Trick or Treat? Government's Halloween Tax Costume

Autumn is now upon us. The leaves are changing, temperatures are falling, football is in full swing, and one of Americans' favorite holidays is just about to arrive on our doorstep. Kids across the country will don costumes and race from home to home in a festive search for sweet rewards on Halloween.

A kind word about their costumes and some candy or cookies are enough to elicit jubilant smiles and infectious excitement as trick-or-treaters eagerly await the loot dropped into their bags. Benefits abound for both the giver and the receiver in our celebration of All Hallows' Eve. But not so fast. Someone call in the fun police.

Consumers are exercising their choice to purchase and give away "unhealthy" snack foods, so something must be done. Politicians, disguising revenue grabs as incentives for improving Americans' diets, are proposing or passing new or higher selective consumption taxes on a lengthening list of calorie-dense items.

In addition to the traditional sins of smoking cigarettes and drinking alcohol, 17 states tax candy at rates exceeding those on other foods and beverages. The Sugar-Sweetened Beverages Tax (SWEET) Act, proposed to Congress over the summer, would impose an additional tax on sugary soft drinks, including soda pop, pre-sweetened tea and sports drinks. Already, 26 states tax soda pop at higher rates than groceries.

Yet consumption taxes are an ineffective way to change behavior. In a forthcoming study to be published by the Mercatus Center at George Mason University - on the causes and consequences of selective consumption taxation - we explore the regressive effects of these taxes on a wide variety of goods. Our research concludes that the "quantities purchased of all of consumption items considered ... are remarkably unresponsive to changes in their own prices, including price changes caused by imposing new selective sales or excise taxes or raising existing tax rates."

Although the proponents of imposing consumption taxes on "lesser desirable" products hope consumers will switch in droves to healthy alternatives, few people replace potato chips with apple chips. Because consumption declines only modestly, an overwhelming majority of consumers simply fork over the cash needed to pay for the higher-priced (higher-taxed) consumption good or substitute other (untaxed) items containing just as many calories (drinking chocolate milk instead of soft drinks, for instance).

Not only do selective taxes do little to influence behavior, their burden falls disproportionately on low-income households during a time of growing income inequality. One explanation for this finding from our research is that "higher incomes supply wider ranges of choices for maximizing household utility. Combined with the demographic characteristics of low-income neighborhoods, which offer few healthy substitutes for fast foods, the selective consumption-tax burden on poor people is differentially heavy."

A consumption tax is a hasty and superficial attempt to enact behavioral policy. More effective and less harmful policies targeting the consumption choice architecture - or offering rewards for healthy choices, rather than punishments for "unhealthy" choices - are available, but politicians are reluctant to adopt such policies because they do not generate tax revenue.

Obesity is a growing problem for Americans, and its social consequences cannot be ignored. But don't be tricked by the paternalistic costume worn by consumption-tax advocates; they offer no solution. Besides, do you really want to be the house on the block that hands out celery on Halloween?