Thought Leadership: Is Soda the Next Tobacco?

Sugar taxes, while nothing new, have been back in the news lately, with England’s recent announcement of a tax on sugar-sweetened beverages (SSB) making headlines. Other governments, including Mexico, France, and even the city of Berkeley, California, have passed similar legislation in recent years. What are the impacts of these taxes, and should investors be concerned?

The most commonly quoted driver of sugar taxes is obesity and its related costs. According to the Centers for Disease Control and Prevention (CDC), more than one-third of American adults are obese, leading to additional medical costs of $140 billion per year. The theory behind sugar taxes is that higher prices will cause consumers to switch to healthier alternatives, causing obesity levels to fall, along with associated medical costs.

The jury is still out on how sugar taxes will impact public health, and will likely remain so, as health implications will be slower to materialize than the financial impacts. However, from a financial point of view, the data suggest two outcomes: a decline in sales of sugar-sweetened beverages, and an increase in government revenue.

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Source: LPL Research, French Government Estimates, National Institute of Public Health of Mexico, City of Berkley, CA 03/22/16

 

A 2012 University of California study indicated that a national soda tax in the U.S. would bring in $13 billion in revenue, and also decrease consumption by 10–15% over a period of 10 years. Although there are no announced plans for a national sugar tax at this time, according to the University of Illinois, 35 states (including Washington, DC) already had their own taxes on SSBs in 2014, with an average tax rate of 5.2%. A 2012 study by the British Medical Journal indicated that a tax of approximately 20% was needed in order to significantly impact obesity rates, meaning that the existing state laws are likely focused on generating revenue rather than driving improvements in public health. And even in Berkeley, which passed a 20% tax, consumption may not be impacted as much as hoped, because consumers can get around the tax by purchasing soda in other nearby towns.

For their part, major producers of SSBs in the U.S. have pledged to reduce the number of calories Americans consume from SSBs by 20% by 2025. They have also expanded their presence in healthier alternatives such as bottled and flavored waters.

Although support for a sugar tax in the U.S. is far from widespread at this point in time and the imminent risk to producers is low, investors would be wise to monitor the outcomes of these laws in other countries. If sugar taxes do turn out to improve public health, while also adding to government revenue, it could result in increased calls for such legislation in the U.S.

IMPORTANT DISCLOSURES
The economic forecasts set forth in the presentation may not develop as predicted.

The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security.

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