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Soda Tax: A health concern or just another tax?

|Includes: DPS-OLD, The Coca-Cola Company (KO), PEP

The administration is pushing its "Soda Tax" as a way to help pay for the healthcare overhaul, while also trying to push the perception that it will help fight obesity.  The plan, as it stands, will charge a tax of one cent per ounce of sugary soft drinks, and it is estimated to provide $14.9 billion for healthcare reform in the first year. President Obama has said the plan is worth considering, while the CEO of the Coca-Cola Company (NYSE:KO) said the idea was "outrageous." 

A team of prominent doctors, scientists, and policy makers said the plan could be a powerful weapon in efforts to reduce obesity. The group's review of research on the topic, appearing in The New England Journal of Medicine, said research on price elasticity for soft drinks has shown that for every 10% rise in price, consumption declines 8% to 10%.  In an industry that is already struggling with volumes in the United States, this tax would be another onerous tax.  

Interestingly enough, other groups in favor of the tax said that the tax should be paid by the company (not the consumer) so it would be able to spread the cost around to other products including non-sugary drinks, and in the case of PepsiCo (NYSE:PEP) even to snacks and granola bars.  So my question is how does putting a tax on granola bars make people more health conscious and reduce obesity? 

Based on the Center for Disease Control's (NASDAQ:CDC) data, which has shown an explosion in the amount of overweight and obese people in America, maybe we have bigger problems than simply soda.  According to the CDC, of the people over the age of 20, 67% are considered overweight or obese, while 30% are considered obese.

I wonder if anyone else is realizing that all these taxes are just going to mean that more of the income of lower income families will be going to the government. Before you start thinking of rebuttals to that question, if soda and other sugary drinks prices increase, do you think that the bottle of water is going to remain the same price?  Is that iced tea that has no added sugar still going to be the same cost?  John Sicher, the publisher of Beverage Digest, a trade publication, said that a two-liter bottle of soda sells for about $1.35. At 67.6 ounces, if the full tax was passed on to consumers, that would add 50% to the price. A 12-can case, which sells today for about $3.20, could rise by $1.44, a 45% increase.  I bought a 20 ounce soda from a corner store in New York City today for $1.75; using the extra cent per ounce, that would make the price $1.95.  That's an 11% increase.  Will that corner store keep its price for Diet Pepsi or Coke Zero at $1.75 while it charges $1.95 for a Dr. Pepper or Cherry Coke?  I highly doubt it. That tax will go through to the consumer and the corner store will get an extra $0.20 profit for every diet soda or non-sugary drink sold.

Rather than taking a negative approach, maybe the government should be looking at spinning this in a positive way.  Instead of taxing sugary soft drinks to battle obesity, maybe the government should offer incentives to help combat obesity. Imagine if all insurance companies or your employer helped pay for your gym membership. Would that entice more people to join/go to a gym? The answer is definitely yes! Not only will it not be a tax on people, but people will be getting healthier and in the long run, that means less money being spent for healthcare.  Seems to kill two birds with one stone if you ask me.

Regardless of whether there ends up being a  soda or sugar tax or whatever the name ends up being, these beverage companies, namely Coca-Cola Company (KO), PepsiCo (PEP), and Dr Pepper Snapple Group (DPS), still represent a strong investment moving forward.  My favorite in the industry is the Coca-Cola Company (KO), but I think that DPS will have the greatest price appreciation over the next 12-months. 

David Silver is a research analyst with Wall Street Strategies (wstreet.com). He specializes in the Transportation and Beverage Industries. For more information about David, refer to his company's website at wstreet.com.