Sugar Tax Could Trigger Black Market, Job Losses, Furey and Coady Warned

Department of Finance attempted to conceal industry warning that a black market for sugar-sweetened beverages could emerge in the province.

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The beverage industry and a Memorial University professor are cautioning that the Liberals’ controversial and hastily announced sugar-sweetened beverage (SSB) tax could result in job losses in the province and lead to a black market for products that will soon be subjected to a 20 cent per litre levy.

The Canadian Beverage Association (CBA) says its members were surprised by Finance Minister Siobhan Coady’s announcement during the 2021 budget speech that the government will become the first jurisdiction in Canada to charge consumers an additional tax on drinks like juice and soda.

Email communications obtained by The Independent show that following the May 31 budget speech the CBA began an intensive lobby campaign to convince government to delay the tax’s implementation and consider co-developing the policy with industry. Throughout the summer and fall, CBA executives and member business leaders met with Premier Andrew Furey on two occasions, with Coady four times, and with MHAs from all three political parties.

Intensive lobbying from CBA

The CBA, which represents companies like Coca-Cola, Pepsi, Red Bull, and Newfoundland-based manufacturer and distributor Browning Harvey Ltd., among others, says its members are concerned the tax could lead to layoffs of good unionized jobs and even trigger the illegal importation of drinks from neighbouring provinces. 

In a June 17, 2021 letter to Furey, CBA President Jim Goetz says while his organization supports the goal of improving health outcomes for people in Newfoundland and Labrador, it believes the province’s approach is misguided.

“Numerous data points demonstrate that sugar sweetened beverage taxes fail to move the needle on driving change regarding serious problems of obesity and diabetes,” Goetz writes. Instead, government should consider educational campaigns, he suggests, pointing Furey to the Balance Calories Initiative, an industry-led effort to reduce Canadians’ calorie consumption from beverages 20 percent by 2025—largely by promoting lower-calorie drink options.

Coady responded to Goetz in a July 6 letter, promising the government will discuss the matter further with industry stakeholders. Meetings ran throughout the summer, but by September little appears to have changed and the CBA continued urging the Liberals to reconsider the policy.

In a Sept. 2 email to Fred Hutton, a senior advisor in the Premier’s Office, CBA Vice President Carolyn Fell says Coca-Cola Bottling Ltd. President Todd Parsons and PepsiCo Canada President Mike Ruff “are available to fly to St. John’s later in the week of September 27 to meet in person,” explaining, after more than two months of lobbying, that the CBA’s members “are very concerned about their employees in Newfoundland and Labrador and the impact the tax will have on the economy and jobs as we’ve seen it happen in other jurisdictions.”

The CBA says its members employ more than 800 people in Newfoundland and Labrador who work in production and distribution facilities and offices—and other workers indirectly through a transportation network with delivery contractors, restaurants and retailers. “CBA members have also been a staple of support for local sports teams, local sport venues, and other vital community-based work,” Goetz writes in his June 17 letter to Furey.

But the SSB tax puts all of this at risk, Goetz says in a follow-up letter, predicting the tax “will increase business costs, discourage investment in the province, and lead to job losses.”

In his Oct. 12 letter—one week before Coady announced details of the SSB tax during a press conference—Goetz urges Furey to “postpone the introduction of a sugar-sweetened beverage tax policy and implementation until the full scope of impact to Newfoundland and Labrador residents, beverage producers, distributors and local business can be fully assessed,” and to “work with industry to introduce an educational program that helps Newfoundlanders get the information they need to choose the best and healthiest beverage options for themselves and their families.”

Concerns about a black market—blacked out

With his letter, Goetz includes what he refers to as an “on-the-record” submission to the government that, among other things, warns of the potential for “illegal cross-border importation if profit-minded truckers begin bringing untaxed soft drinks into Newfoundland.”

The section of Goetz’s letter outlining potential for a black market was redacted at the request of the Department of Finance. Cited as justification for withholding the information were provisions from Section 35.1 of the province’s Access to Information and Protection of Privacy Act, 2015  that allow the head of a public body to refuse to disclose information “which could reasonably be expected to prejudice the financial or economic interest of the government of the province or a public body.”

The Independent challenged the redaction and had the letter’s full contents disclosed.

The previously redacted text continues: “One truck load of cans with 20 pallets of soft drinks could be sold illegally and net almost $4500. It becomes very attractive for a person with a truck to begin shipping cans into Newfoundland from major warehouse stores in Halifax. No legislation exists to prevent this importation activity. This will result in these sales losses to the legitimate Newfoundland beverage producers / distributors who currently employ Newfoundlanders and contribute significantly to the local economy.”

A parade through downtown St. John’s featuring prominent Pepsi advertisements. Photo via Browning Harvey Ltd. on Facebook.

Other “unintended consequences” 

Given the uncertainty around the impending tax’s implications, the CBA commissioned Memorial University Business Administration Professor Tom Cooper to analyze the Liberals’ plan. 

The resulting report flags a number of issues with the government’s rationale and justifications for legislating the SSB tax. Beyond its economic impact on distributors, the report suggests it is unclear the policy as currently designed will achieve the provincial government’s stated health outcomes—or even how those outcomes would be measured.

Cooper notes that according to data from the CBA and others, in Newfoundland and Labrador “there has been a substantial decrease in the consumption of sugar-sweetened beverages over the last number of years,” and that “this trend towards low and zero-calorie options is higher in Newfoundland and Labrador than elsewhere in Canada, and forecasted to increase in market share.”

Moreover, in their messaging about the tax, Coady and Furey have said the average household in Newfoundland and Labrador spends an estimated 2.8 per cent of its total annual food and beverage expenditures on sugar sweetened beverages, a figure Coady has pointed out is two times the national average.

But Cooper and the CBA say they can’t replicate that number using available data, and the government won’t tell them exactly how they crunched the numbers.

The Independent asked the Department of Finance for the data it used to arrive at the number.  In an emailed response, Director of Communications Diana Quinton said the estimate “was based on a review of data published by a number of sources including Statistics Canada, the food and beverage industry, and reports and studies on diet and beverage consumption.”

Quinton did not respond to The Independent’s request for the precise data sources. 

Fell said in an interview that if the province’s calculations cannot be replicated, “we don’t know how the government is measuring them for their baseline and we don’t know how they’re going to measure it moving forward.”

Cooper also notes in his report “there is strong evidence that the impact on business and industry, across the supply and value chain, will be significant in Newfoundland and Labrador,” where the industry “operates on a low-return on investment/scale business model,” he writes. “The small, dispersed population makes distributing expensive and costly. Moreover, being on an island means that all products are not manufactured here and some are shipped in via sea.”

In Newfoundland and Labrador, Cooper told The Independent, “it’s the distributors who bear the brunt of this tax—it’s not just Coca-Cola, it’s not Pepsi Canada. It’s the Browning Harveys, it’s the FJ Wadden’s—it’s the smaller distributors who are going to have to bear the brunt of the cost of doing this.”

The tax could trigger a “‘doom loop’ to the soft drink manufacturing and distributing industry” in the province, he says in the report: “a feedback loop which means each action makes the situation worse for the industry—leading to even more risk for the overall Newfoundland and Labrador economy.”

Cooper also points to social and cultural factors related to sugary beverage consumption in the province, and agrees a strong educational campaign could be more effective.

“When you think about how ingrained drinking soda is in Newfoundland and Labrador—like, that Pineapple Crush with your fish and chips on Good Friday, or the Lamb’s and Coke that you’re drinking on the weekend—there needs to be some education, some telling people, listen, this is an easy way to move to a Diet Coke or to move to a water or another sort of beverage, rather than consuming a full sugar-sweetened one,” he says.

“Newfoundland and Labrador needs a comprehensive approach to address health outcomes and […] that is fair to industry and business stakeholders as well as consumers,” the report concludes. “A comprehensive approach will take time and industry collaboration but will be more effective in the medium to long term to ensure more positive health outcomes for Newfoundland and Labradorians.”

For CBA’s part, Fell said the organization’s “bottom line” is that “industry is willing to come in and help support governments in the way that they want to go,” but that “the way the [Furey] government has decided to proceed poses more risk to industry than the other choices that could have been considered.”

In an emailed statement on behalf of the Department of Finance, Quinton said the department “continues to work with industry on how best to administer the tax,” and that “[p]eriodic audits are undertaken to identify inconsistencies in the tax process—as will be the practice once the sugar sweetened beverage tax is implemented.”

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