Why Investors Should Fear Soda Taxes

Soda tax?
Soda tax?

In these times of fiscal austerity, makers of unhealthy foods are a tempting target for taxation. Activists have long targeted companies like McDonald's (MCD), which just yesterday revealed plans to make over the ubiquitous Happy Meal by adding a fruit or vegetable and reducing the amount of fries.

But trimming portions and adding healthier fare to a fast-food chain's menu aren't enough to substantially curb obesity, which costs society about $147 billion a year in medical costs, according to the Centers for Disease Control and Prevention.

Activists say more radical measures are called for -- like levying a 20% surcharge on sugary drinks and other unhealthy foods and using the billions raised from the tax to subsidize healthier foods, such as vegetables.

That's the kind of plan Mark Bittman of The New York Times says he can get behind: "This program would, of course, upset the processed food industry," he writes. "Oh well. It would also bug those who might resent paying more for soda and chips and argue that their right to eat whatever they wanted was being breached. But public health is the role of the government, and our diet is right up there with any other public responsibility you can name, from water treatment to mass transit."

Are the Food Police Putting the Heat on Your Stocks?

It would be wrong for investors to dismiss Bittman as a "Food Police" radical. There are plenty of like-minded people in positions of power pushing for changes that could affect the food industry stocks in your portfolio.

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Bittman notes that at least 30 cities and states "have considered taxes on soda or all sugar-sweetened beverages." Soda has become the most-villainized food product of the decade, which is odd given that its popularity is fading.

According to industry trade publication Beverage Digest, soda accounted for 24.9% of liquid consumption in 2010, down from 29.1% in 2000. That's partly because of the rising popularity of bottled water. Despite Coca-Cola's (KO) strong quarterly results, North America volume was flat in the second quarter excluding a cross-licensing deal with Dr Pepper Snapple Group (DPS).

So far, Coca-Cola and PepsiCo (PEP) and their unionized workforces have beaten back soda tax proposals in places such as Philadelphia and New York. State legislators in cash-strapped Illinois are considering a soda tax plan as well.

Other Companies That May Be in the Line of Fire

Soda and fast food are easy targets for the Food Police. But the rest of the food industry may also be vulnerable to attack.

Dean Foods (DF) recently introduced a low-calorie chocolate milk for schools. Some districts, including the Los Angeles Unified School District, the second-largest in the country, have already banned flavored milk as part of their fight against childhood obesity.

What's next? Why shouldn't Hershey (HSY) be assessed a fee by the government for its role in contributing to childhood obesity and dental problems? Should Kraft (KFT) be held responsible for the bulging waistlines caused by Oreos and Kraft Macaroni and Cheese? And Kellogg's (K) Froot Loops might as well be classified as sugar-delivery systems.

The influence of the Food Police is slowly growing and has the potential to wreak havoc on the industry for years to come.

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Jonathan Berr does not own shares in the companies listed. The Motley Fool owns shares of Coca-Cola, PepsiCo, and Dean Foods.