Local governments’ need for revenue and the rising cost of America’s poor health have caused many government leaders to propose “fat taxes,” sin taxes on fatty and sugary foods, in their communities. In March health officials in New York State proposed a penny-per-ounce tax on drinks with added sugar that contain more than 10 calories per 8 ounces. Other states and cities including Los Angeles, Washington State, Colorado and Philadelphia have made similar proposals in an effort to raise revenues and reduce unhealthily eating.
Lessons learned from the current sin taxes in Minnesota on cigarettes, alcohol and the lottery should be considered before advocates set their sights on a fat tax in the state.
• In Minnesota taxes on cigarettes and alcohol are the best examples for analyzing how a proposed tax could decrease a negative behavior. Studies show that cigarettes are relatively price inelastic, so tax has not been effective in decreasing their use, while research on alcohol taxes has shown it to be more responsive to price. A recent University of Florida study concluded that a 10% increase in price will decrease alcohol consumption by 5%. A preliminary study by the Rudd Center for Food Policy suggests that a tax on junk food could have a similar effect; their findings indicate that an 18% tax will reduce consumption by 14-18%.
• Like Minnesota’s current sin taxes, a tax on junk foods will be regressive as low income people will pay a larger share of the income on these foods. To address this issue, proponents of a fat tax could take an approach similar to the cigarette tax of dedicating revenues to programs that benefit the poor and subsidize their consumption of fruits and vegetables.
• While traditional sales taxes are levied as a percentage of retail price, sin tax on alcohol is an excise tax with a fixed price per ounce. In determining the tax structure, the fat tax would be most effective if it was based on quantity to encourage consumers to buy less, vs. price, which would promote purchase of less expensive products.
• Proposal of a fat tax is likely to be politically unpopular. A recent CBS poll found that 60% of Americans opposed a tax on junk food. A proven tactic for gaining public support for the lottery, cigarette and alcohol taxes is dedicating funds from the tax to alleviate the social cost caused by the behavior. Proponents of raising the alcohol tax in Minnesota site the need to defray costs created by DWI enforcement.
If proposing dedicated funds it’s important to remember the lessons learned from the lottery: tax bases tend to decrease at a rate faster than dedicated expenditures. In the case of state gambling and lotteries often the only way to grow the tax base is further legalize and create gambling facilities. To a similar affect the only way to grow a tax base on junk food would be to expand it to new foods.