State Net Capitol Journal -- February 20th, 2012

Budget & Taxes

SODA TAXES FIZZLE: Two years ago, when concern over obesity, especially among children, had states from California to New York debating excise taxes on soft drinks, it appeared as though they might become the new sin taxes of choice and follow the pattern of alcohol and cigarette taxes, now imposed in every state. But only one state, West Virginia, ended up passing a soda tax in 2010. And none of the soda tax bills that were proposed in fourteen states last year got much traction at all. (See Bird's eye view: "Obesity taxes not catching on.")

Nearly half of the states tax soda at a higher rate than other food products, according to a report issued last January by the Bridging the Gap Program at the University of Illinois at Chicago. But in most of those states, soda is merely excluded from the sales tax exemption for food. Only four states - Arkansas, Tennessee, Virginia and West Virginia - actually impose an excise tax on soda specifically. And no state currently taxes soda at the one-cent-per-ounce level public health researchers say would be required to reduce its consumption significantly, although a number of states tried to do so last year.

But making headway on any form of soda tax has become a challenge. This year will likely become the fourth in a row that Massachusetts Gov. Deval Patrick (D), a former Coca-Cola executive, has proposed and failed to make soda and candy subject to his state's sales tax.

"The chances of moving it through the legislature have been very slim," said Patrick Tigue of Community Catalyst, a nonprofit organization that supports soda taxes," and this year looks like it promises to be no different."

One reason for the loss of momentum on soda taxes is that the environment in many states has become hostile toward taxes in general. The soft drink industry has also aggressively opposed such measures, even managing to engineer the repeal of Washington's soda tax in 2010.

"The excise tax is discriminatory, it's regressive, it singles out one industry," said Chris Gindlesperger, director of communications for the American Beverage Association. "It's government digging into the grocery cart of people."

Recent scientific research hasn't helped the pro-soda tax movement either. One recent study, for instance, showed per-capita soda consumption fell 16 percent between 1998 and 2010, suggesting consumers might be moving away from soda even without a tax incentive. Another study found that when price increases do spur adolescents to reduce their consumption of soda, any resulting reduction in their caloric intake is offset by an increase in the consumption of other foods and beverages.

Still soda taxes' fall from favor may only be temporary. Tigue said there's still strong support for the taxes in public health circles. And even Gindlesperger said the issue is likely to re-emerge in 2013, after the election season is over. (STATELINE.ORG, TAX FOUNDATION, BRIDGINGTHEGAPRESEARCH.ORG)

GOOD AND BAD NEWS FOR STATES IN OBAMA BUDGET: States would receive $350 billion in short-term stimulus funding and $475 billion in highway funding under the budget proposed by President Obama last week. And states would receive a good chunk of that money - $50 billion for transportation, $30 billion to modernize schools and $30 billion to hire first-responders and teachers - immediately.

But Obama's spending plan wasn't all good news for states. For one thing, it would reduce the tax breaks for high-income earners who buy municipal bonds.

"This could raise borrowing costs [for municipal issuers] because you have to make up for the tax equivalent cost," said Richard Ciccarone, a managing director at McDonnell Investment Management.

The bond market was relatively unphased by the proposal, however, with skepticism apparently widespread about the likelihood of the budget wending its way through Congress with the tax measure intact.

"I think everybody assumes it's dead on arrival," said Parker Colvin, managing director at Stone & Youngberg in San Francisco.

Potentially more troublesome for states is that the budget proposal also calls for payment innovations and other reforms of Medicaid, Medicare and other health programs intended to save approximately $364 billion over the next decade.

"Medicaid spending is now the single largest and fastest growing expenditure in most state budgets," said David Adkins, executive director/CEO of The Council of State Governments. "Any cuts to the program at the federal level will only cause state budget gaps to grow. It is likely federal Medicaid cuts will trigger state budget reductions in discretionary areas such as higher education, which will result in higher tuition rates, actions directly at odds with the president's budget priorities." (COUNCIL OF STATE GOVERNMENTS, REUTERS, STATELINE.ORG)

FL SENATE EXECUTES PRISON-PRIVATIZATION PROPOSAL: The Florida Senate reinforced its long-standing reputation for independence last week when nine Republicans, rejecting arguments that for-profit prisons would save tax dollars and increase efficiency, joined a dozen Democrats in voting down the state's massive prison-privatization plan. The 21-19 vote means the state will not proceed with what would have been the single largest expansion of prison privatization in U.S. history, encompassing 27 prisons and other facilities in 18 counties. Senate leaders said the decision will force the state to cut education and health care funding by $16.5 million, the amount privatization was projected to save in the first year. (ST. PETERSBURG TIMES)

BUDGETS IN BRIEF: Congressional negotiators approved an economic plan last week that extends the federal payroll tax holiday and unemployment benefits. A vote on the $150 billion plan was expected as early as last Friday (WASHINGTON POST). • The aforementioned payroll-tax holiday agreement reportedly does not include an extension of the tax break that allows residents of seven states that don't impose an income tax - FLORIDA, NEVADA, SOUTH DAKOTA, TENNESSEE, WASHINGTON and WYOMING - to deduct state sales taxes from their federal income tax returns in lieu of the state income tax deduction residents of other states receive (STATELINE.ORG, SEATTLE TIMES).

- Compiled by KOREY CLARK

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