Have a Coke and a Tax

The economic case against soda taxes

With the federal deficit reaching $1.4 trillion and most state budgets deep in the red, policy makers are desperately searching for new sources of revenue that the tapped-out American public might support. They think they’ve found one at the corner store: a tax on carbonated beverages. Charging a few more cents for a soft drink, legislators claim, will not only refresh exhausted state and federal revenues; it will make us thinner.

Several versions of this year’s health care bills included a soda tax to help offset new costs. In a September interview with Men’s Health, President Barack Obama called it ‘‘an idea that we should be exploring” because “our kids drink way too much soda.” The idea had been dropped from the health care legislation at press time but is expected to resurface next year.

The proposal is perennially popular on the state and local levels too. Thirty-three states tax the sale of soft drinks, at an average rate of 5.2 percent, and politicians in other jurisdictions are eager to jump on the bandwagon. After New York Gov. David A. Patterson floated the idea of a soda tax in December 2008, New York City Mayor Michael Bloomberg launched his own campaign to tax sugary drinks. “All the studies show that young kids drink an enormous amount of soda, and if they drink the sodas with all the sugar in it, it adds a great deal of weight to them,” Bloomberg said in April.

The economic literature tells a different story. The rationale behind a tax on soft drinks, or any sin tax, is that when the government raises prices on a certain good, it will become so expensive that consumers will give it up. Having been forced to eschew that sin because of the high monetary price, consumers will reap the moral and/or physical benefits of not indulging, thereby bettering themselves and society.

The story sounds plausible. The trouble is that sin taxers don’t appreciate human creativity: Consumers have a knack for replacing one sin with another. When the price of a “sinful” good increases, people often substitute an equally “bad” good in its place.

A 1998 study by William N. Evans, an economist at the University of Notre Dame du Lac, and Matthew C. Farrelly, a public health researcher at RTI International, found that smokers in high-tax states tend to consume cigarettes that are longer and higher in tar and nicotine than smokers in low-tax states. This effect is especially pronounced among 18-to- 24-year-olds because they are more responsive to tax changes than older smokers. They have less money, so they want more bang for their bucks.

A 1992 study by University of Michigan economist John E. DiNardo and University of British Columbia economist Thomas Lemieux found that when states raised beer taxes or increased the minimum drinking age, teen marijuana consumption increased. A 1994 study by University of Illinois economist Frank Chaloupka and Chulalongkorn University economist Adit Laixuthai replicated those results—and also found that beer consumption declined in states that decriminalized marijuana.

Are soda lovers likely to do something similar? Richard Williams and Katelyn Christ, two economists at the Mercatus Center (where I work), argue that soda drinkers would. In a 2009 study, they wrote: “The assumption is that this sin tax would reduce caloric intake because consumers would stop drinking high-calorie drinks and/or switch to lower-calorie drinks. However…if consumers respond to the proposed sin tax on sodas and sports drinks by switching to some of the potential substitute drinks [see table], their caloric intake would either remain the same or actually increase.”

In a 2008 working paper, Emory University economists Jason Fletcher, David Frisvold, and Nathan Tefft examined the impact that changes in states’ taxation rates from 1990 to 2006 had on body mass index and obesity. They concluded that soft drink taxes have a vanishingly small impact on weight because, even when untaxed, soft drinks represent only 7 percent of the average soda drinker’s total calorie intake.

Yet in a recent New England Journal of Medicine article, Arkansas’ surgeon general, New York City’s health commissioner, and five experts on health and economics insisted that a penny-per-ounce tax on sugared beverages could lead the average consumer to reduce soda consumption by about 10 percent and lose two pounds. The authors argue that the soda tax would be effective at reducing the number of soda drinkers because the federal cigarette tax, which amounts on average to $1.34 per cigarette pack, has been effective at reducing the number of smokers. Yet several widely reported studies found that the tax on cigarettes as a whole has reduced smoking in adults by just 2 percent and in teens by 7 percent.

So the soda tax won’t do much to help us lose weight. But does it raise much revenue? Supporters say yes, but there’s a problem here too. If the tax is effective at discouraging soda consumption, it won’t raise much money because people won’t be buying soda. Which does the government actually prefer? Skinnier citizens or fatter coffers?

Last July the Congressional Budget Office estimated that a federal three-cent-per-12-ounce soft drink tax would generate $24 billion over the next four years. Needless to say, that won’t fix the current budget crisis, but the NEJM authors argue that it could have an effect on obesity rates in America. They propose using any money raised by the tax for child nutrition and obesity prevention programs. That way, the thinking goes, even if people still drink soda the tax will help the fight against fat.

If that does happen, the government won’t be able to use the funds to reduce the deficit, subsidize health insurance, or fulfill the other hopes politicians have for the money. But there’s a fair chance it wouldn’t happen in the first place. Governments don’t always spend sin tax money the way they promise. Money from the Master Settlement Agreement, the deal that ended state litigation against the major tobacco companies, was supposed to fund smoking cessation programs and defray the costs that smoking imposes on public health systems. Once they had the money, though, states used it as a giant slush fund, diverting it to schools, roads, and various pet projects. They even invested some of it in tobacco stocks.

Americans may be fat, but the federal budget is morbidly obese; our hunger for chips and soda is nothing compared to the feds’ hunger for our money. If I had to choose between putting the average citizen or the government on a diet, I know which would be better for our fiscal health.

Contributing Editor Veronique de Rugy (vderugy@gmu.edu) is a senior research fellow at the Mercatus Center at George Mason University.

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  • hank||

    "desperately searching for new sources of revenue"

    I'm not sure what fruitcake said this,"a penny saved is a penny earned." Just look at New York and California: if they can do it, any state can do it. Or, was that: spend a dollar to save a dime. Billion, trillion, what's the difference?

    The problem with the states is that they don't have printing presses. Easy fix.

  • ||

    Seriously, desktop publishing is soooo much cheaper these days. They can have an office setup to make money in just a few days for each state.

  • ||

    So how much money did the National Soft Drink Association pay "Reason" to print this tripe this time?
    Too bad "Reason" won't publish how much their corporate donors give them.

  • ||

    An article in "Reason" promoting banal dissidence by opposing taxation?

    It's more likely than you think.

  • crayon||

    Taxes good! Freedom is slavery!

  • the federal budget||

    I wash myself with a rag on a stick.

  • Xeones||

    Here's a case against soda taxes: taxation is theft. Word to your mother.

  • ||

    Since when is taxation theft, you silly person?

  • dennis||

    Armed men demand your money, and throw you in a cage or kill you if you don't give it up. You never agreed to pay them anything, you didn't enter into a contract with them. There's really no way around it, taxes are theft.

  • ||

    I wouldn't go so far as to say all taxation is theft, just most of it.

  • ||

    I doubt any armed men will show up if you don't by a coke.

  • Dan, Computin' Chemist||

    I wonder if this is what Jeffersonian means when saying, "[not] all taxation is theft, just most of it," where there's at least an element of choice with regard to paying the tax. On the other hand, if the idea is to hurt soda sales, then it's kind of like theft from the manufacturers. Not to mention people that sell them, which because the universe is Not Fair would probably hurt small businesses the most and large ones the least.

  • ||

    You can always move.

  • hotsauce||

    Begs the question. Next!

  • dennis||

    How does that even begin to address the fact that whether you deem them necessary or not, taxes are really no different from robbery?

  • crayon||

    Taxes good! Freedom is slavery! Drool!

  • ||

    Is paying rent equivalent to robbery?

  • SKR||

    Bad example. I know I signed a contract for my loft agreeing to pay rent.

  • ||

    Your parents signed a contract when they decided to live in the US and remain US citizens.
    You are free to leave anytime you want and cancel your contract with the US of A.

  • ||

    Donderroooooooooooooo

  • HeadTater||

    That's why the government is the largest of all the organized crime syndicates. You pay them protection, or as the call them, "taxes." If you don't pay, the something bad happens to you or your property. However, the money is supposed to go to services that you aren't likely to see much of. It's not so much theft as it is extortion.

  • ||

    You can always cancel your contract with the government by renouncing your citizenship.

  • People Power Hour||

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  • ||

    My mommy has an abscess on her anus. She screams when I apply the medicine.

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  • ||

    So a woman's uterus is still her own, but our stomachs remain the property of the State?

  • Cabeza de Vaca||

    Yep, didn't you get the memo?

  • ||

    "Uterati shall be free, but the Stomachs, Lungs, Noses, Veins, Eyes and Ears shall be retained as property of The State."

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  • eb||

    i love it when liberals defend abortion on choice grounds... i mean they hold that as such a uniform principle...they just love choice so much that that is why they support right to work laws, gun rights, free trade, charter schools... why they oppose trans fats bans, smoking banks soda taxes, banning high deductible health plans.... oh wait a minute

  • HeadTater||

    racist

  • Dan, Computin' Chemist||

    I'm guessing that a consistent progressives argument in support of choice in abortion, and against choice in what you eat and drink, where you work, guns, etc. would lie in the externialities:

    - Abortion: no risk of harm to someone else, unless you're a fetus, but that's only a problem if fetuses have rights

    whereas

    - Work laws: By choosing to work for less money, you reduce everyone else's wages, means harming someone else's salary (?)
    - Gun rights: accidents, crime
    - Free trade: allows poor people to be exploited (by giving them jobs, I guess); lax environmental regulation hurts the environment
    - Charter schools: hurts ... uh ... equality I guess, because having rich people go to better schools than poor people ... is bad? (not sure about this one myself)
    - Smoking: secondhand smoke is a health risk ... or maybe it's bad because it causes harm to your health, which increases the chances that others have to pay for either through insurance or socialized medicine.
    - Trans fats: again, harming your health means more expenses for others.

    and so on. I think those are pretty consistent neo-liberal positions. Not that I agree with it, just that those positions don't necessarily have to be inconsistent.

    I had a coworker pull a similar thing on me: he claimed a contradiction in the conservative stance of being pro-life but supporting the death penalty. It seems it didn't occur to him that a fetus can't commit a crime (other than trespassing, which isn't capital anyway).

  • anonymous||

    No, you can put a sin tax on abortion too.

  • Nancy Pelosi||

    Not if WE have anything to say about it!

  • ||

    I'm not worried about federal soda taxes. The Chosen One promised that there would be no increase in taxes on those making less than 250K. That would include the vast majority of soda drinkers.

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  • ||

    My friend in the beverage industry had a good point. Oreos, Chips Ahoy, Cheese-Its, etc are climbing all over themselves to promote 100-calorie snack packs as a "diet" alternative. But a 100-calorie Coke is gluttonous?

  • Wind Rider||

    First they came for the cigarettes. To make people smoke less. Didn't really work, and the money didn't go where it was promised to be used.

    Also they went after the gasoline. To make people drive less. Didn't really work (the free market price shock having much more effect), and again, the money didn't really go where it was supposed to.

    Now they're after the fizzy drinks. To make people drink less (for the children's health!) with a lot of statistics, charts and graphs they had some government subsidized, over degreed researcher accumulate, and a government paid PowerPoint slide, graph, and chart lackey make really schnazzy. . .

    Oh, and the money? Pay no attention to the declared purpose - new boondoggles are only a news cycle away from newly gotten revenue arriving.

    Starve the beast, and fire the parasites that suckle at its teat.

  • ||

    and fire the parasites

    Like when you heat up the tweezers before removing a tick, right?

  • ||

    First they came for the smokers, and I did not speak out—because I was not a smoker;

    Then they came for the Hummer owners, and I did not speak out—because I was not a Hummer owner;

    Then they came for the soda drinkers, and I did not speak out—because I was not a soda drinker;

    Then they came for me—and there was no one left to speak out for me.

    You guys are so oppressed!

    You're like a bunch of soda-drinking Anne Franks trying to sip your carbonated beverages very, very quietly.

    BUT THE HEALTH NAZIS CAN HEAR YOU BURP !!!!!!

  • ||

    First they came for the homosexuals, but I was too busy blowing my buddies for pocket change to go with them.

    Then they came for those guys who play with their crotch while sitting in their car at Walmart, and I said "OK, be right there."

  • Solanum||

    I just bought a Nuka Cola machine for my house, so keep your dirty, tax-grabbing claws out of my bottle caps.

  • Ska||

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  • ||

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  • Mad Max||

    That unpatriotic Mayor Bloomberg - telling New Yorkers not to buy soft drinks. This propaganda campaign will starve the government of much-needed revenue!

  • ||

    Many have yet to figure out the problem isn't taxing. It's spending.

    Until the day we elect people that don't want to spend, taxes will continue to increase. It's really a vicious circle, the more we are taxed the more money we want to come back to our state. We want a return on our tax dollars, which is fair. If I'm paying, I want something to show for it. Therefore every elected official wants to please their constituents by bringing federal dollars back to the state, thus creating the demand for more spending, which creates the liablity of payment, the circle continues.

  • ||

    """Arkansas’ surgeon general,..."

    What does a person with three teeth and a hacksaw have to do with it?

  • csTex||

    President Barack Obama called it ‘‘an idea that we should be exploring” because “our kids drink way too much soda.”

    --

    No, asshole, OUR kids drink way too much soda...

    we didn't start electing you dip-shits over 200 years ago so you could help us out on what to drink and how much... go piss up a rope!

  • The Libertarian Guy||

    They're not our kids anymore... they belong to the government.

  • The Mojo Bison||

    I doubt severely that such a tax would seriously decrease consumption. Public schools have used soft drink machines as cash cows for years featuring gross gouging and consumption remains unaffected. I'd venture that even a 15% tax would be stomached by the majority of drinkers (pardon the expression). Purely and simply, it is another revenue machine for the gummint.

  • BakedPenguin||

    They'll be coming after juice next.

  • ||

    http://www.bandujo.com/f8/index_flash.html
    http://www.nyc.gov/html/doh/html/home/home.shtml

    Bandujo Advertising + NYC Health - A Partnership Disgusting New Yorkers

    Why not use the advertising money to open more parks or physical activity/exercise programs for New Yorkers?

    They need to vilify soda so they can tax it. So they want you to lose weight by lifting the coin from your pocket.

    Ask that your tax dollars are spent on programs that do work to solve the problem.

  • SKR||

    C'mon de Rugy, you give us an economic case against soda tax and don't mention that it would just be insanely inefficient? Government gives money to farmers so the corn is cheap. Cheap corn = cheap soda. Tax soda to make it more expensive and get the subsidy money back. Or maybe, and I know this sounds crazy, just keep the subsidy money in the first place.

  • Frank||

    Of course I love the contortions the health nuts go through trying to convince us that the tax would also have to be on diet sodas. Apparently zero calories doesn't matter when you are on a crusade to control other people.

  • Dan, Computin' Chemist||

    Can you outline some of these contortions? The only thing I can think of is the ease of applying the tax in the same context (like a soda machine) differently to different items, but that seems like a pretty wimpy argument.

  • Ben||

    Public health measures to control weight have been proven to be about as efficient ethics classes for politicians. This will be equally worthless in its stated goal. Every doctor that signed the statement that said a soda tax would cause a nationwide 2lb weight loss should be stripped of their medical degrees. Harsh, yes, but anyone with a margin of common sense can see the points of this article. I don't want anyone without any common sense practicing medicine.

  • John||

    Obviously, it's all about the amount of CO2 in each soda. Anyone for flat soda?

  • ||

    I'm thinking the stupidity of taxing a soda is that it's really a tax on high fructose corn syrup. I've always heard that US tax payers subsidize the corn industry and combined with favorable legislation over the years, there's nothing left of the cane sugar industry or anything else to compete with high fructose corn syrup. HFCS is in everything because of the government's involvement in the industry. Now, the government wants to essentially tax corn syrup in an effort to re-mold human consumption behaviour. Isn't that like sticking a tax on something you already put a down-payment on in en effort to keep me from completing the transaction?

  • ||

    More corn ammo: http://mises.org/daily/3934

  • ||

    I drink anywhere between 4 and 8 cokes a day>>> I'm 5'8, 30 years old and weigh 135 pounds...why should i pay this tax? if coke is fattening how skinny would i get if i stopped drinking it? just saying!!!

  • ||

    Rugy hinted on a powerful fact that has a greater impact then most people realize:

    Rules can only regulate behavior, not the underlying causes.

  • abercrombie milano||

    My only point is that if you take the Bible straight, as I'm sure many of Reasons readers do, you will see a lot of the Old Testament stuff as absolutely insane. Even some cursory knowledge of Hebrew and doing some mathematics and logic will tell you that you really won't get the full deal by just doing regular skill english reading for those books.

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