by John Andren*
Once directed at controlling the “social ills” of smoking, alcohol, and gambling abuses, sin taxes have become a favored tool of policy makers in their quest to make consumer’s food and drink choices for them as well. With little scientific evidence to support the effectiveness of such taxes and overwhelming economic evidence against them, you would think legislators wouldn’t waste their time with sin taxes.
But with state and national budgets suffering from large short falls, legislators are scrambling to find new ways to raise revenue. It just so happens soda and fast food appear to be on the top of their lists. The popularity of soft drinks and fast food in America has led to a vociferous debate between those who want to defend their freedom to eat and drink what they want and those who wish to engineer the diets of all American’s according to their own personal ideals.
A new working paper from George Mason University’s Mercatus Center, Sin Taxes: Size, Growth, and Creation of the Sindustry, provides a thorough overview of the supposed economic logic supporting the “need” for sin taxes, and further economic and public choice arguments against them.
The paper’s authors, economists Adam J. Hoffer, William F. Shughart, and Michael D. Thomas, begin with differentiating between the original budgetary justifications for sin taxes—that taxes were needed to reduce to consumption of a sin good, as well as to raise revenues to offset the public financial burden caused by its consumption—with the recent normative motivations of lawmakers to socially engineer consumers’ choices in order to “nudge” them into healthier lifestyles. If the taxes are not an attempt to correct the “market failure” of a public good, then the justification for their burden should certainly face a much higher level of scrutiny; especially if that burden is weighing disproportionately more on lower-income consumers.
In addition to lower-income consumers being a proportionally larger slice of the soda and “junk food” market, Hoffer et al. point out that they also have significantly less flexibility in their discretionary budgets. This limits the ability of lower-income consumers to make the proper substitutions and tradeoffs in their purchases and activities necessary to unburden themselves from sin taxes. Whereas, with a sin tax on fast food for example, middle- and upper- income consumers may “trade-up” to now relatively less expensive meals at nicer restaurants or their homes, or limit spending in other areas of their budgets, lower-income consumers will likely suffer the full economic incidence of the tax. In fact, the obesity problems of the poor may even be exacerbated as those with little money and free time are forced to exercise less as a result of such taxes.
A common argument made by consumer health “advocates” is that the large corporations and trade groups that make up the food and beverage industry are spending millions to fight the imposition of sin taxes on their products, and that this serves as some sort of proof of the bad intentions of big business. But as Hoffer et al. show, this is always the logical conclusion of vague and subjective policies that are left entirely in the hands of legislators. Special interests are able to manipulate the regulations to suit themselves, while politicians are able to extract political rents from affected business that are rightfully afraid of the imposition of, or increases in, the taxes on their products.
Hoffer et al. offer data showing soft drink lobbying alone has gone from less than $10 million in 1998, to over $30 million in 2010, when adjusted for inflation, with a peak of over $40 million in 2009. During that same period, the data shows fast food lobbying rising from just under $30 million to almost $80 million. The money being spent by the industry on unproductive activities such as lobbying against sin taxes is at the expense of “research and development, plant expansion, and job creation,” further increasing the harm done by sin taxes beyond just that done to consumer welfare but to the economy as a whole. As Hoffer et al. state, “the deadweight loss from lobbying may exceed the social welfare gains from reducing negative externalities.” In other words, sin taxes are more trouble than their worth, even excluded from the fact that they serve as a threat to consumers’ freedom of choice.
With 33 states already taxing soft drinks, and numerous other states and cities discussing the same, efforts to punish consumers’ choices remain in full swing. Educating consumers, voters, and policy makers on the poor economic implications and unintended consequences of sin taxes is an extremely important goal for the protection of consumers’ rights. Sin Taxes: Size, Growth, and Creation of the Sindustry, is an excellent overview of the economics of sin taxes and a must read for anyone with an interest in the protection of consumer choice.
*John Andren is an intern with Washington Legal Foundation’s Legal Studies Division who graduated from George Mason University with an economics degree.
For more information about the use of sin taxes to regulate Americans’ consumption choices, visit WLF’s Eating Away Our Freedoms campaign website.