Do Sin Taxes Pay?

Cigarette and alcohol taxes should be higher. Soda taxes are a good idea too.
by | May 21, 2010 AT 3:00 AM
Rows of soda bottles
Marlith/Flickr, CC

Faced with continuing budget shortfalls, state and local governments across the nation are taking a new look at vice. The most recent issue of State Net's Capitol Journal provides a helpful roundup: Ohio has embraced casinos. Californians are considering taxing marijuana and online poker. Rhode Island is eyeing pot sales too, and Alabama continues to struggle with "bingo." Public health activists have joined the vice wagon too. They want to tax soda and fat foods in order to raise funds and combat the obesity epidemic, which cost the country around $150 billion in 2008.

One of the leaders in this effort has been Washington, D.C. councilwoman Mary Cheh. Cheh recently introduced legislation that would impose a one-cent-per ounce tax on soda. Her hope was that the tax would diminish soda consumption and raise money (about $6 million) for a Healthy Schools initiative that would provide District children with healthier meals. Yale University's Rudd Center has estimated that if California were to impose a one cent-per-four ounce tax on sodas, the state would raise a whopping $560 million in 2010 alone. A new paper by MIT economist Jonathan Gruber should help policymakers sharpen their thinking about which sin taxes are really appropriate and about what level they should be set at. In his paper, Gruber provides an overview of the latest thinking about a wide variety of sin taxes, both real (e.g., cigarette and alochol taxes) and hypothetical (e.g. soda taxes). Let's quickly run through his findings:

Cigarettes: Gruber concludes that cigarette taxes as currently structure are not, as many opponents suggest, strikingly regressive. Nor do they cover the costs of the externalities they create for society at their current levels. To promote self control, reduce consumption, and cover costs, Gruber suggests a much (much) higher tax — $5 to $10 per pack.

Alcohol: The major negative externality associated with alcohol consumption, Gruber notes, is drunk driving, which kills 12,000 a year. Current levels of taxes on alcohol are nowhere close to recouping that (and other) externalities. "The best esimates of the tax needed to account for the externalities of excess alcohol consumption imply a tax of 80 cents per ounce of pure alcohol," writes Gruber. "That rate is much higher than current taxes of only an average of 18 cents per ounce." In short, states could raise serious money and save lives by upping alcohol taxes.

Fat taxes: So what about fat taxes? Here things get trickier. A simple tax on calories wouldn't be appropriate: It would deter low-income people from eating. Cheh's soda tax looks a lot better. Gruber points to a growing body of research that suggests that raising the costs of soda reduces calories from pop consumption and leads to reductions in weight and improvements in insulin resistance. (The research suggests a pizza tax might be good too.) However, Gruber's preference is for something more controversial: direct taxes on body weight. Sound impossible? Gruber says its already happening, if indirectly:

"While it is hard to conceive of this approach being a common public policy tool in the near term, such taxation may be happening indirectly through health insurance surcharges. Currently, employers may charge up to 20 percent higher health insurance premiums for employees who fail to meet certain health-related standards, such as attaining a healthy BMI. The new health reform legislation increases this differential to 30 percent, with the possibility of rising to 50 percent. Results of programs that use differential premiums to impose direct financial penalties for obesity will bear watching in the future."

A soda tax might make economic sense, but the politics remain difficult. Even in liberal Washington, D.C., fat taxes are a tough sell. Despite Cheh's enthusiastic advocacy (and lobbying by the actor Morgan Freeman), Cheh's soda tax was defeated yesterday.

Image courtesy Marlith, Creative Commons.