Sin Taxes: The Next Generation

When it comes to food, many of us have our guilty pleasures, whether it’s the occasional chocolate bar or can of soda. However, these guilty pleasures can become dangerous when they make up a significant portion of any diet. A growing preference towards high sugar and high calorie foods has led to an obesity epidemic in Western countries—the United States in the lead. Many low- and middle-income countries are on a trajectory that will lead to similar rates of overweight and obesity in another decade or two.¹

Tax interventions have been long proposed as a means to combat this growing epidemic, but have only recently gained traction. The rationale for these taxes is straightforward: increasing the price leads to decreased consumption, which will result in improved health outcomes. In the case of SSB taxes, the aim is to decrease BMI (body mass index), which is a risk factor for diabetes and other cardiovascular diseases.

On June 16, Philadelphia voted to pass a tax on sugar-sweetened beverages (SSBs), becoming the first major American city to approve such a tax. Attempts to enact similar taxes in other American cities, including New York and San Francisco, have failed, but more than a dozen cities in other countries have successfully implemented similar taxes in the past few years, including Mexico City, Santiago (Chile), and Paris.²These taxes have predictably led to decreased consumption of SSBs, but the effects on health outcomes will only become apparent in the next few years.³

Not surprisingly, the idea of introducing “sin taxes” has drawn bitter debate. Proponents of a tax on SSBs argue that the health burdens imposed by over-consumption of sugary drinks merit taxes similar to those imposed on alcohol and tobacco. These taxes would decrease public health expenditure, increase worker productivity, and raise government revenues. Opponents of the tax accuse governments of fostering a  “nanny state,” by not allowing individuals to consume the legal goods they desire freely, and forcing consumers, particularly those from poorer income groups, to pay more for food.

These arguments merit further investigation. Are sugary drinks similar to cigarettes? Taxes on the latter have gained widespread acceptance over the years. Like cigarettes, sugar has been found to have addictive properties, although the evidence is not as clear or strong as it is for tobacco. However, the societal costs of the health burden from high BMI, which has been linked to over-consumption of sugar, are unequivocal: in 2008, the healthcare costs related to obesity in the United States were estimated at $147 billion, while the annual productivity losses (in terms of absenteeism) were estimated at well over $3 billion.⁴

What about an individual’s freedom to choose what they eat and drink? SSB consumption is highest in low-income groups, whose food choices are limited by a documented lack of access to healthier food options in low-income neighborhoods.^5,6That alone doesn’t explain the high soda consumption — targeted marketing plays a significant role. Beverage companies spend an incredible amount on advertising—$866 million in 2013—most of which is targeted at children and low-income groups.^6,7If free will were enough, it wouldn’t be necessary to bombard individuals with millions of dollars in tailor-made ads on all forms of media.

Consumers will, indeed, pay more at the register for their sugary drinks—that’s the point. In the long term, the groups most affected by the increased tax should also benefit the most from it. For example, studies supporting the Philadelphia SSB tax suggest that consumers in the lowest socio-economic groups, which currently consume the most SSBs per capita, will see the greatest increases in work productivity and the largest decrease in health expenditures.⁸The decreased health expenditures would benefit not only those paying less out of pocket, but also the taxpayers supporting publicly funded healthcare.

An SSB tax will also increase government tax revenues. The government’s role is to fund a number of critical programs that benefit society, including education, healthcare, law enforcement, and transportation. Raising funds through taxes is an inevitable part of the government’s mandate. The question becomes what should the government tax. Economists would argue that an increased tax on labor (income tax) would dis-incentivize work activity. As such, taxes on goods such as SSBs may be a better alternative. This fiscal rationale was highlighted recently in the Philadelphia SSB tax debate, where the SSB tax will be used to fund much needed education reforms.

Considering all of these arguments, an SSB tax is a potentially sweet deal.  As the obesity epidemic continues to grow in Western countries and starts to emerge in developing economies, we can expect to see more debates over not only an SSB tax, but also other taxes on food, including salt and fat taxes. CDDEP’s Fiscal Instruments for Health project is analyzing the impact of a number of sin taxes in South Africa and India, including SSB and carbon taxes, and will add to this discourse, which we hope will push governments toward evidenced-based policy decisions to improve health and economic outcomes for all.