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Do Sin Taxes Really Work?

Brett Hershman

The jury is still out on whether recent introductions of a “sin tax” on soda consumption actually reduces overall use. Cities like Philadelphia, New York City, Baltimore and San Francisco have all introduced taxes on sugary drinks to deter use and other municipalities have proposed bills to follow suit.

Sin Taxes' Macro Success In Question

Although soda consumption has reduced in the last few years, putting pressure on companies like The Coca-Cola Co (NYSE: KO) and PepsiCo, Inc. (NYSE: PEP) to diversify into healthier product categories, children and adults in the United States still consume twice as much calories from sugary drinks as they did 30 years ago.

Disproportionate Damage To Lower-Income Citizens?

The problem with the tax, as with most sin taxes, is that it is placed on items disproportionally used by lower-income individuals. If use is not reduced dramatically, then there is the fear that the taxes become regressive and put more pressure on lower socio-economic classes.

“The key question is how well people are responding to the tax, how much do people reduce their consumption?” said Benjamin Lockwood, a professor of Business Economics at the Wharton School of Business who is conducting a study on the latest round of sin taxes on Soda. “If they don’t reduce very much, the tax becomes regressive,” he said.

Related Link: One City's 'Sugar Tax' Looks Like It's Causing Consumption To Fizzle Out

“Poor people tend to consume more soda than richer people do; it is about twice as high at the bottom of the income distribution in terms of cans a day drank on average, similar to that of cigarettes.”

Costs: Behavioral Tendencies Vs. Financial

The key issue comes down to the behavioral tendency to overweigh upfront costs.

“If something affects you today, you tend to take that into account much more than a few years down the road. People tend to over consume products that have upfront positive effects even if they have long-term consequences,” said Lockwood.

It boils down to a human tendency to want the instant gratification that comes with consuming dangerous products like cigarettes and soda — the same reason many are averse to exercising, because of its delayed health benefits.

Currently, it appears as if the taxes are a bit too low to cause any dramatic reduction in consumption of harmful products, especially unlikely to deter continued use of such addictive products.

Lockwood added, “Right now we don’t have very good evidence on how much people respond to these taxes. For example, the estimated fall in soda consumption from, say, a 10 percent tax ranges from 1.5 percent to 25 percent, a very wide margin. It's important to note how much people reduce soda consumption due to the tax. If they do reduce consumption, then the benefits will go to the poorer consumers.”

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