Argument for soda tax all washed up

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Although it appears that a national tax on soda pop might be too much for the American people to swallow, the prospect that consumers will soon have to pay even more for their favorite sweet and bubbly beverages remains quite real. After all, the feds are not the only ones thirsting for tax revenue. According to a recent report by the Center on Budget and Policy Priorities, 48 out of 50 state governments face budget shortfalls in 2010, with gaps totaling $166 billion. The outlook for 2011 is even worse, with cumulative shortfalls exceeding $350 billion. Thus, for states seeking a potentially palatable revenue source to refresh their depleted treasuries—Coke is it! So, too, are Pepsi, Gatorade, and Red Bull.

States have traveled the wide and pleasant road of “sin taxes” before, placing taxes and restrictions on smoking and alcohol long before the feds ever got in on the action. Unlike other forms of taxation, however, “sin taxes” have perverse effects, making government codependent on the very businesses and behaviors they denounce. If paying your taxes is patriotic, then hats off to all the whisky drinkin’, beer guzzlin’, chain smokin’, and soda-slammin’ Americans, as well as the manufacturers and suppliers of the products they consume. Who knew that something so bad for you could ever be so good for the public?

Consumer surplus notwithstanding, lawmakers tell us they propose taxes on cigarettes, beer, whiskey, and now soda to curb some purportedly undesirable—nay evil—behavior. These elected Billy Sundays declaim that these “sin taxes” will save, if not our souls, at least our health.

But who’s kidding—the primary purpose of “sin taxes,” as with all taxes, is for one thing—to raise money for the government. It’s a function that sin taxes perform particularly well for states, to the tune of hundreds of millions each year.

Of course, policymakers never sell “sin taxes” as a revenue generator. It’s all about public health. This time around, they preach to us about America’s “obesity epidemic,” a largely self-induced affliction that at least one billion of the world’s population probably wouldn’t mind having.

The causes of obesity are the same as they’ve always been—excessive caloric intake, lack of exercise, and genetics—but politicians say they have a solution to this age old problem that is as easy as, and healthier than, pie. Save the sinner: tax the sin. To summarize the logic of a recent report in the New England Journal of Medicine—making soda more expensive will force people to consume less soda and lose more weight, all while raising much needed tax revenue.

This solution is as clever as it is wrong. Slapping a tax on soda to reduce obesity will have about as much effect on the collective waistline as the last fad diet had on mine: none at all.

More to the point, the very thing that makes sin taxes, or the soda tax, so successful at generating revenue is that they rarely achieve the desired health effects for which they are ostensibly adopted. This is because the degree to which people change their behavior in response to a tax varies widely depending on how high the tax is and how sensitive consumers are to the change in price. Consider Arkansas and West Virginia – both states levy taxes on soda; both rank very poorly in obesity, 10th and 3rd respectively. Are the residents of these states measurably better off—any less obese—because they pay higher prices for pop?

It’s practically impossible to project any positive health effects of the soda tax due to the plethora of high-calorie substitute beverages available to consumers. As noted in a recent report by my colleague at the Mercatus Center, Dr. Richard Williams, someone who swaps a Pepsi for an apple juice, milk or lemonade is actually consuming more calories than before. Exactly how beneficial to one’s waistline is a policy that potentially shifts consumption to from a can of soda to a beverage that has more calories?

While the range of soda taxes varies from state to state, it’s safe to say that whatever rate the politicians come up with, it will never be high enough to stop everybody from buying soda. After all, if the tax worked, people would stop drinking soda and it wouldn’t raise any money at all. In other words, the notion that the true purpose of the soda tax is to make people healthier is all wet.

In obesity politics, it’s easy to single out and demonize certain foods and beverages, of which sugary sodas are apparently the easiest target. But political cooks in the state policy kitchens should take this particular morsel off the menu. Unfortunately, it’s not likely to happen: sin taxes are the hardest temptation for legislators to pass up.

Rob Raffety is Associate Director of Regulatory Studies and Government Accountability for the Mercatus Center at George Mason University.

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