Wednesday, July 14, 2010

On Soda Taxes

In the past year many states and cities have proposed adding a tax on soda and other sugary drinks in order to raise revenue that would close their budget gaps. Despite backing from many public health groups, the measures have largely failed but will likely be put back on the table in the future. Contrary to my usual anti-tax opinions, I actually think that a soda tax is a good idea, at least to a certain extent.

Before I explain why, I want to make two important points. First, I think that states should seek to close their budget gaps primarily, if not exclusively, through spending reduction and not through tax increases. Second, I think that the government is never justified in passing laws with the intent of discouraging unhealthy behavior unless such behavior causes harm to those who do not participate (a situation economists refer to as an externality problem).

I support a level of taxing soda and other sugary drinks (though not necessarily the level of taxation being proposed) because it is such an externality problem. Soda consumption in the US is a major factor contributing to obesity. Obesity increases the incidence of obesity related diseases. When people get sick more often, demand for health care goes up. When demand for health care goes up, the price of health care goes up. Therefore, people who drink too much soda and become obese raise the cost of health care for those who drink soda in moderation and maintain a healthy weight.

While taxation is not always the best solution to an externality problem, I believe that it clearly is in this case. Therefore, I support a soda tax that will discourage people from drinking soda to the extent that the excess burden placed on the healthcare system is relieved, and no further. Despite my misgivings about raising taxes to cover budget deficits, however, I realize that some tax increases are inevitable. I therefore would also support a soda tax over other sales/excise tax increases. As I said earlier, I believe that it is wrong for the government to pass a tax for the purpose of discouraging unhealthy behavior, but I do feel that a tax that is intended to raise revenue that results in discouraging unhealthy behavior is better than a tax intended to raise revenue that doesn't discourage unhealthy behavior.


  1. A soda tax sounds like plan as far as taxes go but this will cause soda to go up in price hurting many companies including the small companies that produce off-brand sodas. This could potentially hurt restaurants that sell lots of soda and infuriate buyers who already feel taxed enough with raised sales taxes, gas taxes, and everything else. Taxes are a great way to close budget gaps but hurting the companies you want to keep around and deterring consumers you have been trying to get to spend money is no way to do it. There are many other ways to generate revenue by legitimizing certain "industries" such as prostitution and green leafy substances. Add the "sin tax" and employ people that are unemployed. With legitimate brothels and marijuana growing operations more people have employment opportunities, the government can make money on services that are already used frequently. Then to add to that, law enforcement agencies can spend less time dealing with these "problems" (which are harmless) spending less money to deal with these issues. The money that would be needed to fund sting operations and such could be redirected to other parts of municipalities to then lower the amount of money the state would supply that municipality. If taxes stay where they are, then the state can close its budget gap and then you know the rest. The soda tax is going in the right direction but it isn't what we need especially as it can backfire.

  2. Joseph,
    I disagree with your point that taxes are a great way to close budget gaps. They clearly do close budget gaps, but in my opinion the costs of closing a budget gap by raising taxes is higher than the cost of closing a budget gap by cutting spending.

    I won't go into my opinions on morality or social issues in this blog, but I agree that legalizing and then taxing prostitution and "green leafy substances" would serve the twofold benefit of raising revenue and cutting spending. Some would say the benefits are not worth the costs, but this is a matter of personal opinion that I won't go into.

    Thanks for your thoughts!

  3. You say you don't like, "a tax for the purpose of discouraging unhealthy behavior" yet go on to say the reason we should tax sugary sodas because if you drink them you become obese and increase the cost of health care. Theoretically couldn't any tax dealing with unhealthy behavior be given the same argument that the purpose isn't to discourage said behavior but to keep the cost of health care down? Should anything with sugar, high calorie counts, or even caffeine be taxed because those could also lead to health problems? Diet soda's have fake sugar which are believed to cause tumors so shouldn't diet sodas be taxed? Soy (although high in protein)is thought to be linked to increased estrogen in males and increased breast cancer in women. Shouldn't soy be taxed? I could go on all day finding thousands of "healthy" products that can be unhealthy. Why doesn't the government review every product on the market and analyze whether or not it can be unhealthy and use your argument to tax it, because it COULD make someone unhealthy and COULD increase the cost of health care. Taxing a business that sells a product that is high in sugar isn't a good way to lower the cost of health care. It's a good way to make the consumer pay more for goods and hurt reputable businesses in the process.

  4. Anonymous,
    I agree that in theory nearly every food that is eaten in excess would cause an increase in obesity and a strain on the healthcare system. I support taxes on goods that have proven and significant negative effects on health that also result in an increased demand for healthcare. Based on what I have read, I believe that soda falls into this category. According to "Time Magazine", a penny-per-ounce of sugar tax on soda would reduce soda consumption by 13%, resulting in the average American losing (or not gaining) 2.3 pounds per year.

    I do agree, however, that if governments get too entranced by this line of thought then it is easy for them to overtax goods that produce only minor externalities.

    Finally, I still think that taxing soda is a good way to reduce healthcare costs. Reducing demand for health services is one of the simplest and most effective ways to do so. We just need to be sure that the costs to producers and consumers of soda don't outweigh the benefits to consumers of healthcare.