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Will a Soda Tax Work?

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A few weeks ago, Tom Laskawy took issue with my contention that we don't really know how to convince people to eat better. "Junk food—and that includes any processed food that crosses the line from nutritious to purely caloric—has to get more expensive," he wrote. "Period."

The theory behind this is simple, and, on an abstract level, unassailable. If calories cost more, people will consume fewer of them. If the government slaps a $10 tax on every bag of chips, Lays would probably go out of business. But that isn't likely to happen. The question, rather, is whether relatively modest taxes on calories are effective. Are people extremely price sensitive when it comes to food? Or not?

The evidence appears to point toward "not." A recent study conducted by researchers at the RAND Corp. used evidence from the Health and Retirement Study -- which is generally considered to provide very high-quality data -- to estimate the impact of a 10 percent reduction in the cost of all calories (they use a reduction because, well, food prices have been going down, so that's where we can find real-world data on how people respond to price changes in food). The data isn't very encouraging.

In the short-term, the impact is very small. Over two years, body mass index increases by 0.6 percent. Over time, the impact compounds, so after 30 years, it's a 4.2 percent increase in BMI. To put that in perspective, clinical guidelines say that you need a 10 percent reduction for meaningful health benefits to overweight individuals. And this isn't out of line with other estimates: The paper also has a section surveying similar experiments, and it turns out that this paper is actually more optimistic than many. Which makes me pretty pessimistic. All we're talking about, after all, is a small soda tax. They're talking about a 10 percent change on all calories (and it's total calorie consumption, not just junk food consumption, that's really the problem here). And it still isn't near sufficient.

In a way, that's intuitive. Americans spend very little of their paycheck on food. Less than 10 percent of disposable income, in fact. Compare that to the '30s, when it was more than 25 percent. So it's not terribly surprising that we're not very price sensitive. It's not one of the things that we feel the need to be terribly price sensitive about. But the policy implication is that whether or not soda taxes are a good idea for raising revenue, they're not likely to do a tremendous amount to change the national waistline.


Photo Credit: Randy Squires -- Associated Press Photo.

By Ezra Klein  |  July 7, 2009; 3:23 PM ET
 
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Comments

small point of info: BMI is probably not the most accurate measure. See here: http://www.npr.org/templates/story/story.php?storyId=106268439&sc=fb&cc=fp

Posted by: belmontmedina | July 7, 2009 4:12 PM | Report abuse

Sounds like good money in home-making untaxed potato chips. :-)

Posted by: DenisDrew | July 7, 2009 4:16 PM | Report abuse

Ezra, assuming I'm reading your post correctly, I think the RAND study doesn't help answer this that well. A soda tax affects relative prices in the here-and-now, whereas the RAND study you cite sounds like it is analyzing changes in prices that go across the board, only are changing over time. Have I got that right? It just doesn't seem like analyzing the cost of average calories is useful here. While food costs have been falling in general over time, it's not the calorie content that has driven price changes. Calories might be falling in price, but that doesn't tell us whether junk food prices are falling faster or slower than the price of broccoli.

Posted by: JonathanTE | July 7, 2009 4:43 PM | Report abuse

Although it's certainly appropriate to look at solutions to the obesity crisis individually to gauge their effectiveness, my sense is that an effective public health policy will use a combination of anti-obesity measures in tandem. For example: a soda tax coupled with mandatory display of calories on all menus coupled with a nationwide ban of trans fats coupled with tax decreases on low-calorie beverages, etc. I'm obviously not vouching for the effectiveness of any of these ideas, but my point is that even assuming the impact of a "soda tax" is minimal perhaps the better inquiry is how effective different policies are when implemented together.

Posted by: pbasso_khan | July 7, 2009 4:48 PM | Report abuse

I'm really not convinced that the relative measure is helpful here. How many foods are you going to make relatively more expensive? Just soda? Anything processed? Anything with corn syrup? And how much more expensive? I don't think we have any capacity to do that. And, in general, I think the bigger problem has been simple multiplication of calories (meat and bread and milk matter too, not just junk food), and this speaks to that.

Posted by: Ezra Klein | July 7, 2009 5:50 PM | Report abuse

I think you are ignoring the important point of relative cost compared to other drinks.

If you go to buy a soda tomorrow and all drinks cost 25 cents more most people will probably not drink less soda. But if you go to the store and diet soda/fruit juice is now 25 cents cheaper than regular soda you are more likely to switch.

The idea is not to make bottled drinks slighty pricer it is to make less health drinks more expensive than healthier ones.

Posted by: JonWa | July 7, 2009 5:53 PM | Report abuse

My understanding looking at research is that liquids very high in sugar is uniquely unhealthy. If I remember correctly, something about how you don't register that you are consuming food, so even though you consumed many calories you don't feel less hungry.

I also believe there is research point out that the rapid speed at which sugar from soda can enter you blood stream cause great pancreatic stress leading to diabetes. Very important since diabetes is incredibly expensive to society.

But I do think the better argument for a soda/junk food tax is that unhealthy people are more likely to drink soda and uses health care. So soda drinkers should pay more to finance health care. (Smokers paying higher premiums is likely to be part of any reform, but I would prefer a higher tax on tobacco instead)

Much like how gas tax is a "good" way to pay for roads, since people who drive more use roads more.

Posted by: JonWa | July 7, 2009 6:32 PM | Report abuse

People are insensitive to food costs?

Thats BS ezra. If what you say is true, then WalMart, Safeway, Giant, and everybody else would be RAISING prices on food over time, not lowering them.

Posted by: platon201 | July 7, 2009 6:35 PM | Report abuse

It's a very thoughtful analysis of how taxing behavior that's not necessarily good for us affects that behavior.

However, the relevant Democrat wonkery is: Will they pay it without throwing us out?

Just tax everything. You know you want to.

Posted by: whoisjohngaltcom | July 8, 2009 6:22 AM | Report abuse

In my opinion, the proper question to ask about a soda-tax, or equivalent 'junk-food-tax,' isn't how much will it reduce junk food consumption. If the reduction is large, (ie-price-elasticity of demand is greater than 1) then it's a DUMB tax because it doesn't raise much revenue.

Instead, I can think of four appropriate questions: 1. What is the price-elasticity of demand? (ie-how much revenue can be raised as quantity demanded shifts?) 2. Is it politically feasible--can it be passed? 3. Is this a progressive, neutral, or regressive tax? 4. Does this tax price a negative externality?

It sounds like the answers are: 1. price-inelastic (good); 2. Yes, it is passable; 3. Neutral--probably slightly regressive since junk calories are cheaper than nutritious ones; and, 4. Yes

To me, that makes it sound like an ideal tax to pass.

Posted by: witty_al | July 8, 2009 10:10 AM | Report abuse

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