HEALTH & MEDICINE Taxes on sugary beverages would do little to lower obesity. Would Soda Taxes Really Yield Health Benefits?

BY MICHAEL L. M ARLOW AND ALDEN F. S HIERS California Polytechnic State University

oughly one-third of U.S. adults are clas - ment programs other than those associated with controlling sified as obese, which is defined as hav - obesity, much as cigarette tax revenue now does. ing a body mass index of 30 or higher. Obesity rates for most all age and gender FLAWS IN THE ECONOMIC CASE FOR SODA TAXES groups exceed 30 percent, with men aged Proponents of soda taxes argue for government intervention 20 to 39 years being the lone exception. because, they say, free markets fail to allocate resources in soda R Obesity is especially prevalent among markets efficiently, with the ultimate consequence being too minorities; African-Americans have a 51 percent higher preva - many obese people. Three assumptions underlie their argument: lence of obesity, and Hispanics have 21 percent higher obesi - Soda causes obesity. ty prevalence than whites. n Consumers lack adequate information and beverage Obesity has become a major public health concern, given n choices. its association with chronic conditions that include diabetes, Soda drinkers impose external costs on others who hypertension, high cholesterol, stroke, heart disease, certain n pick up some portion of obese people’s higher med - cancers, and arthritis. Excess mortality stemming primarily ical costs. from cardiovascular disease and diabetes is also believed to be associated with higher grades of obesity. Researchers at the Let us consider each of these assumptions. Centers for Disease Control and Prevention in Atlanta esti - mate that obesity now accounts for 9.1 percent of all medical Soda causes obesity? The correlation between soda con - spending — $147 billion in 2008. sumption and obesity rates does not imply that soda con - Various factors are believed to promote rising obesity rates, sumption causes obesity. Other possibilities include obesity but the hypothesized relationship between “nutritively sweet - causes soda consumption, no relationship exists between ened beverages” (NSBs) and obesity has increasingly become soda consumption and obesity, and soda consumption and the focus of attention. Some public health advocates call for obesity are interdependent. Moreover, even if soda con - Pigouvian taxes (see “Much Ado about Pigou,” Spring 2010) sumption did cause obesity, there is no reason to believe on these beverages, often referred to as “soda taxes,” as effec - that soda is the lone causal factor behind obesity; other like - tive interventions that will lower obesity as well as generate ly candidates include lack of exercise, age, genetics, con - tax revenues that can be used to fund public programs aimed sumption of other high-calorie foods and beverages, and at lowering obesity. many other factors. In this article, we discuss the economic theory and empir - Tax advocates claim that soda consumption causes obesi - ical evidence of using soda taxes to lower obesity. We conclude ty, but evidence demonstrating this casual link is weak at that these taxes are unlikely to significantly lower obesity, and best. A 2006 review article by Vasanti Malik et al. of the rela - that they promote many unintended consequences that may tionship between the consumption of sugar-sweetened bev - adversely affect public health. Higher tax revenues stemming erages and obesity found 16 studies indicating a significant from soda taxes are also likely to be used to expand govern - positive relationship between consumption and body mass

Michael L. Marlow and Alden F. Shiers are professors of economics at California index, 10 studies that did not find a significant positive rela - Polytechnic State University in San Luis Obispo. tionship, and four studies with mixed results. A 2007 literature

34 REGULATION FALL 2010 review by Lenny Vartanian et al. found eight studies with a significant positive relation - ship, 15 studies with no sig - nificant positive relationship, and two studies with mixed results. Although the authors of these surveys conclude that the evidence supports the view that soda consumption causes obesity, we suggest the evidence remains less than clear. Most articles in their surveys demonstrate correla - tion and not causation, and ignore confounding factors such as age, exercise, genetics, and other factors that proba - bly affect body weight. The Malik survey acknowledges this point: Overall, results from our review support a link between the consumption of sugar-sweetened bever - ages and the risks of over - weight and obesity. However, interpretation of the published studies is complicated by several method-related issues, including small sample size, short duration of follow-up, lack of repeated measures of dietary exposures and outcomes, and confounding by other diet and lifestyle factors.

A recent commentary by David Allison and Richard Mattes in JAMA: The Journal of the American Medical Association acknowledges this same point:

Given current evidence, lit - tle can be concluded with confidence beyond the fact that requiring individuals to drink large amounts of NSBs Unempowered consumers? Some soda tax advocates claim causes greater weight gain than not doing so. Randomized that consumers drink too much soda as a result of inadequate controlled trials of NSB consumption reduction have been access to healthier food and beverage choices. But there are applied effectiveness studies rather than rigorously controlled roughly 40,000 food products in the typical U.S. supermar - efficacy studies. Only the latter ensures fidelity of the inter - ket. It is difficult to argue that this array of products some - vention. how ignores consumer preferences, especially given compet - D R

A The authors conclude that much of the research and subsequent itive pressures and technological advances in processing, L L A

B news reports surrounding the issue have been extensively influ - storage, transportation, and communication.

N A

G enced by multiple biases that have eroded the reporting of The growing variety of food products reflects an industry R O

M objective science on this important public health matter. that adapts to consumer preferences regarding health-relat -

REGULATION FALL 2010 35 HEALTH & MEDICINE ed choices. Between 1987 and 2004, 35,272 new food products of any soda tax advocate who also supports adjusting health labeled “low fat” or “no fat” were introduced into the U.S. food insurance premiums. market. That led researchers at the U.S. Department of Finally, even if obesity shortens lives, economic theory Agriculture to conclude that unhealthy food consumption indicates that obesity reflects a positive externality rather patterns do not stem from a market failure to supply healthy than a negative one. That is, external benefits associated with food and beverage choices. obesity are not fully accounted for in markets since obese indi - While regular soda accounts for roughly 70 percent of viduals collect less from Medicare and Social Security over U.S. soda sales, diet soda sales have been growing rapidly. their shorter lifetimes. Kip Viscusi has estimated that smok - Some forecasters predict that diet sales will eventually over - ers “save” taxpayers roughly 23¢–32¢ for each pack of ciga - take regular soda. It thus seems that an active private market rettes they smoke because of reduced social insurance costs exists in providing “healthy” choices to consumers, which sug - — in addition to excise taxes already levied on cigarettes. A gest that there is little need for government intervention into recent paper by K. McPherson analyzing United Kingdom data soda markets. found that, although annual health care costs are highest for obese people earlier in life (until age 56 years), and are high - Externalities? Soda tax advocates argue that negative exter - est for smokers at older ages, the ultimate lifetime costs are nalities — external costs not fully accounted for in markets — highest for the healthy (nonsmoking, non-obese) people. indicate a market failure in which too much soda is con - McPherson finds that life expectancy from age 20 is reduced sumed. Externalities are argued to exist because consumers by five years for obese people and seven for smokers. The con - who become obese will not fully pick up the higher medical sequence is that healthy people live to incur greater medical costs associated with their obesity. Taxes equal to these exter - expenditure on average, more than compensating for the ear - nal costs would theoretically raise soda prices to levels con - lier excess costs related to obesity or smoking. sistent with efficient consumption levels. Non-obese individuals thus receive external benefits in However, it is unlikely that taxes could ever correct for any the form of additional public resources. If we were to follow externality associated with obesity. The problem with the soda tax advocates’ thinking, then we should in fact subsidize externality argument is that, even if obesity raises health care soda consumption so as to encourage it. Despite tax advocates’ costs of the obese, this externality should be corrected by hav - fondness for taxing negative externalities, they never seem as ing health insurers impose surcharges on obese insureds that anxious to correct positive externalities. reflect the additional costs. Few criticize surcharges imposed by auto insurance firms on drivers with drunk driving records, PIGOUVIAN TAXES IN PRACTICE so why not correct for higher costs associated with obesity Even if tax advocates are correct about soda consumption through insurance premiums? causing so many problems, it is unlikely that soda taxes would Unfortunately, federal health care legislation passed ear - rectify the externality. The distance between theory and prac - lier this year severely reduces or eliminates differential tice in the real world is great enough to warrant much skep - health insurance pricing. The legislation requires insur - ticism over the ability of policymakers to calculate the “correct” ance companies to provide coverage for preventive health tax and then implement it in a world where politics and spe - services, which include obesity screening and nutritional cial interests have vested interests in designing tax codes. counseling. The legislation does not require obese people Policymakers must legislate “correct” taxes to truly correct to pay more for insurance, but provisions could possibly externalities. Since it remains unclear that soda consumption allow insurers to charge premiums to people with “lifestyle causes obesity or whether it reflects negative or positive exter - risk factors” such as tobacco use. It remains doubtful that nalities, the possible range of “correct” soda taxes lies between obesity will be considered a lifestyle risk, however, given the positive, zero, and negative values. Thus, it is unclear if obesi - legislation’s focus on obesity screening and nutritional ty should be taxed, subsidized, or simply left alone, although counseling. Moreover, expected eliminations of pre-existing tax advocates assume it should be taxed. Even if they are cor - exclusion clauses that previously allowed insurers to deny rect, the probability that policymakers know the correct tax is coverage to obese individuals and those with past bariatric slim to none, thus leading to further possibilities that the tax surgery would reinforce the view that obesity is not a is set too high, causing further erosion of resource efficiency. lifestyle risk factor that should be reflected in higher insur - Economic theory also indicates that, if there are negative ance premiums. externalities, taxes should vary over different beverages as Still, it remains unclear that soda consumption causes well as different groups of consumers. Studies imply that obesity, or that it is the sole causal factor behind obesity. the effects of NSBs on obesity differ for different types of And even if it is, the sensible policy would be to alter health drinks and, because different racial/ethnic groups have dif - insurance premiums to allow for obesity risk premiums, not ferent preferences, that taxes should vary between groups. As a Pigouvian tax on soda. Such reform would not rely on the noted above, the prevalence of obesity is highest for non- false premise that soda consumption is the lone causal factor Hispanic blacks, followed by Hispanics, and then non- behind obesity, as such a risk premium would “tax” body Hispanic whites. In addition, consumption data reveal that weight, which is the essential problem that soda tax advocates white persons consume more carbonated soft drinks than claim they are interested in controlling. Yet we are not aware other race/ethnic groups, and that blacks consume more

36 REGULATION FALL 2010 high-calorie fruit drinks and ades. If NSBs are a major cause substitutes. What beverages and food consumers would of obesity, then these data suggest that fruit drinks and ades switch to and what the social effects of that change would be are a greater cause of obesity than carbonated soft drinks, and are not known. therefore fruit drinks and ades should be subjected to a high - Soda tax advocates seem to believe that a soda tax will lead er tax than carbonated soft drinks. Yet there are no estimates to more water and diet drink consumption, but it is likely that of how much greater are the externalities of fruit drinks and substitutions into other products with caloric properties ades than carbonated soft drinks, so there is no basis for similar to soda will arise, with overall effects on weight determining the correct taxes. It is also unlikely that differ - unknown. Moreover, a supply of new drink choices is likely ential taxation across racial/ethnic groups would be legislat - to emerge that creatively circumvents the new taxes, thus ed, thus again calling into question the ability of policy - again muting intended reductions in sugar consumption. makers to “correctly” tax beverages for various externalities. Examples of unintended consequences of interventions abound. A 2004 study by M. C. Farrelly et al. and a 2006 The non-obese Although common sense indicates that not study by J. Adda and F. Cornaglia both indicate that tax hikes all soda drinkers are obese or even overweight, a soda tax can - on cigarettes have led smokers to switch to higher tar and nico - not differentiate between consumers by their weight. Even tine brands so that they can maintain chemical intake levels if soda consumption causes obesity, there is no logic to tax - as they smoke less, to the detriment of their health. A 2001

Recent economic research indicates that factors other than soda consumption are probable causal factors of obesity

ing consumers — even excessive ones — who do not have study by John DiNardo and Thomas Lemieux found that weight problems. teen marijuana consumption rose following state tax increas - Moreover, taxes on all soda consumers are likely to exert es on beer. A 2004 study by S.-Y. Chou et al. found that high - differential effects on light vs. heavy demanders. A recent er cigarette prices, which reduce smoking, are associated with study finds that taxes on alcohol consumption significantly higher rates of obesity. lower drinking by light drinkers, but not heavy drinkers. Recent research suggests a few of the unintended conse - Thus, taxes dramatically lower consumption of those who quences of soda taxes. Some consumers will likely switch to drink relatively little, but exert little to no effect on con - diet sodas, but some researchers worry that the health effects sumption habits of those individuals who are the targets of of artificial sweeteners may be worse than those of regular policymakers. There is little reason to suspect anything dif - sugar. A recent study by Gideon Yaniv et al. concludes that a ferent in the case of soda taxes. tax on junk food (including soda) could increase obesity as it Soda tax hikes are also unlikely to be large enough to sig - leaves less time for exercise, especially among physically active nificantly lower the weight of the population. A recent paper people, when it leads them to spend more time shopping for by Jason Fletcher et al. examined how state tax rate changes fresh ingredients and preparing food at home. from 1990 to 2006 affected body mass index. They found that a one percentage point increase in the tax rate was associat - Other causes of obesity Recent economic research indi - ed with a decrease of just 0.003 points in body mass. Thus, cates that factors other than soda are probable causal factors even a large tax increase is unlikely to exert much effect on of obesity. A 2003 study by Tomas Philipson and Richard population weight. The authors concluded, for example, that Posner finds that technological change has reduced the a 58 percent tax on soda, equivalent to the average federal and demands for heavy labor and thus created a more sedentary state tax on cigarettes, would drop the average body mass by workforce prone to weight gain. Another 2003 study by David only 0.16 points — a trivial effect given that obesity is defined Cutler et al. points out that improvements in food-storage as a body mass index of at least 30. Thus, it is most unlikely technology have reduced the time cost of preparing meals, that taxes could be raised enough to transform the obese into which leads to more food and beverage consumption. Finally, much slimmer people. huge innovations in medical technology that include treat - ment of obesity-related illnesses have arisen that lessen health- Substitution Unintended consequences of government inter - related costs of obesity. As a result, some people have become vention arise whether or not its advocates wish to acknowl - less concerned about their weight. It remains unclear how a edge them. Economic theory demonstrates that taxes focused soda tax would overturn any of these factors that contribute on one product, such as soda, will lead consumers to purchase to weight gain.

REGULATION FALL 2010 37 HEALTH & MEDICINE

Diversion of funds Despite good intentions or political CONCLUSION promises to the contrary, past efforts to fund prevention We have argued that soda taxes are unlikely to correct for any programs often fund very little of those programs. Tobacco real or imagined problems related to our nation’s obesity rate. control is a clear example of where promises failed to meet It is not only unclear that soda causes obesity, but even if it did, practice. It has been estimated that no more than 10 cents on policymakers have neither the technical expertise nor politi - the dollar of funds from the 1998 Master Settlement cal courage to set taxes that correct any externality problems. Agreement with tobacco companies have been spent on tobac - Even if policymakers did have such expertise, soda taxes co control programs, despite promises that a majority of the would likely be regressive, as lower-income households spend funds would be aimed at smoking prevention. Given the cur - a greater share of their income on soda than higher-income rent fiscal imbalances at the state and federal levels, increased households. As such, soda taxes would disproportionately fall tax revenues generated through soda taxes would surely have on the poor — soda drinkers who may or may not be obese. a similar fate. Moreover, spending on tobacco control has been If non-obese individuals truly pay some of the higher health shown to exert trivial effects on cigarette consumption, thus care costs of the obese, the best solution would be to correct calling into question the effectiveness of public spending on this negative externality through imposing surcharges on obesity prevention efforts. health insurance premiums of the obese. R Readings

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