The Wages of Sin Taxes

Sugar and soda taxes are becoming popular tools to fight obesity in multiple countries. But are they good policy?

Stefan Wermuth / Reuters

As of Chancellor George Osborne’s March 16 budget, the sugar tax is set to return to Britain. This time it will take the form of a sin tax, levied to both discourage and profit from an act purported to be harmful to society. Osborne and some pro-sugar tax activists hope the move will help reduce obesity––especially childhood obesity––in Britain, and some of the revenues are intended to go toward physical-activity programs for children. Under the plan, by 2018, sugary drinks will be taxed based on the amount of sugar they contain, with some exemptions for fruit juice and milk.

The tax might turn into a policy export. Along with sugary-soda taxes in Mexico, local soda-tax experiments in the United States, and soda and “fat” taxes elsewhere around the world, sugar taxes are something of a policy darling in the fight to get people to eat and live healthier. And indeed sugar taxes have a long history in Britain specifically. But is imposing sin taxes good policy?

Prior to their newest incarnation as a deliberate public-health tool, British sugar taxes historically played a major role in the U.K.’s relationship with the United States. Ian Williams’s Rum: A Social and Sociable History of the Real Spirit of 1776 details how the infamous taxes in the Sugar Act of 1764 and its predecessor, the Molasses Act, helped spark the American Revolution by raising the price of the American colonies’ sweetest import and also by disrupting the production and consumption of rum, which had become as important as cash in the early colonies. The Sugar Act itself functioned as a kind of sin tax, given its impact on rum consumption, despite the fact that it was mainly intended as a revenue-raising protectionist measure. According to Gina Hames’s Alcohol in World History, the British Crown had long been concerned with the colonies’ indulgence in alcohol. So more-restrictive taxation of sugar and molasses addressed several problems at once, providing necessary cash, disrupting foreign competition, and promoting slightly less drunkenness.

Even after those disgruntled colonists threw off the yoke of restricted rum, sin taxes became a big part of American policy. Alcohol, tobacco, and gambling are generally subject to such taxes wherever they exist in the United States, and it appears likely that legalized marijuana will move that way as well.

As a response to obesity, the basic logic for sin taxes is clear. Sugary and fatty foods, processed foods, and soda can contribute to obesity, and taxing them will make them more expensive, which should decrease demand for them. Sin taxes also rely on two less obvious logical tenets. Firstly, in the U.S., poor and low-income people are more likely to suffer the worst effects of some unhealthy behaviors, meaning that relatively small increases in the price of unhealthy goods can have outsized health impacts. The second is that while increased prices lower demand for a given good, people will still “sin” enough that the taxes will yield some revenues.

If that’s the logic, does it work in practice? A study on increased alcohol taxes in Illinois concluded that when a tax of 1 cent per serving of beer and 5 cents per serving of spirits was imposed in 2009, the state saw a total monthly decrease of 25 percent in drunk-driving deaths, and a whopping 37 percent among young people, in the two years afterward. While those findings were consistent with the findings of previous studies, the Illinois study found in addition that the decrease in drunk-driving deaths occurred even in heavy drinkers, who economists had long believed to have alcohol demands so inflexible as to be considered immune to taxes.

The evidence in favor of sin taxes on cigarettes is less clear, but still convincing. It is well-known at least that cigarette taxes cut cigarette consumption. Still, there is little data on how such taxes affect deaths from smoking-related diseases like lung cancer. The few studies that do exist show that high enough taxes are correlated with small, but significant, decreases in strokes, heart attacks, and lung cancer.

Alcohol and tobacco sin taxes are popular policies not only because of the health impacts on users, but also because alcohol and tobacco both have significant externalities—environmental, economic, and health consequences for people other than the users. Alcohol abusers, for example, can pose a direct danger to others through drunk driving, reckless behavior, and domestic violence. Secondhand cigarette smoke is carcinogenic in its own right, and an allergen and general nuisance beyond that. So sin taxes aren’t just aimed at saving “sinners,” but also protecting those around them.

But not all sin taxes are created equal. Evidence about the effects of sugar and similar taxes on health is limited, since the taxes are relatively new as a public-health tool, and testing them requires long-term monitoring of complicated and sometimes minor interactions and outcomes. Most of the available evidence comes from Mexico, where a one-peso-per-liter tax on sodas and an 8-percent tax on junk food were both put into effect in 2014. Some have declared the taxes a success on the grounds that they have cut Mexico’s extremely high soda and junk-food consumption sharply.

But there isn’t much evidence yet that they actually make people any healthier or less obese. Obesity is complicated, with multiple interacting causes related to nutrition, fitness, occupation, genetics, and environment. And while the relationship between, say, alcohol consumption and drunk-driving deaths appears straightforward, sugary snacks or junk food aren’t the only possible culprits in obesity. If denied sugary foods or soda, people might just turn to bread or bacon. At the same time, the externalities of obesity are vague. Obesity certainly burdens health-care systems, but so do plenty of other semi-avoidable health problems. Should people be taxed for not being physically active? For having unprotected sex? For eating sausages? For extending the life of terminally ill patients?

Without clear evidence that sugar or fat taxes have direct personal or external health benefits, the argument in favor of these sin taxes centers on their fundraising quality, which my colleague Derek Thompson, among others, contends is enough of a reason to impose them. But on the other hand, the taxes function to charge poor people more for items they use more, which has the dual effect of both decreasing an already small pool of affordable nutrition options and decreasing their ability to purchase the goods they want. Even if such taxes do prove down the line to decrease obesity, poor people who aren’t obese or overweight face the prospect of having to live more healthily and to higher standards than those who can afford to pay the taxes, just by virtue of being poor.

As Britain embarks on the next great experiment in the utility of a sugar tax, Osborne appears to be banking on revenue and measurable health outcomes. What happens in the U.K. could very well affect whether local governments in the U.S. consider their own sugar taxes. The desired outcomes may indeed come to pass, but the policy also runs the risk of simply being just another regressive tax that raises revenues at the cost of poor people’s spending power. Is that palatable to some? Probably. But they shouldn’t sugarcoat the drawbacks.