Should There Be a Tax on Soda and Other Sugary Drinks?

Across the country, activists are battling to put a cap on soda consumption—and one of their biggest lines of attack is taxes.

The argument: Sodas and other sugary drinks lead to problems like obesity and diabetes, which drive up health-care costs. So, the drinks should carry a higher tax to keep people from overdrinking, as well as help cover medical costs.

A host of states have levied taxes on sugary drinks, as did the city of Berkeley, Calif., in a recent move. Soft-drink companies have battled hard against these measures, saying their products are being singled out unfairly. Other critics have argued that taxes don’t help to reduce consumption, and that they feed bureaucracies that waste money instead of helping the public.

The fight comes as U.S. soda sales have declined for 10 straight years as consumers switch to alternatives such as bottled water and tea. Per capita consumption of soda dropped to 41.4 gallons last year from 52.4 gallons in 2004, according to industry tracker Beverage Digest.

Arguing for a soda tax is Kelly Brownell, dean and the Robert L. Flowers professor of public policy at Duke University’s Sanford School of Public Policy. Making the case against the tax is William Shughart II, the J. Fish Smith professor in public choice at Utah State University’s Jon M. Huntsman School of Business and research director of the Independent Institute.

YES: It Is an Effective Way to Cut Obesity And the Harm It Does

By Kelly Brownell

There is a long history of voters supporting taxes meant to protect health and to offset costs produced by products that can cause harm. It’s time to add sodas and sugary beverages to that list.

We’ve seen time and again that taxes can have powerful beneficial effects. Economists point to taxes as the single most influential factor in the striking reduction in smoking in the U.S.—the-per capita number of cigarettes smoked is a quarter of what it was in the mid-1960s. The lives saved in the U.S. and elsewhere can be counted in the millions.

Improving health

Likewise, taxes on certain categories of foods could improve health and save money for all Americans. Consumption of these drinks is linked to increased risk for a number of diseases, particularly obesity and diabetes. Fully 42% of the annual $142 billion in health-care costs attributable to obesity are paid with public funds through Medicare and Medicaid, and obesity is but one disease affected by poor diet.

Add to this the heavy marketing of the products, the gratuitous addition of caffeine to many drinks (keeps people coming back for more) and the likely addictive properties of sugar, and it is easy to see why sugary beverages have become the frontier.

Momentum for soda taxes is building. Such taxes have been enacted in France, Barbados, Romania and Mexico. In the U.S., over 30 states have levied taxes on these beverages. An individual city, Berkeley, Calif., recently enacted a tax, and other cities and states are considering similar action.

Opponents of taxing sugary beverages say that taxes don’t change consumer behavior. Yet in Mexico, consumption of sugary beverages has declined by 6%, with a tax half the size of that most often proposed. The drop is not likely attributable to anything other than the tax, as sugary-beverage sales have increased in other Latin American countries.

The tax in Berkeley, which will increase prices around 20%, is forecast by experts to reduce consumption in the neighborhood of 15% to 20%. And there’s no evidence that those consumers will simply go elsewhere to buy sodas for less, as some critics speculate.

Benefits vastly outweigh costs

Critics also argue that taxes on sugary beverages are regressive and would hurt the poor, but obesity and diabetes are highly regressive diseases. Tobacco taxes helped prevent cancer and heart disease among those least able to afford the medical care these diseases require. Furthermore, the revenue from soda taxes could be used to help those most in need by subsidizing the costs of foods like fruits and vegetables.

Tax opponents argue a black market will develop in sodas if we enact high taxes. But the same argument could be made about tobacco taxes, which have been massively successful, even if some illicit sales occur.

As for the idea that diet sodas are potentially more harmful than sugary ones: There is a massive literature on the health effects of sugary drinks. There is a much, much smaller literature on the health effects of diet drinks, and this is highly inconsistent.

Tobacco and alcohol taxes are now commonplace and are considered a permanent part of the public-health and economic picture. Soda taxes are likely to follow the same course and will provide considerable benefit in the U.S. and around the world.

Dr. Brownell is dean and the Robert L. Flowers professor of public policy at Duke University’s Sanford School of Public Policy. He can be reached at [email protected].

NO: The Health Benefits Are Far Less Than Claimed

By William Shughart II

Imposing a tax on sugary drinks is bad policy. It doesn’t solve the health problems it purports to address, creates new problems and leads to waste in the public sector. Just because the idea has gained traction among voters does not make it defensible.

First and foremost, taxing sugary drinks does not reduce purchases enough to matter. Numerous studies find that consumption is persistent, despite higher taxes. That means health benefits will be vanishingly small. Proponents point to a recent soda tax in Mexico that supposedly reduced consumption, but that study has not been peer-reviewed—the finding was announced in a news conference, supported only by PowerPoint slides.

Taxes too low?

One important reason taxes don’t cut consumption much is that the taxes are often set too low to affect behavior. Why not set them higher? That introduces other problems. Set taxes high enough, and underground markets will arise, as they have for cigarettes in New York City.

Black markets aren’t the only way that people skirt high taxes. When a product becomes more expensive in one area, they simply go across the border and buy it in a neighboring spot where it’s cheaper. That’s likely why some retailers in Berkeley, Calif., which recently implemented a new soft-drink tax, did not initially pass the tax on to customers, and thus paid it out of their own pockets, according to some early reports. They feared losing business to stores in nearby cities if they charge customers the full price.

There are other reasons to reject soda taxes. Evidence is mounting that drinking diet soft drinks may be as bad as—or even worse than—sugary drinks. The human body apparently reacts the same way to artificial sweeteners as it does to “real” sugars. The pancreas pumps out insulin, but zero-calorie artificial sweeteners do not produce the energy rush that curbs appetites and satisfies cravings for sweetness. Yet these drinks aren’t subject to taxes on sugary beverages.

Squandered cash

Beyond that, there’s the matter of how these taxes are used. Selective taxes on sugary drinks and other modern “sins” (junk food, fast food) are revenue engines for the public sector. But the evidence suggests very little of the revenue ends up actually improving health outcomes. And the burden of paying for these measures falls most heavily on low-income households; budget constraints narrow the range of food choices open to them.

What’s more, wasteful rent seeking by advocates and adversaries of a selective tax can swamp its social benefits, if any. Suppose that a proposed tax is expected to raise $1 million in revenue over the medium term. Producers and retailers of soft drinks will be willing to spend up to $1 million to block the tax from being enacted; groups supporting programs financed by the revenue also will spend money to pass the tax. So, if $1 million (or more) is invested in lobbying, that sum is transformed into a social cost, which must be added to the already-heavy burden that every tax creates.

The argument that taxing sugary drinks helps to promote healthy lifestyles deflects attention from their actual effects. We don’t normally expect politicians to be truthful. But if they want to impose these taxes, they should be honest enough to admit that they will not end obesity or diabetes, but rather will generate more of other peoples’ money for profligate state governments to spend.