A Penny For Your Sugar: Setting A Price On Sin

The American Heart Association recommends that everyone should cut back on added sugar to help curb obesity.

Sugar-added beverages are pretty popular, and given the US obesity rate and its associated costs, they pose a problem.

The theory: Tax sugary beverages, and consumers will buy a healthier alternative in order to avoid the tax. Over time, individuals would reduce consumption of sweetened beverages, reduce chances of putting on extra pounds, and use less medical care.

Does this theory hold (sugarless) water? Not much. Although, early data on Mexico's year-old soda tax does show some promise.

US communities have been trying for several years to levy soda taxes in the name of good health. Soda purchases are falling, and there is some evidence that people are buying different drinks without an extra tax. But are people buying healthier, sin-free drinks?

Are people aware of their sugar sins? A new study out of the University of Connecticut finds that "although most parents know that soda is not good for children, many still believe that other sugary drinks [like flavored water, or orange-flavored or other foil-wrapped drinks] are healthy options." 

Maybe a sin tax is just the thing shoppers need to help them live a light and healthful life. 

After 30 failures around the country, soda tax backers have finally claimed one legislative success, and another larger effort could be on the way. Thanks in part to an expensive campaign last November, Berkeley, California became the first city in the nation to pass a tax on the distribution of sugar-sweetened drinks — a penny per ounce.

(Berkeley started collecting the tax in March, so it's still too early to tell whether it is changing consumer behavior).

Meanwhile, this spring, the Vermont legislature will consider a statewide 2 cents per ounce tax on any sugar-sweetened beverage.

In Vermont, like Berkeley, the soda tax would be an excise tax paid at the wholesale level. It wouldn't be like a sales tax paid at the register and seen on a receipt.

Consumers might notice the extra cost of their purchase, but they won't know its source. The higher cost might be enough to make them choose different beverages.

To change consumers' behavior with a tax, the tax should be "salient." That's tax-speak for "able to be seen and felt." One can see exactly why in this neat study on tax salience and tax rates by Amy Finkelstein.

Here's where things get complicated: What does it mean to be salient? A 2009 paper by Raj Chetty, Adam Looney and Korey Kroft found that a shelf price with a built-in excise tax is more likely to reduce demand than a tacked-on sales tax.

Tatiana Homonoff and Jacob Goldin (a former TPC intern) decided to look more closely at the consumers. They found that low-income consumers responded to both tax-inclusive shelf prices and the tax added at the register. High-income customers were the ones likely to ignore the sales tax.

Back to Vermont: Imagine it enacts its sin tax. A mom strolls down a grocery aisle and sees a 12-pack of that orange-flavored drink, the one that isn't soda but is subject to the tax, the one that she believes is healthy. It's about $3 more expensive than it used to be.

Will she keep strolling and find something else, or will she shrug and put it in her cart?

Now consider this. Vermont's proposed soda tax is projected to raise $35 million. Vermont needs to close an expected budget shortfall. I'm sure Vermont lawmakers are concerned about the health of their constituents and their shopping choices, but they're concerned about Vermont's fiscal health too.

They expect a certain number of shoppers to "sin" in Vermont, and not buy their sugar-sweetened beverages in soda-tax-free New Hampshire, or drink something far less expensive and certainly sugarless, like tap water.

They expect the temptation of those sweetened drinks to be just strong enough, and the sin tax to be just low enough, to bring in that $35 million.

So take heart, shoppers. A sweet little sin can be good for a person's taste buds, as well as for public coffers.

The Tax Hound, publishing the first Wednesday of every month, helps make sense of tax policy for non-geeks and connects tax issues to the non-tax world. Need help? Post a comment!

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