Time to End the Failed Experiment of “Sin” Taxes
It seems like an economic no-brainer that if you can raise the cost of a good or service, people will buy and consume less of that good or service. This is the broad theory behind sin taxes; goods that are viewed as having negative consequences for society are taxed to discourage use and pay for supposed financial burden they put on the public. They aren’t new—they’ve been around since at least Cleopatra’s reign when she taxed beer to mitigate public drunkenness (or pay for her war with Rome) and just about every culture utilizes sin taxes to raise revenue and nudge residents to make “better” choices. But do they work? That is the question Philadelphia’s City Council will hopefully wrestle with while they decide whether or not to implement a sin tax on soda in order to fight obesity.
Arguments for soda taxes rely on the assumption that small price increases will result in less soda purchased, less soda consumed, and an overall reduction in calories and thus weight. In Philly, officials estimate that the 3 cent per ounce tax will result in a more than halving of soda purchases, based on an economic analysis. While this might work as an economic theory, in the real world, people respond unpredictably to price changes. For example, while some people might cut back on soda, others might cut back on different groceries in order to dedicate more money toward soft drink purchases.
Even if a sin tax does happen to influence sales, real-world evidence indicates that it might not last long. In Finland, for example, a 2011 tax on confectionery items reduced sales of sweets at first, but within a year media and shops reported that sales had returned to pre-tax levels. Similarly, the recent peso-per-liter soda tax enacted in Mexico correlated with an initial decline in sales volume of 1.9 percent, but rebounded the following year— increasing by 0.5 percent in 2015 over the previous year’s sales.
Most importantly, however, even if sales of soda decline, this doesn’t mean that consumption of sweets or calories has changed at all. Indeed, researchers from the Instituto Tecnológico Autónomo de México, who examined purchasing behavior in 8,000 homes before and after implementation of the soda tax, found that while the tax increased the overall cost of calories by 4 percent, consumption of calories declined by just 1 percent per week. And unsurprisingly, when they looked at BMI before and two years after the tax, they found “no discernable difference.” Most shockingly, they found that homes with a head of household that was obese were less influenced by the tax; meaning those for whom the tax was designed to influence were least affected.
Undoubtedly, sin tax proponents will say the problem is that they’re not high enough. Yet, when researchers looked at the effects of soda taxes as high has 40 percent, they found only the smallest change in weight after a year and noted that people who switched from soda to another beverage usually substituted it with equally high-calorie products.
While sin taxes may not be good at reducing usage of the supposedly “sinful” product, they are certainly useful as a means for raising revenue; unfortunately, the poor usually end up paying a disproportionately high amount of such taxes. While the hope is that higher prices on soda will prompt the poor to switch to a cheaper, non-taxed product (such as water), much of the evidence discussed here and elsewhere demonstrates that those with lower incomes will more likely continue purchasing soda as normal, but have less of their income to spend on other goods. As researchers found in Mexico, the soda tax there had less of an effect on soda purchasing for those in lower socioeconomic brackets.
Imposing a soda tax will do more to extract money from the poorest members of society than to change people’s beverage choices.