Budget & Tax

Should the government tax soda?

March 1, 2017

Jayson Lusk

By Jayson Lusk

Worrisome trends in the prevalence of obesity and type II diabetes have raised questions about the role of the federal and state governments in regulating the healthfulness of consumers’ diets. While fat and sugar taxes were considered fanciful ideas just a couple of decades ago, these policy proposals are now commonplace.

Former New York City Mayor Michael Bloomberg made headlines when he tried to outlaw the sale of large-sized sodas. Though his efforts were struck down by the courts, related initiatives have found their way into law. For example, several locales such as Berkeley and Philadelphia have recently passed taxes on sugar-sweetened beverages. The Philadelphia measure, implemented at the first of 2017, added a 1.5 cent tax per ounce to most sugary and diet beverages.

With so-called soda taxes gaining traction across the U.S., many are wondering if similar initiatives would make sense in their state or even at the federal level. While public health issues are a serious concern, it is also important to marry those concerns with the evidence on whether proposed public policies will have the effects we desire. In fact, many of the same factors that make obesity such a complicated and multifaceted problem extend to the economic analysis of public health policies.

To begin, it is important to recognize that the federal government already places an implicit tax on sugared sodas. However, the manner in which the government goes about this makes the tax less than transparent even to many public health experts. Research shows that various farm policies aimed at controlling the supply and imports of sugar make U.S. sugar prices two to three times higher than in the rest of the world. Moreover, while farm policies aimed at corn production might slightly depress the price of high fructose corn syrup (a common soda sweetener), countervailing ethanol policies have had a much larger effect in recent years. In 2000, less than 10 percent of corn production in the U.S. went to ethanol production, but today the figure is around 40 percent. The shift to ethanol production is one reason why the price of high fructose corn syrup more than doubled from 2000 to 2015. It’s no wonder that per capita sugar consumption has fallen precipitously over the last decade.

Total caloric intake from sugar consumption peaked at 423 kcal/person/day in 1999 and is now 15 percent lower at 358 kcal/person/day. Moreover, whereas high fructose corn syrup contributed about 42 percent of caloric intake from sugar in 1999, today the figure is only about 33 percent. In short, Americans today are consuming less sugar in total and less as a percentage from high fructose corn syrup (the primary beverage sweetener) than they did 20 years ago. And yet, problems with obesity and type II diabetes persist.

Numerous studies show that sugar tax policies have trivial effects on soda intake and body weight. When sodas are taxed, consumers substitute toward other caloric foods or drinks, like fruit juice or alcohol, which may have more calories than taxed sodas. That is one reason why some analysts argue that only across-the-board food taxes will significantly affect weight. The problem with food taxes, however, is that they are regressive. That is, the tax burden is disproportionately borne by the poor, who spend a larger share of their income on food than the rich.

Fundamentally, what motivates the view that soda taxes will increase consumers’ well-being? No one likes to pay higher prices. It is true that excess soda consumption may lead to health problems, but we also care about our food budget and desire consuming tasty, satisfying food and beverages. Life is full of difficult tradeoffs, and it is problematic and paternalistic for a third party to deem another person’s choices “wrong” given that different people have different preferences and incomes. If people do not understand the risks of sugar consumption, then the appropriate policy response is information provision, not a tax.

Even if new soda tax revenues could be directed toward education programs, as was promised in Philadelphia’s recent law, one would need to show how the costs of the tax are offset by the benefits of extra information. But there is scant evidence on educational effectiveness. There are already a number of public and private health information campaigns, and it is unclear what effects yet another would have. Even if it could be shown that anti-soda education effectively lowered sugar consumption and was an overall desirable policy, there are likely to be more economically efficient ways to fund such education programs than a soda tax.

Another factor that is rarely considered by soda tax advocates is how food companies and soda manufacturers might respond to the policy. For instance, beverage manufacturers are likely to absorb some of the tax increase, passing along a smaller portion of the tax to consumers than is dictated by the law. Also consider how a beverage manufacturer might respond to a law banning advertising of soda to children. Given that the firms can no longer use revenue on promotion and advertising, they might instead redirect those resources to cost-cutting efforts that reduce soda prices. Competition moves from who has the most compelling ad to who has the lowest price. Lower prices will encourage more consumption: exactly the opposite of what was intended by the ban. Consumers and food producers are not passive bystanders—they respond, sometimes in unanticipated ways, to food policies.

Despite these arguments, it must be admitted that, at least at currently proposed levels, soda taxes simply aren’t that big of a deal. Yes, higher prices will harm consumers’ pocketbooks, but by relatively small amounts. Yes, higher prices will likely reduce soda consumption, but by small amounts that are unlikely to have any meaningful effect on obesity or diabetes prevalence. Yet the policy will add one more rule to the books for food companies to follow, and will add new bureaucratic oversight and lobbying efforts in deciding which items are taxed and which are not.

Soda taxes are often pitched as a type of silver bullet. But as H.L. Mencken once wrote, “there is always a well-known solution to every human problem—neat, plausible, and wrong.”

Agricultural economist Jayson Lusk is the Samuel Roberts Noble Distinguished Fellow at OCPA. The author of The Food Police: A Well-Fed Manifesto about the Politics of Your Plate (Crown Forum, 2013), Dr. Lusk is Regents Professor and Willard Sparks Endowed Chair at Oklahoma State University.