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The Case Against Soda Taxes to Curb Obesity

4 min readBy: Andrew Chamberlain, Gerald Prante

In a story that has garnered considerable media attention, the American Medical Association is considering recommending that a special taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. be imposed on soft drinks in an effort to curb obesity.

From the Chicago Sun-Times:

The American Medical Association, meeting in Chicago this week, will consider a controversial proposal to fight obesity by taxing soda pop.

A committee of the influential doctors’ group is recommending the AMA lobby for a “small” federal tax on sugar-sweetened soft drinks, with proceeds going to anti-obesity efforts such as physical activity programs and healthier school meals.

The committee did not specify how high the tax should be. But a consumer group, Center for Science in the Public Interest, estimates that a 1 cent a can tax would raise $1.5 billion a year. That’s more than the advertising budget of McDonald’s. (Full story here.)

As with many attempts to achieve broader social goals through the tax system—as opposed to simply raising revenue efficiently for programs—a soda taxA soda tax is an excise tax on sugary drinks. Most soda taxes apply a flat rate per ounce of a sugar-sweetened beverage. aimed at curbing obesity is not designed with any economic rationale in mind. Instead, it appeals to a paternalistic desire to control individual behavior in society, and treats the tax system as merely a convenient mechanism to achieve that end.

The problem with this approach to tax policy is that the possibilities for such interventions are endless. Every organization, regardless of mission or political orientation, has a set of social outcomes they’d like the tax system to encourage or discourage, ranging from smoking, gun control, illegal drugs, abortion, adult entertainment, gay marriage, drinking, immigration, gambling and more. Because the tax system can change relative prices facing individuals, it can have a powerful effect on individual behavior regarding all these issues, and across a large number of individuals.

But is there an economic rationale to these types of taxes in general? One might argue that there are what economists call “negative externalities” caused by drinking soda, and that as a result people are drinking “too much” of it in the private marketplace. But what could these externalities be?

Many have claimed that drinking soda leads to obesity, and that the health risks associated with being overweight may drive up the price of health insurance. While this nutritional linkage is scientifically far from clear, even if it were true, this is clearly not a negative externalityAn externality, in economics terms, is a side effect or consequence of an activity that is not reflected in the cost of that activity, and not primarily borne by those directly involved in said activity. Externalities can be caused by either production or consumption of a good or service and can be positive or negative. as understood by economists. Externalities are costs imposed by some party onto another outside the normal operation of the price system. If the rising demand for health care by obese people leads to rising health care prices, that isn’t an externality. That’s just a normal price change in the marketplace like any other.

Others have claimed that obesity—again, on the unlikely assumption that soda consumption is in fact an important cause of obesity—drives up taxes because it leads to increased expenditures for government-provided healthcare. However, there are problems with this line of reasoning as well.

First, as with other health-influencing behaviors like smoking, if rising health expenditures due to obesity are counted as “negative externalities,” then for the calculation to be honest it must also include “positive externalities” associated with decreased life expectancy, such as reduced government expenditures on old-age related programs such as Social Security. Any legitimate measurement of the tax-related “externalities” from obesity must account for both taxpayer losses and gains, and cannot simply total-up the costs alone.

Second, not everyone who drinks soda, and thus who would pay a soda tax, ends up obese, making a broad excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. on soda a blunt and inefficient mechanism for curbing obesity. As we’ve written before, if the true goal is weight reduction, there are more direct means of achieving that than a poorly targeted excise tax on certain politically unpopular products or industries.

Of course, the core problem that obesity taxes are an attempt to solve is that some users of government-funded health care inevitably make risky health choices that others end up subsidizing through the tax code.

But the simplest solution is not an additional tax on risky health choices, and the products that supposedly lead to them. It is to create a health care system in which individuals who demand healthcare bear the costs of their own individual behaviors, as they are expected to do in most other areas of the marketplace.