Northern California town's sugary soda tax is first to defy state ban

SAN FRANCISCO — A tax on sugary drinks takes effect Thursday in the beachside community of Santa Cruz, seven years after California banned its cities and counties from implementing local grocery taxes as part of a reluctant deal with the powerful beverage industry.

The 2-cent-per-ounce tax, approved by voters in November, is the first in the state since lawmakers approved the 2018 deal. The American Beverage Association spent heavily to campaign against the ballot measure in the small city of 60,000, and in court called the tax illegal and likely to strain city resources.

Santa Cruz officials are prepared to challenge the state's preemption law in court, and despite the legal uncertainty, hope their new tax will spur other states and cities to act. The measure aims to reduce sugar consumption, especially among children and teens, and raise money for health programs and other community initiatives.

''It's about democracy and and standing up to special interests,'' said Shebreh Kalantari-Johnson, vice mayor of the Santa Cruz City Council. ''It's about having the independence to generate revenue for our community.''

The trade organization representing Coca-Cola, PepsiCo and others said in a statement Wednesday that it is assessing next steps.

The tax was opposed by a broad coalition, including labor unions and small businesses, "as an unfair burden on working families struggling with record-high prices,'' said Steven Maviglio, a spokesperson for the American Beverage Association.

Health advocates have been fighting for more than a decade to tax sugar-sweetened beverages, saying higher prices would curb consumption of a product that increases the risk of obesity, heart disease and stroke. Opponents say the regressive tax disproportionately impacts low-income families who can least afford it and hurts local businesses.

Berkeley, a nearby city similar to Santa Cruz, in 2014 passed the country's first tax aimed specifically at sugar-sweetened beverages. A handful of other cities followed, including nearby San Francisco, Oakland and Albany, as well as Philadelphia; Seattle and Boulder, Colorado.

No state has approved a sweetened beverage tax at the state level, although some have tried.

In 2018, California lawmakers reluctantly passed the Keep Groceries Affordable Act, banning local taxes on soda and other sugary drinks until 2031. In exchange, the advocacy group California Business Roundtable withdrew a beverage industry-backed ballot measure that would have made it much harder for cities and counties to increase any taxes.

The deal forced Santa Cruz to abandon its plans to bring a sugary drink tax to a vote. But city leaders didn't give up.

That same year, a city councilmember and health advocacy nonprofit sued, arguing that the Groceries Act's penalty provision unlawfully targeted voter-approved charter cities from exercising its authority over local affairs. Under the act, a charter city that pursued a local tax on sweetened drinks could be penalized by losing its sales tax revenue.

In 2023, however, a state appeals court struck down the penalty provision as unconstitutional, but did not rule on the preemption itself. In June, the Santa Cruz City Council placed a tax measure on the ballot and in November, nearly 32,000 voters approved it by a margin of 52 to 48.

The "no" side spent $2.8 million; the ''yes'' side spent under $100,000.

The 2-cent-per-ounce tax applies to sodas, ice teas, sports drinks and any other non-alcoholic beverage that contains an added caloric sweetener and has 40 calories or more per 12 fluid ounces of drink. There is an exemption for small businesses with less than $500,000 in gross receipts a year.

Carina Moreno opposed the tax measure and said she will have to raise prices at her restaurant, Tacos Moreno.

"I was really disappointed when I heard that it did pass,'' she said in an email. ''We already pay high prices for sugar drinks."

But tax advocates say the Santa Cruz win is stunning given how much money the opposition spent.

Dr. John Maa, a San Francisco surgeon and chair of the American Heart Association's advisory committee in California, said the future of sugary drinks taxes may lie in smaller communities where advocates can mobilize grassroots support.

''This is a big week for the soda tax movement,'' he said.