Soda Taxes

Illinois Hoping Citizens Drink State's Debts Away with Statewide Soda Tax

Skyrocketing costs, financial crisis make the Land of Lincoln very thirsty.


soda fountain
Everett Collection Inc. /

Moody's economic forecast for Illinois for 2017 is remarkably blunt, even a little grim. This is just the first paragraph of the summary:

Illinois is one of the Midwest's weakest links, reflecting both soft job creation and the state's descent into fiscal quicksand. The state trails the nation in most metrics and political gridlock is imposing significant economic costs. The jobless rate has resumed its descent after rising late last year into early 2016, but much of the decline owes to a sharp drop in the labor force and population losses.

The state's unemployment rate for December, 5.7 percent, is one full percentage point higher than the national average. The state is losing jobs among all employment sectors, blue collar and white collar alike. Manufacturing jobs had been recovering slowly with the economy in Illinois, but are now dropping again. The state's population is also shrinking. Illinois' population growth has been dropping since the 1990s. It hit negative numbers three years ago and has stayed under since. Illinois is losing tens of thousands of its residents to other states and elsewhere.

The state is a fiscal disaster, partly due to its complete inability and unwillingness to get a handle on its spending, particularly on its own employees. Illinois' pension liabilities are tied with Kentucky's as the worst in the nation. The state's obligations jumped to $130 billion in 2016, an increase of 17 percent, due to poor returns and lowered return assumptions.

So when you've got a citizenry who is not recovering the way the rest of the country is (to the point that they're leaving) and you've got a humongous state debt problem, one would assume that even the most progressive, spend-happy government official would realize they have to rein it in.

But not Illinois. They just need to find more money! One legislator's brilliant idea: soda taxes. Yes, this monster again. State Sen. Toi Hutchinson (a Democrat from the greater Chicago area) has proposed Senate Bill 9, which would add a one cent tax for each ounce of every sale of a sugar-sweetened drink statewide. Almost all that money will go into the state's coffers. A small amount (2 percent) would be sent to the state's Department of Revenue to administer the program. The rest goes into the general fund.

Much like Philadelphia's passage of a soda tax, this doesn't appear to be a nanny state effort to "nudge" people to healthy drinking choices by forcing up costs. The proposal really does seem to be focused on raising revenue for the state. They predict the tax will bring in $560 million annually for the state. Which means that if their pension obligations never get any worse and the revenue doesn't decline because people stop buying soda (or a black market develops), this money can cover the state's pension liabilities in a mere 232 years. And that's not even counting the state's other financial debts!

Of course, Illinois pension crisis undoubtedly will get worse, and this entire soda tax proposal is a way for legislators (and public sector union leaders) to deflect away from the problems that plague the state that aren't being addressed. And in this case, they're pursuing a regressive tax that's more likely to affect poor people more than rich people. They're taking money from their poorest residents in order to bankroll their highly paid government employees. Brendan Bakala at the Illinois Policy Institute notes how consumption works out in the real world:

While retailers would face heftier costs from the new tax, it would be poor and lower-income Illinoisans who would be hurt the most. A poll from Gallup shows that 45 percent of people making less than $30,000 a year consume regular, sugary soda. And as incomes rise, consumption of regular soda decreases. Only 34 percent of those making $30,000-$74,999 a year consume regular soda, and only 20 percent of people making $75,000 a year or more drink regular soda.

For poor residents of Cook County (the Chicago area) this would be on top of another soda tax approved and set to begin in July. It's also a penny per ounce tax.

Though Illinois is heavily dominated by Democratic rule, citizens voted in a Republican governor, Bruce Rauner, who took office in 2015 with a focus on getting the state's economy back in order. Unfortunately the Democratic control over the legislatures has prevented any changes, and the state's Supreme Court has tossed out pension reforms as a violation of the state's constitution. Michael Lucci, vice president of policy for the Illinois Policy Institute, bluntly tells Reason there isn't any good news about the state's finances he can tell us, and in fact he believes the state is in worse shape than people even think. Much as what happened with California's municipal bankruptcies, keep an eye on the cities first.

"A lot of localities are a lot worse than the state," Lucci says. "Localities will have a significant problem and there will be a domino effect. There's not really anything going on that will change that course. We are kind of shouting from the rooftops, 'This is serious.' We might not have any way out of this soon."

Because the entrenched Democratic and public employee union interests are so resistant to any changes, Lucci said the Illinois Policy Institute has sent memos to the incoming Donald Trump administration asking them to improve and streamline bankruptcy code so that cities will actually be able to fix their debt problems if they become insolvent.

Lucci noted the recent job losses in the state and mapped out differences in communities. Chicago has seen jobs recover, but the rest of the state is still losing ground. The counties surrounding Chicago have seen a net increase in jobs over the past eight years (up 110,100) while the rest of the state lost jobs during that same time frame (down 42,700). The community Hutchinson represents has been improving (Chicago has a whole host of financial problems of its own), but the taxes she's proposing are going to hit hard those who still have not recovered.

Unsurprisingly, while Hillary Clinton took Illinois on the strength of the popular vote in the Chicago area, most of the counties outside of the metropolis went for Trump. Analysis of county-by-county votes over time shows the non-urban parts of Illinois growing redder and redder. Trump's economic populism struck a chord with folks outside the cities. Note though, Lucci sees a much bigger problem in the cost of attempting to do business in Illinois, not the foreign trade Trump likes to point to.

"Manufacturing jobs have been lost, but we also have a state government that just crushes guys who are trying to produce," Lucci says. "Our guys pick up their facilities and move to Indiana, or move to Wisconsin. Mexico would be a secondary problem for Illinois." He points to property taxes and workers compensation costs as major barriers to business-building when compared to other nearby states. Illinois is second only to Nevada in the share of homeowners who are underwater with their mortgages, owing at least 25 percent more than the market value of their houses.

And yet, Lucci notes that the legislative debate seems to be entirely about how much taxes should be raised, a discussion of how much the state can get away with, not about cutting back. He has heard that the proposed soda tax could get abandoned (in favor of income tax increases) out of fears of how citizens will respond when they see the immediate consequences.

"When people actually see what happens, they're going to start asking, 'What is my government doing?'" Lucci says. "There's going to be such sticker shock. It's gonna be one of those issues where people are like, 'Wait a minute, my government has gone insane.'"

Ultimately, it's going to take state constitutional amendments to permit the state and cities to reform pensions and collective bargaining agreements. Lucci notes that there are Democratic lawmakers who understand the reforms are necessary—Democrats did actually vote for the pension reforms that the state's Supreme Court tossed out. But until that actually happens, leaders will continue to try to extract more and more money from citizens rather than tighten their belts.

"People are getting hit so hard from so many directions," Lucci says. "They're getting angry."