October 4, 2015

All Taxes Start as Good Intentions, but Don't End That Way

Michael D. Thomas

Assistant Professor of Economics, Creighton University

William F. Shughart II

Summary

Good intentions are one of the least scarce resources on the planet. The trick, of course, is put all those good intentions to work in ways that actually achieve desired goals. In a world where virtually every other resource is in short supply, the targets of one’s good intentions must be focused on actions that address the most pressing issues. The “Chicago Sweetened-Beverage Tax,” now being considered by the city’s Health and Environmental Protection Committee, is long on good intentions and short both on prioritization and on understanding of the economic principles of public finance.

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Good intentions are one of the least scarce resources on the planet. The trick, of course, is put all those good intentions to work in ways that actually achieve desired goals. In a world where virtually every other resource is in short supply, the targets of one’s good intentions must be focused on actions that address the most pressing issues.

The “Chicago Sweetened-Beverage Tax,” now being considered by the city’s Health and Environmental Protection Committee, is long on good intentions and short both on prioritization and on understanding of the economic principles of public finance.

The ordinance, introduced at the end of July, will, if passed, impose an excise tax of one cent per ounce on all sugary soft drinks sold within the city’s limits to curb consumption of “the number one source of sugar in the American diet.” As the ordinance’s preamble states, “numerous studies” have implicated sugar as contributing to a modern obesity “epidemic, along with the health problems associated with excessive body weight, including Type II (adult-onset) diabetes, asthma, and heart disease.

The proposed ordinance assumes that a one-penny per ounce tax will lead to a 23.5 percent reduction in retail sales of sugar-sweetened beverages (SSBs), whether pre-bottled or mixed from syrup or powder at restaurants and convenience store fountains, purchases of which are subject to the same penny per ounce tax. A 23.5 percent reduction in sales, in turn, is projected to lower youth obesity rates by 9.3 percent and to cut them by 5.2 percent in adults.

That estimate of a nearly one-fourth drop in sales assumes that (1) the new excise tax will be passed on fully to consumers in higher retail prices (a 12 cent increase for a 12-ounce serving, which works out to a 12 percent price hike if an untaxed container costs $1.00), (2) consumers will not respond by switching to (untaxed) diet sodas, which mounting evidence shows to be just as unhealthful as sugary soft drinks, or (3) buy untaxed or lesser taxed SSBs beyond Chicago’s city limits.

None of those assumptions is warranted. A study of the impact of a similar SSB tax implemented in Berkeley, Calif., on January 1, 2015, found that only 22% of the tax there – not 100% – found its way into higher retail prices. Our own research, published by the Mercatus Center, suggests that a 12 percent increase in SSB prices triggers only about a 6 percent reduction in retail sales.

The tax supporters’ good intentions thus will fall far short of expectations.

How will the projected SSB tax revenue be spent? Most of it is dedicated to a special “Wellness Fund” created by the same ordinance. Twenty percent of the fund’s receipts will sponsor studies on obesity and 75 percent will be spent on educational programs emphasizing the benefits of healthy eating and physical fitness. The revenue therefore largely will flow to educators and researchers, not ordinary people.

Between one and two percent of the revenue is earmarked for studies of the tax’s actual effects on Chicagoans. But scholars of public finance already have documented the effects of selective excise taxes on producers and consumers, not just in theory, but also in practice.

It likewise is well known that the burdens of selective excise taxes on sugary drinks, like all retail taxes, fall heaviest on low-income households. Berkeley tried to avoid the regressive effects of its SSB tax by exempting soda purchases made with food stamps, but we also know that poor people disproportionately suffer the health consequences of poor diet choices.

Finally, we also know that reelection-seeking politicians will raid any public treasury account like the “Wellness Fund” whenever other budget priorities become more salient. Does anyone expect the Wellness Fund to be spent as intended if potholes in Chicago’s streets must be filled or if the pension funds for police and firefighters go deeper into the red?

We think not. We also think that Chicago’s proposed SSB tax, although grounded in good intentions, simply is another political ploy to raise revenue on the backs of poor Chicagoans who are less able to pay it than commuters and middle and upper income households.