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The case for taxing soft drinks

  • Article by: ROGER FELDMAN
  • December 3, 2011 - 4:19 PM

It is time to tax sugar-sweetened, carbonated soft drinks -- known in the Midwest as "pop." A pop tax would promote healthful behavior, reduce medical care costs and raise revenue for Minnesota.

Americans love carbonated soft drinks. Each of us consumes the equivalent of a 20-ounce bottle every day.

This is more than the people of any other country drink -- 10 times as much as the Japanese. (The number includes both diet and sugared soda, but not other sugared drinks.)

Americans' daily caloric intake from sugared soft drinks has increased by 170 percent over the past 20 years. Pop accounts for 11 percent of the total daily calories consumed by the average American woman and 8 percent of the calories consumed by the average man.

Among children, per capita soft drink consumption has increased by 500 percent over the past 50 years, making soda the most commonly consumed beverage.

One might argue that our love for pop reflects Americans' unique tastes, possibly encouraged by beverage industry advertising. But avid consumption of pop is not just an individual choice: It is a public health problem.

Research links pop to obesity, diabetes and heart disease. And according to Prof. Mark Pereira at the University of Minnesota, people who consume two or more sugared soft drinks per week are twice as likely to develop pancreatic cancer as are those who consume no soft drinks.

The link between pop consumption and obesity is especially important, given that 34 percent of adult Americans are obese and another 34 percent are overweight.

Obesity has the same association with chronic health conditions as does adding 20 years to one's age. Americans are literally drinking themselves to death -- with soft drinks.

Obesity is also associated with a 36 percent increase in medical care costs. So the consequences of excess pop consumption show up in higher health insurance premiums and additional Medicaid and Medicare spending.

How would a pop tax work?

First, the government would decide what to tax. I assume the tax would apply only to pop, but some evidence points to a link between diet soda and health problems, so a tax on all carbonated beverages should be considered.

Second, the tax rate would be set. Most pop-tax proposals call for a small tax, such as two cents per 12-ounce can, which would raise the cost of a 12-pack (now $4.80, on average) by 5 percent.

The tax would be imposed at the wholesale level, so it would show up in the "shelf price" we pay at the grocery store or vending machine.

To predict the change in behavior from such a tax, economists use a concept called the "price elasticity of demand," which measures how much consumption of a good changes when its price changes.

The price elasticity of demand for pop is about -1. This means that a 1 percent increase in price would lead to a 1 percent decrease in consumption.

With a 5 percent tax, pop consumption would fall by 5 percent. Evidence also suggests that a soda tax would increase the consumption of substitutes such as reduced-fat milk, juice, tea and coffee.

I estimate that the average Minnesotan (man, woman, and child) drinks about 360 12-ounce cans of pop per year; the tax would cause that to fall to 343 cans. Each of us would pay $6.86 more in taxes, on average, and the state would collect $36 million per year from all 5.3 million of us.

Of course, we are not all average. Pop consumption, like many other unhealthful behaviors, is greater among lower-income groups.

Thus, a pop tax would take a larger fraction of income from poor people. Such taxes are called "regressive" and are often thought to be unfair.

But according to Prof. Kelly Brownell at Yale, a leading expert on obesity and nutrition, the poor are disproportionately affected by diet-related diseases and would benefit most from reduced consumption of unhealthful foods.

A pop tax is among the least coercive methods of changing behavior. Rather than banning pop or restricting access to it, a pop tax nudges consumers to drink less pop.

Would a pop tax overextend the government's power to regulate personal choices, including the choice to make oneself fat?

In fact, people would still have that choice, but the price of pop would for the first time reflect the costs that personal choice imposes on others -- through higher health care spending, lower productivity and other negative effects.

Implementing a pop tax will not be easy. After the state of Washington passed a law in 2010 calling for a temporary two-cent pop tax, the American Beverage Association poured $16.7 million into a recall campaign.

The tax was portrayed as "taxing the shopping cart," and voters overwhelmingly repealed it, 60 percent to 40 percent.

This suggests that pop taxes will not succeed unless advocates can build grass-roots support for them.

To build public support, they might seek to dedicate some of the tax revenue to public health and antiobesity initiatives, so that the tax is not perceived as simply fixing the state's budget problems.

A poll of New York residents found that support for a pop tax jumped from 52 percent to 72 percent when respondents were told that the revenue would be used for obesity prevention.

Subsidizing healthful alternatives to pop also would build support for a pop tax, especially if subsidies bring healthful foods into neighborhoods where they are not available.

About one-half of Minneapolis and one-third of St. Paul are classified as "food deserts" -- areas where entire neighborhoods do not have a grocery store. Pop tax revenue could be used for tax breaks to grocery stores that locate in those areas.

Finally, we need to end government programs that subsidize the production of pop. The U.S. government spends about $20 billion per year subsidizing various crops, depending on prices and crop yields.

About 40 percent of this is paid to farmers who grow feed grains, including corn. Corn, turned into high-fructose syrup, is a major ingredient in pop. The average American consumes 37.8 pounds of high-fructose corn syrup per year.

Beet sugar also receives a small subsidy and is used to make pop. There is simply no reason to continue these costly subsidies.

Some advocates have called for more broadly based tax on all snack foods, or perhaps a "fat tax."

I do not recommend a general "snack tax," mainly because it would be difficult to define what constitutes a snack food.

A fat tax is also questionable. Everyone needs some fat in their diet, and the price elasticity of demand for fat is low. The tax would not lead to significant changes in behavior.

However, a pop tax meets all the conditions that the public should look for. We know how to define "pop."

Pop consumption is associated with health problems and higher medical care costs. And people will cut back their consumption in response to a small tax.

It's time to tax pop.

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Roger Feldman is the Blue Cross Professor of Health Insurance at the University of Minnesota.

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