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Voters take a stand on a sugary drink tax and annual gas tax adjustments

California: Berkeley will tax sodas and other sugary beverages, San Francisco will not

On November 5, 2014, the LA Times proclaimed the City of Berkeley’s Sugary Beverages and Soda Tax, Measure D, to be a success; about 75 percent of voters backed it. The penny-per-ounce tax affects the following sugar-sweetened beverages sold in the city:

  • Sodas;
  • Sports and energy drinks;
  • Juices with added sugar; and
  • Syrups that go into sugary drinks at cafes, such as Starbucks' Frappuccinos.

Measure D does not tax diet sodas or alcohol.

The tax is not imposed on retailers or consumers of sugary drinks. Instead, the LA Times article points out that Measure D levies the tax on the 15 to 20 companies that contract with beverage makers to distribute their products in the city; they will be charged as part of their business license fee.

Berkeleyvsbigsoda.com, an advocacy group that campaigned for Measure D’s passage, explains that the tax revenue would go into the city’s general fund. In addition, Measure D creates a panel of experts in child nutrition, healthcare, and education to make recommendations to the City Council about funding programs that improve children’s health across Berkeley. The panel will issue annual public reports detailing the impact of funded programs.

The advocacy group points out that sugary drink taxes are modeled on other excise tax regimes, like tobacco taxes. It describes the three ways that these kinds of taxes work: 

  1. They raise awareness.
  2. They raise revenue for community programs that combat the influence of sugary drink marketing. Revenue from the tax could fund community and school based programs across Berkeley that give families tools to make healthy choices about what they eat and drink.
  3. They reduce consumption. After Mexico passed a similar soda tax at the national level, consumption of sugary drinks decreased. It’s a case in point to the growing body of research that predicts a penny-per-ounce tax will decrease consumption and save lives.

Why tax sugary beverages?

Berkeleyvsbigsoda.com further reveals that soda and other sugary drinks are the number one source of added sugar in the American diet, and are linked to increased risk of diabetes and other diseases, like heart and liver disease, obesity, and tooth decay. Here are some facts on sugary drink consumption and diabetes posted on the site:

  • A 20 ounce bottle of soda is equivalent to 22 packets of sugar.
  • 2 out of 3 California teenagers drink at least one soda or other sugary drink each day.
  • Drinking even one sugary drink a day significantly increases the risk of Type 2 diabetes.
  • Liquid sugar affects the body in a unique way that increases the risk for diabetes more than sugar in food.
  • Beverage companies spend hundreds of millions of dollars annually marketing directly to youth, bypassing parents, and market more heavily to minority youth.
  • 40 percent of all children will develop Type 2 diabetes in their lifetimes. The prediction is worse for African American and Latino children, as the likelihood increases to 50 percent.
  • 40 percent of Berkeley’s 9th graders are overweight or obese.

The LA Times article noted that the American Beverage Association spent $2.4 million in an unsuccessful effort to defeat Measure D and another $9.1 million in San Francisco. In San Francisco, voters rejected a similar measure, Proposition E , which would have imposed a 2-cents-per-ounce tax on sodas and other sugar-sweetened drinks.

Massachusetts: Voters approve the repeal of annual gas tax adjustments

On Election Day, voters eliminated the requirement that the state’s gasoline tax, which was 24 cents per gallon as of September 2013, (1) be adjusted every year by the percentage change in the Consumer Price Index over the preceding year, but (2) not be adjusted below 21.5 cents per gallon.

According to a Mass.live article, 53 percent voted to eliminate annual adjustment. The result is an estimated loss of revenue of $1 billion over 10 years, which was used to borrow money for the state.

Differing viewpoints

A WBUR Radio Boston story offered perspectives on both sides of the issue. In the background are the following facts:

  • Last year, the Massachusetts legislature raised the gasoline tax to 24 cents per gallon. It was the first increase since 1991, and lawmakers said it was necessary to pay for bridges and roads, as well as public transportation.
  • The legislature indexed the tax to inflation: when the value of the dollar increases, the tax would increase along with it.

On the radio show, an opponent of the tax adjustment, Steve Aylward, a representative of the Committee to Tank Automatic Gas Tax Hikes, argued that the group’s main concern was that the Legislature would not have to take future votes on the issue. Mr. Aylward reasoned that this amounted to taxation with representation.

Besides this, Mr. Aylward said that Massachusetts has brought in $1.1 billion in unexpected revenue over the last two years. But if the tax’s goal is $1 billion, then it is unnecessary because “they already got that in the past two years in excess revenue.” He concluded that under this scenario, “your state is wasting money at an enormous rate. So why would you want to raise taxes when you have a surplus?”

In contrast, Michael Widmer, the president of the Massachusetts Taxpayers Foundation,
contended that adjusting a tax to inflation is the traditional way of doing things, and that the repeal means the state cannot maintain public transit, or bridges and roads that are in unsafe and poor condition.

Mr. Widmer’s conclusion was this: “In the end, we need to maintain our roads and bridges. We do not have the budget surplus that Steve’s referring to. We’re actually running a deficit this fiscal year. We don’t have extra money for transportation. The indexing of the gas tax, the money goes directly to transportation, roads, bridges, public transit like the MBTA…And by the way, the cost of indexing, which is half a penny a year approximately, for the average driver, is $5 a year.”

Implications

The repeal of Massachusetts’ indexing of the gasoline tax to inflation leaves the state with just the flat rate tax of 24 cents per gallon. According to a 2011 report by the Institute on Taxation and Economic Policy, flat tax schemes are not capable of generating a sustainable revenue stream in the long-term. This is because the tax remains fixed, but the costs to construct and maintain a transportation network, including asphalt, concrete and labor expenses, inevitably increase over time.

How Massachusetts will handle the shortfall remains to be seen.

The Affordable Care Act’s tax credit provision will stand trial before the Supreme Court of the United States

On Friday, November 7, 2014, the United States Supreme Court agreed to hear a new challenge to the Patient Protection and Affordable Care Act (ACA). This is the second time it will contemplate the ACA’s constitutionality. In the first case, National Federation of Independent Business v. Sebelius, the Court concluded that the individual mandate provision, which requires most Americans to obtain health insurance or pay a penalty, was a valid exercise of Congress’ power under the U.S. Constitution’s taxing clause. The clause gives Congress its power to “lay and collect” taxes.

This time around, in King v. Burwell, the Supreme Court will consider the legality of the ACA’s premium tax credit provision. The case originates from the United States Court of Appeals for the Fourth Circuit, which is the court with appellate jurisdiction over the district courts in the state of Virginia. There, the court refused to stop the government from extending eligibility for the tax subsidies to individuals who purchase their health insurance on a federally facilitated insurance marketplace, known as an exchange.

The dispute

The crux of the conflict is statutory language that can be interpreted to either allow - or disallow - individuals who purchase their health insurance on a federal exchange to receive a tax subsidy to reduce the cost of the insurance. The Internal Revenue Service (IRS) says that the ACA entitles individuals to receive subsidies regardless of whether they purchase their insurance on a state run or federally facilitated exchange.

Others read the actual language of the ACA and contend that the subsidy is only available when an individual purchases his insurance on a state-established exchange.

If this sounds familiar, that is because it is. As we wrote here last month, a federal trial court in Oklahoma recently concluded that the word “exchange” only includes state established exchanges, as set forth in the explicit language of the ACA itself. According to SCOTUSBlog.org, the government recently appealed that ruling to the U.S. Court of Appeals for the Tenth Circuit. In light of the Supreme Court’s acceptance, the Justice Department now plans to ask the appeals court to put the case on hold while the Supreme Court takes up the issue.

As other courts conclude cases on the tax subsidy question, we can expect additional motions to hold in abeyance pending a Supreme Court decision.

No circuit split

It is notable that the Supreme Court accepted King even though there is no circuit split to be resolved. As it currently stands, the Fourth Circuit is the only circuit with a decision on record. According to SCOTUSBlog.com, the Circuit Court for the District of Columbia recently vacated a July 22, 2014 ruling that would have caused a split. In that decision, a three-judge panel held that the subsidies are only legal when purchased on a state-operated exchange.

Only 16 states and the District of Columbia have set up such exchanges; the remaining 34 rely on federal exchanges. In light of this, the ruling could cripple the ACA. For that reason, the Obama administration sought a review in front of the entire court, which the court granted.

The ACA remains in full force

Secretary of Health and Human Services Sylvia Mathews Burwell, speaking at a Center for American Progress event reported on by the Cleveland Plain Dealer, said that despite this potential disruption, the “most important thing for consumers to know is that nothing has changed” relative to the open enrollment period that began on November 15, 2014.

For additional information regarding these subjects or any other multistate tax issues, please contact:

David M. Kall
216.348.5812
dkall@mcdonaldhopkins.com

Susan Millradt McGlone
216.430.2022
smcglone@mcdonaldhopkins.com

Multistate Tax Services

Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. We understand this can be a daunting task. McDonald Hopkins Multistate Tax Services provides a broad range of state and local tax services including tax controversy, tax evaluation, tax planning, and tax policy. With professionals who have worked both inside and outside government agencies, our multistate tax team leverages its knowledge and experience to help clients control their complex multistate taxes.

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