The War on Soda: The economic case against it

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

But the 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 an item, it will become expensive enough to discourage consumption. Having been forced to quit that sin because of high price, consumers will reap the moral and physical benefits of not indulging, 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” item increases, people often substitute an equally “bad” one.

A study by William N. Evans, an economist at the University of Notre Dame du Lac, and Matthew C. Farrelly, a 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 is especially pronounced among 18- to 24-year-olds because they have less money and want more bang for their buck.

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” - like milk or fruit juice - “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 tax would be effective at reducing the number of soda drinkers because the federal cigarette tax, on average $1.34 a pack, has been effective at reducing the number of smokers. Yet, 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 3-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 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 that it wouldn’t happen in the first place. Governments don’t always spend sin-tax money the way they promise. Money from 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. But once they had the money, 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.

By Veronique de Rugy, a columnist at Reason magazine, where this first appeared, and senior research fellow at the Mercatus Center at George Mason University.

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