A Taxing Decision for Coke and Pepsi

It's something only New York City's "nanny mayor" Michael Bloomberg could love.

In a country with the highest per-capita consumption of soda, Mexico is proposing a $950 million tax on beverages made by Coca-Cola , PepsiCo , and other soft-drink bottlers to fund weight-control efforts south of the border, such as installing water drinking fountains in schools.

Source: SXC.hu.

Indeed, the mayor's philanthropic organization has contributed money to the pro-tax campaign, which led to the appearance of signs in Mexico curiously urging people to "Say No to the Bloomberg tax!"

According to a 2011 study by the Yale University Rudd Center for Food Policy and Obesity, the average Mexican consumes 163 liters of soda, or 43 gallons, per year, making our own 31-gallon-per-year soda habit pale in comparison. Is it any wonder that Mexicans have also surpassed us in obesity rates?

Well, yes, you can wonder, because as the bottlers note, you can't pinpoint any single source as the cause for the increase. Like the researchers who said soda was potentially causing violent behavior in kids -- only to admit even they couldn't find the nexus between soda consumption and the aggressive tendencies -- it's easy to look at two disparate data points and draw conclusions. In this case, tax proponents see high obesity rates and high soft drink consumption and say there's a causative relationship, but that's just demagoguery, not necessarily science.

The bottlers correctly point to a mix of factors, including a greater consumption of fried foods, as contributing to a rise in obesity-related diseases, and earlier this year Coke published a position paper noting the existence of an obesity problem but also saying it's impossible to pinpoint its cause. The U.K.'s prestigious Royal Society also says the increase in consumption of processed foods is a culprit in the growth of high-fat diets in Mexico.

Soda tax backers say in addition to the money it would bring in, it would also cause a 16% to 24% decrease in consumption, which the bottlers obviously can't afford these days. Coke witnessed a 1% decline in case volumes in North America last quarter and a 4% drop in its Europe region, though they were up 2% in Latin America, with overall revenues falling 3%. Pepsi saw a 4.5% drop in volume at its Americas beverages division, as did Dr Pepper Snapple , which saw carbonated soft drinks fall 4% year over year. Losing Mexico, too, would be devastating to their bottom line.

With soft drink sales accounting for 40% of the income realized by small Mexican shops, the tax threatens their livelihood, according to the country's National Association of Small Stores.

There's little doubt that consuming large quantities of sugary soft drinks is not good for you, but taxing your way to health won't cure the problem either. Denmark tried that with a tax on both saturated fats and soda, but repealed them a year after their implementation, though admittedly it was more for economic reasons than health issues.

Yet Mexico, which saw its GDP contract in the second quarter for the first time since 2009, might find that if it successfully implements the soda tax, it may just pop any chance of economic recovery.

Can soda make you rich?
Coke has been described as a money-printing machine. Which makes sense, since the best investing approach is to choose great companies and stick with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.

The article A Taxing Decision for Coke and Pepsi originally appeared on Fool.com.

Fool contributor Rich Duprey has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.