drink them regardless. I think they just may save more money and be able to do more things otherwise with that savings.”