A Fat Tax That’s Hard to Swallow
Friday, June 12, 2009
Your beverage might soon contain the cost of universal healthcare.
When President Reagan announced a war on drugs, crack cocaine was public enemy number one. Now our government has a different kind of coke in sight—this time it’s “the real thing.”
Congress is desperate to find money to pay for its ambitious healthcare reform. More access to healthcare services for all Americans, better quality care, and more efficiently provided services are the lofty goals but they come at a cost; perhaps more than $1 trillion over the next decade. With the U.S. fiscal deficit already set to exceed $1 trillion annually, finding a way to pay for this expansion of government is a critical, yet challenging, task.
The Senate Finance Committee recently released a set of policy options designed to raise revenue to fill the pending healthcare fiscal hole. One tax proposal is a new idea in Washington: impose a tax on beverages sweetened with sugar or high-fructose corn syrup. Historically, such targeted taxes have only applied to “sinful” commodities such as alcohol and tobacco. If this proposal becomes law, soda, energy drinks, iced tea, and even apple juice and chocolate milk will be taxed. Are these the new sins of our great society?
If a proposal becomes law, soda, energy drinks, iced tea, and even apple juice and chocolate milk will be taxed. Are these the new sins of our great society?
While the committee document is vague on many details for this new tax, and offers no rationale for why we need to pay more at the soda fountain, presumably there is a concern that sugar-sweetened beverages are contributing to obesity.
Obesity in the United States is a very serious problem and a significant contributor to our rising healthcare costs. According to the Centers for Disease Control, obesity has grown at an epidemic rate since the mid-1980s. American obesity levels have skyrocketed over the past few decades, from 23 percent in 1988–1994 to 34 percent in 2005–2006. Diabetes, heart disease, and general discomfort for the adjoining airline passenger are all significant costs of obesity in our country. The Congressional Budget Office reports that average healthcare spending for obese people is nearly $1,000 more per year than for normal weight people and that 12 percent of the rise in healthcare spending in the United States from 1987 to 2001 was due to increased levels of obesity.
But to narrow in on soda and juice, leaving fried chicken and pizza untouched, is to begin to weave a new and awkward maze of tax policies that create more confusion than healthy behavior.
While it is important to tackle our collective chubbiness, imposing a revenue grab such as a sugared beverage tax is an ill-designed approach. If the government is serious about lowering obesity rates, it needs a more holistic approach and understanding of why we are as fat as we are.
A recent paper by Harvard economists David Cutler and Ed Glaeser and University of Chicago Professor Jesse Shapiro provides an interesting explanation for these rising obesity rates and why no other country is as “heavy” as the United States. In short, calories burned have held steady while calories consumed have risen markedly, primarily due to more snacking. The answer for why this is so can be found in the revolution in mass production of food. The switch to mass food preparation has lowered the “time price” of food consumption and driven up demand. When you can buy French fries for a dollar that are ready in a minute, why waste time peeling, cutting and frying?
Because of the presence of equally cheap (and convenient) substitutes such as fruit drinks and fruitades, sports drinks, and lemonade that are similarly sweetened, a soft drink tax is unlikely to have much effect on food consumption and therefore obesity. Individuals who consume less sugar through soft drinks will likely find their sugar high elsewhere. According to one estimate using data from 1990 to 2006, a one percentage point increase in the state soft drink tax leads to a decrease in body mass index of only 0.003 points.
Prior experience has shown that when Congress picks narrowly conceived items or activities in our economy and chooses to tax or subsidize them, enormous inefficiencies emerge as a result.
Prior experience has shown that when Congress picks narrowly conceived items or activities in our economy and chooses to tax or subsidize them, enormous inefficiencies emerge as a result. Indeed sugar and sweetener prices are already inflated because of sugar quotas and ethanol subsidies. Attempts at micromanaging the health of our citizens through narrow provisions in the tax code is evidence that some Democrats are bent on taking the idea of the nanny state to a new level.
From a soda tax, Congress could easily expand the tax code to include a potato chip tax, a corn chip tax, or perhaps a tax on salty bagged snacks. Maybe mayonnaise should get taxed and mustard subsidized?
Congress should be concerned about obesity and its associated healthcare costs. But to narrow in on soda and juice, leaving fried chicken and pizza untouched, is to begin to weave a new and awkward maze of tax policies that create more confusion than healthy behavior.
Alex Brill and Aparna Mathur are research fellows at the American Enterprise Institute.
FURTHER READING: In “Hate the Sin, Tax the Sinner?” Rev. Robert A. Sirico discusses why the temptation to impose sin taxes is one that should be resisted for economic and moral reasons. In “Take Two Servings of Paternalism,” David White writes that “we have crossed the line from banning things that are unsafe to banning things that are unhealthy.” The American has also covered the unintended consequences of smoking bans, the prohibition of new fast-food restaurants in south Los Angeles, and low-sodium campaigners.
Image by Darren Wamboldt/Bergman Group.