Have a Coke and a Tax: The Economic Case against Soda Taxes

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WITH THE FEDERAL deficit reaching $1.4 trillion and most state budgets deep in the red, policy makers are desperately searching for new sources of revenue that the tapped-out American public might support. They think they've found one at the corner store: a tax on carbonated beverages. Charging a few more cents for a soft drink, legislators claim, will not only refresh exhausted state and federal revenues; it will make us thinner.

Several versions of this year's health care bills included a soda tax to help offset new costs. In a September interview with Men's Health, President Barack Obama called it "an idea that we should be exploring" because "our kids drink way too much soda." The idea had been dropped from the health care legislation at press time but is expected to resurface next year.

The proposal is perennially popular on the state and local levels too. Thirty-three states tax the sale of soft drinks, at an average rate of 5.2 percent, and politicians in other jurisdictions are eager to jump on the bandwagon. After New York Gov. David A. Patterson floated the idea of a soda tax in December 2008, New York City Mayor Michael Bloomberg launched his own campaign to tax sugary drinks. "All the studies show that young kids drink an enormous amount of soda, and if they drink the sodas with all the sugar in it, it adds a great deal of weight to them," Bloomberg said in April.

The economic literature tells a different story. The rationale behind a tax on soft drinks, or any sin tax, is that when the government raises prices on a certain good, it will become so expensive that consumers will give it up. Having been forced to eschew that sin because of the high monetary price, consumers will reap the moral and/or physical benefits of not indulging, thereby bettering themselves and society.

The story sounds plausible. The trouble is that sin taxers don't appreciate human creativity: Consumers have a knack for replacing one sin with another. When the price of a "sinful" good increases, people often substitute an equally "bad" good in its place.

A 1998 study by William N. Evans, an economist at the University of Notre Dame du Lac, and Matthew C. Farrelly, a public health researcher at RTI International, found that smokers in high-tax states tend to consume cigarettes that are longer and higher in tar and nicotine than smokers in low-tax states. This effect is especially pronounced among 18-to-24-year-olds because they are more responsive to tax changes than older smokers. They have less money, so they want more bang for their bucks.

A 1992 study by University of Michigan economist John E. DiNardo and University of British Columbia economist Thomas Lemieux found that when states raised beer taxes or increased the minimum drinking age, teen marijuana consumption increased. A 1994 study by University of Illinois economist Frank Chaloupka and Chulalongkorn University economist Adit Laixuthai replicated those results--and also found that beer consumption declined in states that decriminalized marijuana.

Are soda lovers likely to do something similar? Richard Williams and Katelyn Christ, two economists at the Mercatus Center (where I work), argue that soda drinkers would. In a 2009 study, they wrote: "The assumption is that this sin tax would reduce caloric intake because consumers would stop drinking high-calorie drinks and/or switch to lower-calorie drinks. However ... if consumers respond to the proposed sin tax on sodas and sports drinks by switching to some of the potential substitute drinks [see table], their caloric intake would either remain the same or actually increase."

In a 2008 working paper, Emory University economists Jason Fletcher, David Frisvold, and Nathan Tefft examined the impact that changes in states' taxation rates from 1990 to 2006 had on body mass index and obesity. …