Soft Drinks Tax an Inefficient, Ineffective Way to Fight Obesity

Published August 1, 2009

Policymakers think they have found a magic pill of sorts to cure obesity: excise taxes.

Most economists, particularly those in public finance, find it preferable to raise revenue by taxing a broad base at a low rate, in order to maximize the amount of revenue while reducing distortions to the economy. The opposite of a broad-based tax is an excise tax, a tax levied on particular goods.

Taxing sugar-sweetened soft drinks to reduce obesity and, in some cases, raise funds to advance this goal seeks the same economic legitimacy as past attempts to tax “sin products” such as tobacco, alcohol, and firearms. Not surprisingly, though, this tax raises efficiency concerns similar to those taxes.

Taxes on sugar-sweetened soft drinks do not necessarily advance the overall public interest, may be regressive in nature, and hardly ever work as intended.

Unfair Taxes

Economists have found taxpayers are more tolerant of tax increases if the stated objective of the increase is to reduce activities that are widely frowned upon and to increase funding for projects or programs believed to promote worthy objectives.

However, evidence shows governments often divert the funds to other political purposes, and taxpayers have no knowledge of or control over this diversion.

A classic example of this is the Arkansas soft drink tax passed in 1992. The money was supposed to go into the state’s Medicaid program, but when there was an attempt to repeal the tax, taxpayers discovered policymakers were diverting the revenue to the general fund.

Soft drink excise taxes also may be regressive, because the weight of these taxes often falls disproportionately on the poor.

Unless a good is disproportionately consumed by the rich, an excise tax on any specific commodity will be regressive. That is, even if soft drinks are consumed at the same rate by rich and poor people, spending on soft drinks will represent a larger proportion of earnings for low-income families, and thus the taxes represent a larger share of poor people’s total income.

Ineffective Taxes

Generally, an increase in taxes passed on to consumers in the form of higher prices will lead to a decrease in the amount of the good purchased. The questions for policymakers are, (1) does this occur, and if so, (2) by how much does consumption decrease?

Recent studies challenge the case for using excise taxes to solve social problems. In their 2008 study, Emory University economists Jason M. Fletcher, David Frisvold, and Nathan Tefft specifically evaluate the effectiveness of soft drink taxes at reducing obesity, analyzing the impact of changes in states’ taxation rates from 1990 to 2006 on changes in BMI and obesity.

Their results show soft drink taxes have a statistically significant impact on behavior and weight but the effect is small because soft drinks are only 7 percent of a person’s total calorie intake. The authors calculate that if a 75 cent soda were taxed to a higher price of 90 cents, the BMI of a severely obese person would fall from 40 to 39.98.

These results illustrate behavioral changes are not big enough to lead to large changes in population weight based on the current magnitudes of state soft drink tax rates.

A 2007 study analyzed the demand for dairy products by questioning how responsive consumers are to changes in dairy prices. The authors found consumers are not responsive to changes in dairy prices; that is, when dairy prices increase, consumers do not decrease their purchases of these goods by much, and the effect on caloric intake and fat consumption is trivial.

Several Problems

The ostensible reason for taxing sugar-sweetened soft drinks is to reduce the rate of obesity and simultaneously raise revenue to fund projects and programs that will further this end. However, multiple problems arise when trying to resolve this serious social problem by imposing excise taxes on sugar-sweetened soft drinks.

First, the effectiveness of these taxes appears to be trivial because soft drink consumption is a relatively small part of the diet for overweight people and drinks that serve as substitutes for sugar-sweetened sodas—milk, sports drinks, fruit juices, etc.—may also be highly caloric or consumed in greater amounts than the soft drink.

In addition, governments may not spend the increased revenue from these taxes on the intended social purpose, and consumers have little control over these funds.

Also, the burden of soft drink excise taxation would likely fall disproportionately on the poor.

Richard Williams is managing director of the Regulatory Studies Program and the Government Accountability Project at the Mercatus Center at George Mason University. Katelyn Christ is a graduate student in economics at George Mason University and a graduate student fellow in the Regulatory Studies Program and the Government Accountability Project. This article is excerpted from their Mercatus Center policy study, “Taxing Sins: Are Excise Taxes Efficient?” Reprinted with permission.

For more information …

“Taxing Sins: Are Excise Taxes Efficient?” by Richard Williams and Katelyn Christ: http://www.mercatus.org/uploadedFiles/Mercatus/Publications/RSP_MOP52_Taxing%20Sins_web.pdf

Jason M. Fletcher, David Frisvold, and Nathan Tefft, “Can Soft Drink Taxes Reduce Population Weight?” August 14, 2008: http://www.economics.emory.edu/Working_Papers/wp/2008wp/Frisvold_08_08_paper.pdf