An op-ed published in the Los Angeles Times on June 3 declares that selective excise taxes on cigarettes have saved “millions of lives” and that “a soda tax could too.” Those claims are implausible and leave a distorted impression about what these taxes can and cannot accomplish.
The three economists who wrote the column draw an analogy to the textbook example of gasoline taxes, justified as ways of reducing fuel consumption and curbing tailpipe emissions that can harm even non-drivers. Their collective opinion thus draws on standard public finance theories, dating back to the work of A. C. Pigou in the 1930s, concluding that the most effective way to get people to internalize the costs their consumption of a good imposes on others – a “negative externality” in econ-speak – is to tax it. The tax raises the price of the good as some of it is passed through to retail markets and, hey presto, consumers predictably buy less of it, thereby reducing the social costs of their own consumption choices.
The key question is, by how much do purchases fall after a good is taxed? That depends on the good in question. In the case of cigarettes, the answer is not very much. The best estimates of the responsiveness of smokers to changes in cigarette prices – the “elasticity of demand,” again in econ-speak – is that a one percent increase in price causes about a one-half of one percent decline in cigarette sales. The trifling response is explained by smokers’ addiction to their favorite vice (it’s physiologically hard to cut down or quit, as almost everyone knows) and by the small number of alternatives available to them when cigarettes become more expensive.
The stability of quantity demanded in the face of higher prices turns out to be a good thing from the point of view of the taxing authority: cigarette taxes are revenue-engines because sales don’t decline markedly when a tax is imposed or its rate is increased, which accounts for the popularity of cigarette taxes at the federal, state and local levels. But the low elasticity of demand for cigarettes undermines the economists’ claims that taxes have saved millions of lives.
Although smokers represent a smaller share of the American population than they were 60 years ago, cigarette taxes deserve little credit. More plausible explanations can be found. The most important is that smoking has been in steep decline since the early 1960s, when the U.S. Surgeon General issued a report linking cigarette smoking to lung cancer. Evidence of other dire health risks from cigarette smoking has accumulated over the years, and it is the dissemination of such information, along with the modern shift toward more healthy lifestyles, that explains why smoking rates have fallen so dramatically over time.
Adults also have cut back on cigarette purchases because of the growth of smoke-free workplaces, public buildings, restaurants, bars and other spaces where people gather, along with evolving public attitudes that disfavor smoking. Lighting-up has become so inconvenient, logistically and socially, that many consumers feel it’s no longer worth the trouble.
Cigarette taxes are also weak at discouraging smoking when they can be evaded. In jurisdictions with very high tax rates, such as New York City, smuggling flourishes, allowing smokers to buy cigarettes without paying any tax at all. Cross-border shopping where cigarette tax rates are lower than at home also limits the reach of the taxman’s arm.
The supply side of the market likewise matters. Alert entrepreneurs have responded to cigarette taxes by introducing tobacco-free alternatives like nicotine pouches and vaping products, which most evidence suggests are less harmful than cigarette smoking, but to stop consumers from switching, many jurisdictions have added them to the cigarette tax base.
Soda taxes tell a similar story. Now levied by seven U.S. cities and nearly 40 counties, selective taxes on sugar-sweetened beverages are intended to help curb obesity, Type II diabetes, and other health problems associated with imbibing soft drinks. Those outcomes largely are private costs but become “social” costs when the treatment of such diseases is financed by taxpayers through public health insurance programs (Medicaid and Medicare). If you’re morbidly overweight because you drink sodas to excess, then everyone’s health insurance premiums eventually will rise.
The soda story is slightly different, however, because the small number of cities and counties that impose soda taxes means that consumers tend to be very responsive to tax-induced price increases: the local demand for soft drinks is more elastic than the demand for cigarettes because soft-drink consumers easily can shop in nearby towns. The City of Philadelphia learned a hard lesson when it imposed a tax of 1.5 cents per ounce on sugar-sweetened beverages (the highest soda tax rate in the nation) and saw soft-drink sales drop off the proverbial cliff. Enacted after Berkeley, Calif., imposed the nation’s first soda tax of one cent per ounce, Philly’s soda tax immediately prompted retailers in neighboring locations to provide cell phone apps informing consumers where they could buy untaxed sugary soft drinks.
More to the point, selective soda taxes don’t seem to have more than small effects on body weight and, hence, cannot be expected to make much of a dent in the health consequences of obesity. As with cigarettes, independently of tax policies, sales of sugary soft drinks have been falling for a decade.
The authors of the Los Angeles Times op-ed recommend that soda taxes be imposed statewide or even nationwide so that consumers cannot avoid them. But crossing borders is not the only way that consumers can respond to a soda tax. Evidence has been reported that a tax on sugar-sweetened beverages causes some people to increase their consumption of donuts and other sugary foods. Pushing a balloon on one spot causes it to expand in another.
The column’s authors also recommend replacing liquid-based soft drink taxes with a tax on their sugar content so as to better target the obesity culprit. They claim that a tax of 0.4 cents per gram of sugar would be “optimal.” A 12-ounce can of Coca-Cola contains about 39 grams of sugar, making a total tax of $0.156 per can. A 12 pack of 12-ounce cans of Coke sells for $4.88 on Amazon, or about 41 cents each. If the tax were fully passed through to consumers, the price of a can of Coca-Cola would go up by just over 38 percent. Philadelphia’s tax of 1.5 cents per ounce, raising the retail price by almost 44 percent, already has made a six-pack of soft drinks more expensive there than a six-pack of beer.
We must also consider that any change in tax law triggers rent-seeking by individuals and groups that stand to benefit from or to be harmed by the proposal. A tax increase of the size contemplated for soft drinks will produce lobbying efforts for and against it that themselves are socially costly and are likely to more than offset any welfare gains the tax possibly could generate.
The supply side again matters. Over the past year or so, most soft drink producers have begun marketing unsweetened, sodium-free, calorie-free, fruit-flavored carbonated beverages that are not subject to existing selective soda taxes and won’t be subject to the proposed one.
The LA Times column shows what happens when economists or anyone else lets blackboard theories of optimal taxation blind them to the realities of actual human behavior. Even if the theory is correct, tax rates are determined by political processes. No matter how well-meaning and genuinely concerned they may be about public health, politicians will not be able to sustain a tax that adds almost 16 cents to the price of something that otherwise retails for 41 cents.
These inconvenient truths help explain why Cook County, Ill., repealed its soda tax and why voters in Santa Fe, N. Mex., resoundingly said “no” to one. Selective excise taxes may raise revenue for the public sector by targeting the consumption of things that elites disdain, but they do not save millions of lives.
Republished from Independent.org.