Why a Smart Tax on Soda Would Work

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Sin taxes work. How do I know? Easy: Last night, when I went into a green market in my neighborhood in New York City, I noticed that an ordinary pack of Marlboros now sells for a stunning $14. “Have you noticed people buying less?” I asked the woman at the register.

She said: “Yes.” So, QED, right?

Well, not quite. First of all, this is what’s called an anecdotal study, which is also known, in technical terms, as completely useless. What’s more, a $14-per-pack price that serves as a mere disincentive to purchase in a comparatively wealthy area like Manhattan serves as an absolute bar in lower-income areas — effectively making cigarettes unattainable. How do you think that would work out? (See, e.g., Prohibition, 1920-1933, for answers.)

Still, sin taxes, judiciously imposed, do work and have indeed played a role in the steady decline of smoking in the U.S. That success has raised repeated questions about whether it might be wise to try a similar strategy on another health scourge — sodas and other sugary drinks, which are helping to contribute to America’s exploding levels of obesity. Last year, New York Mayor Michael Bloomberg called for a penny-per-ounce soda tax — leading to the usual pushback from business and libertarian groups, the usual ads from industry decrying such nanny-state social engineering, and the usual flurry of scientific studies, which reached no firm conclusion at all.

Now, new research from Iowa State University has made perhaps the best case yet for the effectiveness of a soda tax — provided it’s not the consumer who pays it. Instead, say economists Helen Jensen and John Beghin, it should be the manufacturers themselves to get hit with the levy, a charge they can handle in far more flexible ways than the ordinary shopper standing in the checkout aisle.

The study, which was published in the journal Contemporary Economic Policy, was based in large measure on the fact that the sweetness you taste in a high-calorie soda can be produced from a lot of different ingredients, including high-fructose corn syrup, more benign cane sugar and artificial sweetener. How you formulate the drink can affect not only the calorie content but also the way the body metabolizes those calories. Applying  a tax that encourages manufacturers to choose the healthiest possible recipe can have a powerful downstream effect.

“What you’re trying to do is apply the tax as close as possible to the thing you’re trying to change,” says Jensen. In this case that means the recipe, not the shopper’s choices.

There are a lot of reasons this makes sense. First of all, Jensen explains, sweeteners represent 2% to 4% of the cost of manufacturing a soda, while a soda sin tax, in order to be effective, would have to be as much as 40% of the cost per bottle, research has shown. Industry itself, never mind the consumer, is better served by making that small adjustment up front than by risking a crash in sales from people who decide that there’s only so much they’ll pay for a bottle of soda — which, after all, is a nonessential purchase no matter how much we like to guzzle the stuff.

“If the manufacturer makes a small adjustment the cost is distributed and diluted through the manufacturing and marketing chain,” says Jensen. “It has more of an impact.” That’s not to say manufacturers won’t pass any increased tax bill directly onto consumers. They will. But the price hike will be a few pennies, as compared to many, many of them.

Jensen and Beghin stress that their expertise is economics, not public health. Obesity, they acknowledge, is a multifactorial thing, and there are plenty of Americans who drink no soda at all but have no shortage of other ways to pack on the calories.

“We are not saying, ‘To resolve obesity, here is what you should do,’” said Beghin in a statement. “We are saying, ‘Given that you are considering a panoply of tax instruments, is there a better way to use that idea?’” They would argue yes. The tax man would probably agree — and so, surely, would your doctor.

Jeffrey Kluger is a senior editor at TIME. Find him on Twitter at @jeffreykluger. You can also continue the discussion on TIME‘s Facebook page and on Twitter at @TIME.

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