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Time for a Fat Tax?

The anti-obesity forces want to target soda pop and other sugary drinks. Two experts review the pros and cons.


Penelope Lemov

Penelope Lemov is a GOVERNING correspondent. She was GOVERNING's health columnist and was senior editor for several award-winning features.


Commented May 4, 2010

While it may be much more difficult politically, wouldn't be more effective both fiscally and health...

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Will soda pop go the way of cigarettes -- highly taxed and socially shunned?

It took anti-smoking advocates dozens of years to push cigarettes out of restaurants, airplanes and movie theaters, and for state legislators to raise those taxes to ever-higher punitive and revenue-earning levels.

Now The anti-obesity forces are borrowing a couple of plays from the old cigarette playbook and targeting soda pop and other high-fructose or high-sugar drinks and snacks as a contributing factor to today's obesity problem. One of their major thrusts is an effort to bring high-sugar drinks into the sin tax category. There have been rumblings in the halls of Congress that a so-called "fat tax" could be levied to help fund health care reform. On the state level, New York legislators defeated a fat tax this spring, but other states have it in their sights.

It is a contentious issue with a double agenda. One is social: Is this an appropriate way to focus minds on obesity and the role soft drinks and sugary snacks play in that problem? The other is fiscal: Would this be an effective way to raise much-needed revenue? The two are entwined in any discussion of how much sense a fat tax makes.

A few days ago, I talked to William Shughart, professor of economics at the University of Mississippi, and Jocelyn Johnson, associate professor of public administration and policy at American University, about the pros and cons of a fat tax. Here are highlights from our discussion:

Would a fat tax be simple, neutral and transparent?

William Shughart

William Shughart: All excise taxes are simple and easy to administer. The downside from my point of view is that like all excise taxes, a tax on soda is regressive. Horizontal equity says that people in similar economic circumstances should have the same tax bill. A selective tax on junk food or soft drinks or cigarettes violates that standard of equity. This kind of tax is not neutral. It hits some products more heavily than others, some consumers more heavily than others, and some people will respond to that by switching to something else.

Jocelyn Johnson: Point-of-sales taxes are less transparent than other ones. We don't recognize the burden compared to property or income tax. It's small increments, and unless you look at your receipt and calculate the burden you're imposing on yourself monthly -- which no one does -- it's not as visible and not as salient as other taxes. Yes, it's transparent in the sense that there is a vote on it and people can be aware of that. But in terms of feeling it on a regular basis as a tax, instead of just a price increase, it's not so transparent.

Jocelyn Johnson

Can a tax on soda raise significant revenue?

WS: On the federal level, the estimates I've seen suggest a tax rate of 1 cent per ounce of soft drink. That's 12 cents on a can of soft drink that could cost from 50 cents to $1.50 -- so we're talking about a tax of 12 percent on a $1 purchase and twice that on a 50-cent can of soda. That would raise $20 billion a year at most for the U.S. as a whole. Any individual state that imposed that tax could not expect to solve any budget problems they are facing.

Another thing that gets into play is that things like cigarette taxes or soda taxes tend to be levied at both the federal and state levels. So there's competition over the same tax base, and in that situation it's very reasonable to expect that the combined federal and state tax rate would exceed the rate that would maximize the total revenue raised by the tax. Estimates I did a decade ago found that the federal and state cigarette taxes were far higher than the revenue-raising maximum and that both levels of government could collect more if they reduced the tax rates -- because consumption falls faster as the price goes up.

In Mississippi this year, we raised the state excise tax on cigarettes from 18 cents a pack to 68 cents -- that's 50 cents. Surprise! Surprise! In the first month, revenue was $20 million less than expected. People either cut back or started buying on the Internet or Indian reservations or going across the border to other states where tax rates are lower. So there's a lot of leakage of revenue in a federal system like ours with differential tax rates across states.

Can a tax on soda achieve its social agenda of lowering the consumption of high-calorie beverages -- and thus effecting the obesity epidemic?

JJ: Work done on cigarette and alcohol taxes demonstrates what we know: If you increase the price with a tax, demand will drop. It sends a strong cost signal to consumers so they recognize there are external costs linked to behavior. It's the classic justification of motor fuel, cigarette and pollution taxes: The tax is there to remind you that you're imposing costs or harm on others.

WS: If somebody stops buying soft drinks as result of this tax and starts buying chocolate milk that's not subject to the tax, they'll be drinking more calories and fat per ounce than they would have in a can of soda pop. So it could be counterproductive. States and even the federal government have tried these taxes off and on for years, and for various reasons, they have all been repealed, except in Arkansas and West Virginia. If you look at the state rankings on obesity rates, my state of Mississippi is number one, but Arkansas and West Virginia are not too far behind. So it's not clear that they have the intended effect of dramatically reducing obesity rates.

New York City is now running ads on its subway system that show a bottle of soda with fat coming out of it. The tag line says, "Don't drink yourself fat." And various health groups are pushing hard to make the public aware of the dangers of obesity. Are high-sugar sodas and snacks where cigarettes were 20 years ago?

JJ: I don't think it's at that level yet. I don't see a lot of pushes to suggest the sugar industry has the potential to cause death like we did with cigarettes. There will be a push against high-sugar soda and snacks, but it won't be like cigarette smoking. Sugar is everywhere. Everyone consumes sugar. But not everybody smokes or consumes alcohol. In the press against obesity, do we want to tax a bag of sugar in grocery stores? I doubt it.

Are there ways to make a fat tax more politically palatable?

JJ: Here's the question I would ask any state considering it: What are you going to use the revenue for? Reducing consumption in and of itself is desirable. But to me, it would be more effective to tie revenue costs associated with the behavior to an increase in funding for treating chronic obesity or diabetes or paying for Medicaid. Personally, I think it is easier to justify a tax if you're correcting a cost. There are drawbacks to targeting and earmarking, I understand that, but it is a more logical direction for the revenues.

WS: Earmarking a tax for a good purpose often is more politically palatable than putting the money into the general fund. But there's a lot of legal room in earmarking, and it's not always clear that the money raised by a specific tax all goes to a program.

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