If you lived in Richmond, California, would you vote yes or no for their proposed soda tax?
The tax is unusual because it does not charge people at the register. Instead, retailers would have to pay a license fee that is based on how many ounces of SSBs (sugar sweetened beverages) customers purchase. The city expects sellers to increase prices because of the fee.
City councilmen who like the proposal remind us that half of the children in Richmond are obese and that they can use the $3 million they project for sports fields, children’s diabetes treatment and nutrition education. An economist might add that the fee is Pigovian named after Arthur Pigou (1877-1959) who supported the concept because it discourages undesirable behavior and raises revenue.
On the other side, City Councilman Corky Boozé said it is unfair that the tax targets the poor. In a more affluent community, residents have the ability to avoid it by traveling elsewhere but not in Richmond where few people can afford cars. ”I eat sweet potato pie and candied yams,” he added, “And what about cupcakes? Are they going to tax them?” Predictably, one store owner worries that his business would suffer if he passes along the entire fee of 68 cents on a 2-liter drink to his customers.
Opponents also point out that the license fee is regressive. With a regressive tax or fee, the poor pay a higher percent of their income than those who earn more. Assume for example that 2 people both buy the same item and pay a $10 sales tax but one earns $100 a year and the other, $1000. The first individual is paying 10% of her income while for the second, it is 1%.
So many issues…
Do you believe the license fee is fair? Do you care if its impact is regressive? Do you like a Pigovian approach? Does it reflect an appropriate role for government?
In November, at the Richmond polls, how would you vote?
To read more about soda taxes, this NY Times update discusses New York City’s large size sugary beverage ban and here, here and here econlife looks at soda and fat taxes. For an academic approach, this Chicago Fed paper also focuses on the impact of soda taxes while details about the Richmond proposal are in this PBS interview, this NY Times article and a WSJ story.
States debating a tax on soda have to decide whether they want to raise revenue or diminish obesity. If a sales tax on soda is not very high, people will continue buying sugary drinks. The result? The state gets more money. On the other hand, if the tax is high enough and people buy fewer sugary drinks, then a major cause of the “obesity epidemic” in the United States will be addressed.
When will a tax impact sales? A recent study described in the American Journal of Public Health concluded that soda prices need to increase by 35% (45 cents up from the baseline price) for people to diminish soda purchases by 26%. With health care costs soaring and obesity spreading, all a state needs to do is levy a 35% soda tax. Are they? According to a 2009 Kaiser Family Foundation study, the highest soda tax rates, at 7%, are in California, Indiana, and New Jersey.
With state budget crises erupting everywhere, do you expect state lawmakers to opt for health over a revenue stream?
The Economic Lesson
An economist would say the sales tax debate is about the price elasticity of demand. If price changes a lot and the quantity we buy remains the same, as with medication and gasoline, then our demand is inelastic. By contrast, if price swings have an impact on buying, then our response is elastic. With soda, within a certain price range our demand is inelastic. Once we reach the 35% level, though, we switch to an elastic response.
Would you support a penny an ounce tax on sugar sweetened beverages? According to the NY Times and The New England Journal of Medicine, the idea is becoming increasingly attractive to many municipalities. By putting on our economic glasses, we can better decide whether to support it.
First, we can ask whether society should be compensated for the cost it experiences from unhealthy behavior. Any cost absorbed by an “innocent” third party because of someone else’s behavior is called an externality. The tax would then be a payback.
To make up our minds, we can also assess the cost and benefit of the decision to tax sugary beverages. Diminishing obesity, increased intake of healthier foods, and decreased risk for diabetes, are several of the benefits associated with the impact of a soda tax. As suggested by one study, a 10% tax would decrease consumption by 7.8%. Meanwhile, on the cost side, we have the impact on manufacturers, on jobs, and the expense of implementing the tax. Some people believe the biggest cost, though, is the freedom we lose.
Finally, we can focus on the tax itself. Opponents point out that the tax is regressive because when everyone pays the same amount, the less affluent feel a larger burden. By contrast, supporters ask us to focus on the revenue’s destination. If the soda tax becomes a “benefits received” levy, then the money would be destined for treatment of sugary drink related maladies.
The Economic Lesson
Named after economist Arthur Pigou (1877-1959), Pigovian taxes are levied on undesirable activities called negative externalities. At best, they eliminate the activity. But even when less successful, the revenue that is generated can be used productively.
What if there was a miracle food that helped fight colds, prevent cancer, heart disease, and cataracts, and fostered healthy bones? According to several non-medical web sites, there is one. It’s broccoli.
And what if another food promoted diabetes, obesity, osteoporosis, dental cavities, kidney stones, high blood pressure, and maybe even heartburn? Some say soda does this to us.
In yesterday’s NY Times, an article described a recent study that indicated a tax on soda limited its intake. Should we support “sin taxes”? Quoted in Econ 101 1/2, Napoleon III “was once implored by a lady to forbid all smoking on the grounds that it was a great vice. Laying aside his cigar he replied, ‘This vice brings in one hundred million francs in taxes every year. I will certainly forbid it at once–as soon as you can name a virtue that brings in as much revenue.’”
The Economic Lesson
Contemplating decisions, assessing opportunity cost through an opportunity cost chart is always a handy way to gain insight. At the top we would have “tax soda” and the alternative, “don’t tax soda”. Then, for each choice, we could list the benefits. Two benefits of the tax would be healthier individuals and more state revenue. Two benefits of no tax would be individual freedom and jobs for the soft drink industry. Which benefits are you willing to sacrifice?