Study: Sin Taxes Punish The Poor

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Peter Fricke Contributor
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Sin taxes like the infamous New York City soda tax generally fail to change consumer behavior while imposing significant costs on the poor, a new study claims.

In a study released Tuesday by the Mercatus Center, scholars Adam Hoffer, Rejeana Gvillo, William Shughart II and Michael Thomas assert that, “selective consumption taxes are both ineffective and regressive, and that improving education and increasing the availability of healthier goods may be better steps than raising taxes on those who can least afford them.”

Governments at all levels, buoyed by “a growing list of academic studies,” impose so-called “sin taxes” in an effort to reduce demand for products, such as junk food, tobacco and alcohol, that are deemed to have social costs (which usually take the form of increased health care expenses).

Advocates also point out that consumers who do not adjust their behavior in response to sin taxes are at least forced to help pay for the consequences of their behavior, further mitigating the social cost. (RELATED: Mexico Plans to Tackle Obesity with Sin Taxes)

The authors of the Mercatus study, however, find that sin taxes generally have a negligible effect on consumption, and that the revenues they generate are not, in fact, used to offset the social costs of continued consumption.

“None of the nearly $1 billion in revenues generated annually by state [sin] taxes,” they note. “Actually has been spent on health care programs or healthier food subsidies,” even when the taxes are specifically earmarked for that purpose. This, they say, “supports the belief that current budget shortfalls, not the expectation of higher future public health care costs, are the real motivator behind proposals to selectively tax the ingredients in less healthy food choices.”

The authors also contend that, “to the extent that consumption of disfavored goods continues after a selective tax is imposed or increased,” the main effect of sin taxes is to shrink consumers’ discretionary budgets, forcing households to “reduce their expenditures on all budgeted consumption items, whether taxed or untaxed.” (RELATED: Study: Sin Taxes Actually Cause Illegal Behavior)

And consumption does continue after sin taxes are imposed. The authors report that a 10 percent increase in price of sweets, for instance, would only reduce demand by 3.4 percent, while a similar increase in the price of tobacco actually correlates with an increase in consumption, albeit a very slight one of less than 1 percent.

Moreover, they conclude that for the products that are most often subject to sin taxes, demand varies only slightly with income, meaning “people with lower incomes tend to spend a much larger percentage of their budgets on disfavored goods than wealthier people do.”

“Given that the consumption of snack food and other disfavored items is quite unresponsive to changes in price,” sin taxes can actually have the perverse effect of “[causing] households to cut their expenditures on all other income-normal goods,” including healthy alternatives, “which tend to be more expensive.” (RELATED: New Washington State Sin Taxes Hike Prices of Beer, Bottled Water, Candy)

“If policy is necessary to achieve desirable social aims,” the authors propose several alternative approaches that they say would be more effective, and less burdensome to consumers, than sin taxes.

One option is to conduct educational campaigns, which “can be an extraordinarily cheap means of nudging consumers into healthier choices,” and are remarkably cost-effective. According to a previous study, “a health-conscious advertising effort targeting 200,000 people costs about the same as a single coronary bypass operation.”

Similarly, simply making healthy options available, for example by sponsoring farmers’ markets, tends to lower the price of those options, and thereby makes people more likely to choose those products over less-healthy alternatives.

Ultimately, they conclude, “true long-term change will come from the formation of better habits through better nutritional education,” whereas “taxing away disposable incomes may make it more difficult for individuals to make long-run health a priority.”

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