How Soda Taxes Would Encourage Bad Budgeting


Slate's Matt Yglesias argues that if policymakers want to discourage soda consumption, they ought to pursue higher taxes on soda rather than arbitrary and essentially performative bans on lans on large portions in certain cases:

It tells us that any plausble soda tax should be seen primarily as a tax policy matter and only very secondarily as a public health measure. The habitual soda drinkers who make up the bulk of the soda-buying population will mostly just pay up. You'll raise a lot of revenue in an economically efficient way, and only very mildly deter soda consumption. What's more, the people most likely to be deterred are the people with a weak attachment to soda drinking. Those are people who either aren't negatively impacted by the health consequences of soda drinking (because they don't drink much soda) or who won't be positively benefitted by reduced soda consumption because they'll gladly substitute to something like (like coffee drinks with tons of sugar in them). 

The more interesting question is the long-term one. I'll gladly pay $3 for my Diet Pepsi because I'm already a diet soda junkie. But if all Diet Pepsies everywhere were this expensive, would I have taken it up in the first place? Very possibly not.

I don't support special taxes for soda or any other beverages, but it's almost certainly the case that a straightforward retail tax on sugary drinks would be more effective at reducing soda consumption than New York Mayor Michael Bloomberg's quixotic portion-size rule: If you tax something, you get less of it. The larger the tax, the bigger the behavioral effect.

The problem with these sorts of taxes that Yglesias doesn't address is that they facilitate irresponsible budgeting. Politicians don't slap taxes on popular activities only to let the new revenues collect interest somewhere; they use that money to pay for new programs. But that means programs end up relying on funding from 1) an activity that public officials say they want to discourage and 2) a declining revenue stream as behavior slowly shifts away from the taxed activity.

We've seen this time and time again with smoking taxes, which are often used to fund public health initiatives, including Medicaid. Initial revenue estimates prove too optimistic, and then state or local governments are left with expensive programs and declining revenue streams, as well as an awkward need for more people to smoke in order to pay for health programs.