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No-No Taxes: Sin. . . and Soda?

Adapted from a lesson submitted in Economics Online for Teachers. The FTE thanks Megan Lehman, teacher of AP Micro and Macro, Honors American Studies, and Honors Contemporary America at Governor Livingston High School, Berkeley Heights, NJ, forexcellent research and the original draft of this lesson, and for permission to edit and distribute this Hot Topic

Student Reading

Calling for consideration of a sugar tax, President Obama told Men’s Health magazine in July, 2009, that “There’s no doubt our kids drink way too much soda.” He may not have doubts, but others don’t share his certainty. In response to the President and to proposals for soda taxes, Coca-Cola CEO Muhtar Kent erupted like a shaken bottle of his own product. Calling the proposals “outrageous,” he fumed, “. . . I’ve never seen it work where a government tells people what to eat and what to drink. . . . If it worked, the Soviet Union would still be around.’’

And so the line is drawn. Supporters, including the President, numerous state governors, and a bevy of public health advocates, argue that sugar taxes offer a double bonus – improving Americans’ eating habits and raising revenue. On the other side, the soft-drink industry, some policy analysts, and opponents of government limits on individual choice argue that the costs in economic impacts and reduced freedom outweigh any hoped-for (but far from certain)benefits. Although discussed in summer, 2009, the sugar tax failed to make itout of Congress. But, in 2010, the battle moved to state and local governments. New York Governor Paterson endorses a by-the-ounce levy; California state legislators have introduced soda tax bills, localities have banned new fast food restaurant construction, and school districts have removed sugary drinks and candy from vending machines.

Soda Tax Could Shake Up Industry Kelley Weiss, NPR, 10/14/2009

. . . [T]he director of Yale's Rudd Center for Food Policy and Obesity, Kelly Brownell, says the [soda] tax would have a big payoff.

"Using a tax, much as has happened with tobacco, to try to change consumption patterns in a way that would benefit overall public health and provide a very much-needed revenue for programs, seems like a home run.”

. . . In a New England Journal of Medicine article out this month, Brownell and several other public health experts argue that a . . . penny-an-ounce federal soda tax could generate $150 billion in the next 10 years.

. . . But American Beverage Association spokesman Kevin Keane says you can't compare tobacco taxes and soda taxes. "You can have a soft drink and be a healthy person," says Keane. "You can't say the same about smoking."

. . . "We have some economic data that shows there'd be $22 billion lost in economic output," Keane says, "whether it's jobs, whether it's people buying less product, etc. But there's no doubt, and we concede that it would affect sales."

It shouldn’t surprise anyone that sugar tax proposals generatetremendous resistance from the soft-drink industry. For beverage companies the heart of the issue is concern that a tax will reduce sales of non-diet sodas as consumers respond to the higher price by purchasing less. Faced with a threat to the bottom line, the industry spent over $18 million lobbying Congress in 2009. As the Center on Budget and Policy Priorities reports, whether they will be as successful as the battle moves to the states remains to be seen.

Taxing High Sugar Soft Drinks . . . Chuck Marr and Gillian Brunet, May 27, 2009

So far . . . [the beverage industry has] been successful in stalling federal legislation, but they’re rapidly becoming aware that that was only one battle in what may be a long fight. The Center on Budget and Policy Priorities reports that “. . . 14 states levied a sales tax on food for home consumption as of 2007, 39 states imposed a sales tax on at least some soda purchases. In some of these states, the tax is simply part of the sales tax that applies to food; in others, it is a separate or a higher tax. Some 28 states impose a higher sales tax on vending machine soda sales . . . than on food generally, and 21 states impose a higher tax on soda purchased at grocery stores than on other food purchases.”

A handful of states — mostly in the South — impose excise taxes on soft drinks at the wholesale level. For example, Arkansas has an excise tax on soft drinks and uses the proceeds to help fund Medicaid. The Arkansas tax is paid by: 1) distributors, manufacturers, and wholesalers that sell soft drinks (or syrups and powders used to make soft drinks) to retailers in the state; and 2) retailers that purchase soft drinks from unlicensed distributors, manufacturers, and wholesalers. The entities that pay the tax are licensed by the state and report and remit taxes on a monthly basis. In these states, the tax is embedded in the purchase price that consumers pay, rather than added at the check-out counter.

While Muhtar Kent’s underlying concern over reduced sales is appropriate to his role as CEO and consistent with the marching orders he gets from the millions of stockholders who have invested in Coca-Cola’s success, it does seem to ignore that taxes designed to raise revenue and influence people’s behavior – so-called sin taxes – are nothing new in the United States. Taxes that raise the price and cost of consuming alcohol and tobacco have long been reliable sources of government revenue, and there is evidence that sugar taxes could be equally dependable in filling treasuries.

Proposed Tax on Sugary Beverages Debated William Neuman, New York Times, Sept. 2009

[A review of research, published in the New England Journal of Medicine]. . . on price elasticity for soft drinks . . . has shown that for every 10 percent rise in price, consumption declines 8 to 10 percent.

John Sicher, the publisher of Beverage Digest, a trade publication, said that a two-liter bottle of soda sells for about $1.35. At 67.6 ounces, if the full tax [of a penny/ounce] was passed on to consumers, that would add 50 percent to the price. A 12-can case, which sells today for about $3.20, could rise by $1.44, a 45 percent increase.

“A one cent per ounce tax would create serious problems and potentially adversely impact sales for the American beverage industry,” Mr. Sicher said.

[Not everyone agrees with Sicher.] . . . “I think we should be satisfied that soda taxes would be having a modest effect on consumption but would generate billions of dollars that could be used to mount public health campaigns,” said Michael Jacobson, executive director of the Center for Science in the Public Interest, an advocacy group that favors such a tax.

He said that if the tax was levied on the manufacturers of the sugary drinks they might be able to spread the cost among many of their products, from chips to granola bars to diet sodas, which would keep sugary drink users from feeling the full impact.

Who Decides What’s Good for You?

Others, outside the beverage industry, are less concerned with the bottom line and more with the social and philosophical implications of sin taxes, or "punishing people for enjoying life once in a while," as one detractor put it.( ) Reason Magazine is a prominent and consistent voice of opposition to government in the marketplace. Editor Katherine Mangu-Ward challenges the prevailing orthodoxy that sin taxes are an expression of government concern for the general welfare, arguing, instead, that they are all about money.

. . . Myths About Sin Taxes on Soda Katherine Mangu-Ward September 27, 2009

1. Sin taxes are for our own good. The basic idea sounds reasonable enough. Why not have the government nudge citizens along the path to righteousness by making bad choices more expensive? . . . Soda taxes, like most sin taxes, aren't primarily designed to reduce consumption -- they're designed to raise revenue. Tap water is already virtually free. Adding a few cents in tax to a $1.29 soda bottle isn't going to send cost-conscious Coke-guzzlers swarming to the nearest water fountain. Forty states currently take a bite out of sales of soda or junk food -- if anyone's addicted to soda, it's state legislatures. . . . [The] Senate Finance Committee's interest in soda taxes at a hearing this spring wasn't about keeping American spawn slim; health-care reformers were salivating over the projected $24 billion in revenue that a 3-cent tax would generate over the next four years.

. . . 3. Soda taxes help everyone. Even advocates of soda taxes admit that the costs will be borne disproportionately by the poor, who spend a larger percentage of their income on soda than other groups. Nonetheless, politicians continue the long tradition of taxing the wazoo out of a can of Coke while leaving upscale beverages and luxury foods sin-tax-free. Eight ounces of Naked's Mighty Mango juice ($3.79 a bottle at Whole Foods) contains slightly more sugar than the same serving of cola, while diet soft drinks have the same calorie count as water. But nationwide, fancy juices and venti mocha Frappuccinos remain almost completely untouched by sin surcharges, while a bodega bottle of Sprite brings down the wrath of the taxman.

Will They Work?

While proponents and opponents argue the philosophical questions, some researchers are more interested in the practical:How will consumers respond to a soda tax? Will it make a real impact on their diets or will they continue to indulge in sugary beverages? If tax money is used to subsidize (and thus reduce the price of) healthy foods, will people change their habits? Tiffany O’Callaghan,science writer for Time.com, reports on two recent studies that weigh in on those questions.

Would junk food taxes really make people eatbetter? Posted by Tiffany O’Callaghan 2/25/2010

. . . [S]oda taxes . . . have been subject to severe scrutiny as critics protested that implementing a tax before verifying that it would achieve the end result was shortsighted and potentially overreaching. So, in attempt to determine just how sin taxes might impact people's food choices, psychologists from the University of Buffalo decided to put junk food levies to the test—in the lab.

Researchers recruited shoppers to peruse the aisles of a mock supermarket filled with 68 common foods labeled with nutritional information. Participants were given a predetermined amount of cash, and were told to use that money to purchase a week's worth of groceries for a family. The first time, all of the products on the shelves were priced in keeping with local supermarkets. In subsequent trips, however, junk food was taxed—an additional 12.5%, then 25%— or healthier foods were subsidized to reduce cost.

The study, published in the journal Psychological Sciencerevealed that taxes were more effective at getting people toavoid certain products than subsidies were at prompting healthier food purchases.(emphasis added) In scenarios where junk foods were taxed, study participants generally came away with a lower caloric total for their groceries, and a higher ratio of protein to fats and carbohydrates. Yet, in situations where healthy foods were subsidized, the savings were often spent on additional junk food. That is, instead of stocking up on more fruits and vegetables because they were cheaper, the study's shoppers bought their veggies, and then used the leftover cash to bring home extra treats like chips and soda. In the end, the subsidies-only scenarios resulted in higher total calorie counts, and didn't result in overall nutritional improvement on the week's groceries.

Because the scenario is hypothetical, the findings certainly shouldn't be taken as the final word in the sin tax debate, the researchers stress. . . . [T]he next step should be research to determine whether these results would be replicated in the real world.

Study: Sin taxes promote healthier foodchoices Posted by Tiffany O’Callaghan 3/10/2010

. . . A study published this week in the Archives of Internal Medicine followed more than 5,000 people from 1985-1986 to 2005-2006, tracking food consumption habits, as well as height, weight and blood sugar levels. They then compared that data with information about food costs across the 20-year period. Researchers found that incremental increases in price of unhealthy foods resulted in incremental decreases in consumption. In other words, when junk food cost more, people ate it less.

Analyzing the cost of soda and delivery pizza in terms of adjusted 2006 dollars, the researchers found that . . . every 10% increase in cost was associated with a decrease in calorie consumption—7% for soda, and 11.5% for pizza. What's more, a $1 increase in soda price was associated with lower daily caloric intake (about 124 calories less per day on average), lower body weight (2.2 lbs. less, on average) and better blood sugar levels, according to the researchers. . . .

[L]ead author Kiyah J. Duffey, from the Department of Nutrition at the University of North Carolina, Chapel Hill, points to the results as possible evidence supporting the use of taxes as a means to promote healthier eating habits. Duffey and co-authors suggest that, based on these findings, an 18% surcharge on soda and delivery pizza could, on average, cut 56 calories per person per day—a reduction that means dropping five pounds per person during the course of a year.

Think About It

Sugar taxes sound like a good idea, a two-birds-with-one-stone approach to raising revenue and improving health by encouraging people to change their eating habits. Before deciding whether to support or oppose the taxes, use the explanations and evidence in the news excerpts and the tools of economic reasoning. Analyze the institutional rules of the taxing game and the incentives they create, and predict whether the changed rules will produce the promised results at a cost you can accept. Answer the discussion questions below before taking a position supporting or opposing the proposed tax.

Discussion Questions:

  1. Use supply and demand analysis to explain how soft drink sales and revenue are affected by a soda tax, if it is:
  2. paid by consumers at the check-out counter
  3. levied on producers
  4. In the highly competitive soda market even small percentage changes in market share impact revenues and profits significantly. Given that producers are motivated by profit and that they have no control over the market price, how are they likely to respond to a soda tax? What will be the likely longer-run impact on consumers of the soda producers’ response?
  5. If, as the study suggests, a 10% increase in the price of soda causes an 8 – 10% decrease in sales, is overall demand for soda relatively elastic or relatively inelastic?
  6. Suppose a soda tax is enacted by your state and you will be charged an additional 1¢/oz. at the check-out counter. How do you think your family’s, your friends’, and your own consumption will change? Why?
  7. Elasticity of demand is not constant over all price ranges or among all users. For example, studies suggest that demand for cigarettes is highly elastic among teenagers and highly inelastic among long time users. Based on your answers to question 4, above, write 2 hypotheses about the characteristics of the elasticity of demand for soda.
  8. If sin taxes aresuccessful in discouraging the targeted behavior, they raise less revenue over time. How do the characteristics of the elasticity of demand for tobacco explain:
  9. why tobacco taxes continually rise; and
  10. why not only the federal government, but all 50 states, and many local governments depend on tobacco taxes to fund on-going programs.
  11. Do you think a sugar (or sin) tax is appropriate? Why or why not? Which of the following have the strongest influence on your opinion: economics (likely outcomes and impacts), philosophical beliefs (freedom, choice), social implications (equality, health and welfare)?

Teacher Guide

  1. Use supply and demand analysis to explain how soft drink sales and revenue are affected by a soda tax if it is:
  2. paid by consumers at the check-out counter Quantity demanded will decrease because consumers will face a higher price for the product. (On a graph, the demand curve tells us how much consumers will buy at all prices, so if you have students graph this problem, they should not shift the demand curve.) The tax sends no immediate signal to the producer because production costs do not change. Producers sell to retailers, not consumers, so until the retailers react to the changed consumption, production may continue at previous levels (causing short term surplus). However, expectations are a significant supply shifter, so producers’ knowledge of the tax and expectation of decreased sales may cause a shift in supply even before retailers’ orders change.
  3. levied on producers The tax increases cost of production for the producers and supply will be reduced; the extent of the reduction dependent upon a) how much of the added cost can be passed along to consumers in this highly competitive market, and the related factor b) the elasticity of demand for soda. (See discussions of elasticity below.) If you ask students to graph this problem, the supply curve should shift to the left, resulting in a higher market clearing price.
  4. In the highly competitive soda market even small percentage changes in market share impact revenues and profits significantly.