Per-calorie Sugary Drink Tax Not as Sweet as It Sounds

June 05, 2014

Early this week, the Robert Wood Johnson Foundation touted a new study which found that taxing a sugary drink based on the amount of calories it contains rather than its size would be more effective in reducing caloric consumption.

According to the study, a .04 cent per-calorie tax on sugary drinks would reduce beverage-based calorie consumption by 9.3 percent, while taxing beverages at a half-cent per ounce would reduce consumption by just 8.6 percent. Targeting the amount of calories is said to also “save consumers $736 million per year nationwide,” when compared to a per-ounce tax, but with the crucial caveat that this figure does not take into account the potential economic responses from producers and retailers (more on this important part later).

This report is well-timed, as public health organizations that engage in the policy sphere have met this week for a “Soda Summit” in attempts to invigorate discussion around taxes on soda, limitations on advertising for beverage companies, and bans on beverages based on size. Most soda tax attempts have failed at the state level, though there is talk from Rep. Rosa DeLauro (D-Connecticut) of introducing a federal bill at some point.

We have detailed before why targeting specific foods and beverages via sin taxes is poor tax policy. Principally, they often fail to create the desired changes in behavior because people just consume more calories elsewhere. In fact, even the lead author of the study released this week has previously published research which shows that a soda tax simply induces consumers to substitute soft drinks with other unhealthy foods high in sodium and fat. Although taxing calories specifically represents a more direct (and thus effective) tax, it likely would still result in a similar substitution effect – mitigating supposed improvements in public health.

The fiscal motivation for attempting to curb obesity is sometimes stated by proponents this way: because obese people get sick more often, they create greater costs for other members of society in the form of higher entitlement spending or higher health insurance premiums, and taxing them is appropriate to compensate society. Economists call this cost-shifting a negative externality. But what proponents miss is that this cost-shifting problem is totally intrinsic to the structure of our government health care programs, not some market failure that needs to be combatted with tax policy. A much better way to limit these shared costs is by adjusting public health programs to build better incentives into the programs themselves.

Additionally, while a soda tax would not likely have the health benefits proponents promise, it would impose extra costs on all consumers of sugary drinks, regardless of their weight or other nutritional habits. What’s more, the proposed tax would disproportionately harm low-income individuals, who have been shown to consume more drinks with sugar in the context of their overall diet than higher-income individuals.

The bottom line is that whether you are taxing based on size or calorie count, a tax on sugary beverages is regressive, ineffective, arbitrary, and costly. The solution to our obesity problem does not lie in government building ill-contrived, heavy-handed incentives into our tax code. Rather, it lies in private individuals making sensible lifestyle and dietary choices based on their respective resources and preferences.   

More on excise taxes here, and food and beverage taxes here

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