The soda tax fallacy
Assemblyman William Monning (D-Carmel), the Health Committee chairman, introduced a bill in February to tax soda in California. Monning joins a growing list favoring such a tax. Count in President Obama, New York Mayor Michael Bloomberg, bestselling author Michael Pollan and many from the public health community. The tax aims to better Americans’ health with financial disincentives for sugary soda while providing needed revenue for government treasuries. But a quick consideration of the price and success of one sandwich — McDonald’s Big Mac — shows the impracticality of the soda tax.
The Big Mac is the leading symbol of fast food. It’s also an icon of the public policy debate on obesity. It weighs in at 540 calories, 1040 milligrams of sodium and 29 grams of fat.
At the end of January, McDonald’s announced it would raise prices by up to 2.5% on several menu items in 2011. The company’s stock price closed the day up by more than a dollar. Markets weren’t worried that a price increase would hurt McDonald’s business. Nor should they be.
Readers of the Economist know that since 1986, the magazine has used a “Big Mac Index” to compare international currencies and purchasing power. Foreign Big Mac prices are compared with the average price of the Big Mac in four American cities. For health policy analysts, the index serves another purpose: It’s a historical record of the rising price of America’s favorite sandwich.
Follow the Big Mac’s history over the last quarter-century and you’ll find a trend. While the Big Mac never changes — two all-beef patties, special sauce, lettuce, cheese, pickles, onions on a sesame seed bun, as the old jingle reminds us — its price often fluctuates. Occasionally, the price drops. Yet over time, modest price increases of as much as 10 or 20 cents a year outpaced inflation. In 2010, the Economist priced the sandwich at $3.58. Adjust for CPI, and that’s a 12.5% real increase over Big Mac prices in 2000.
Despite frequent price increases, America continues to have Big Mac attacks, with the company selling more than 550 million of the sandwiches every year. If customers aren’t buying these burgers, it’s often because they’re ordering other McDonald’s products — like the Angus Bacon and Cheese burger, with 45% more calories, 35% more fat and twice the sodium of a Big Mac.
Once you’re in the habit of eating from a frozen tray, a pizza box or a fast-food carton, how high a price hike is needed to force you to break that habit? Anyone who’s seen a Starbucks customer buy 240 calories worth of caramel macchiato at $4 a cup knows that coffee-fix loyalty is too powerful to be crushed with a 5% or 10% hike in prices.
A Rand Corp.-led study published in the journal Health Affairs in 2010 echoed this argument. After analyzing 28 states with higher sales taxes on soda or dedicated soda taxes, it found “no significant relationship” between tax rates and overall soda consumption. The study’s authors argued that a tax had to be gigantic — as high as 18% — to actually change behavior.
Worse, most obesity policymakers recognize that a soda tax would have to be applied to any drinks with a similar calorific content — whether it’s coffee or beer, milkshakes or juice. Otherwise, soda drinkers might simply respond to a tax by drinking cheaper, sweeter alternatives. The same challenge applies to food: It’s pointless to tax Big Macs as a social evil at 540 calories and not do the same to, say, a 1,000-calorie plate of chicken shawarma. So imagine trying to enforce calorie tests on greasy spoons, taquerias and mom-and-pop ethnic restaurants. Enforcing liquor Prohibition in the 1920s will seem like child’s play by comparison.
Of course, industrial foods and fructose-sweetened drinks are cheaper because Congress subsidizes multinational agribusinesses by as much as $20 billion a year. We should cut those subsidies because it’s absurd for a nation that’s trillions in debt to give taxpayer dollars to profitable companies that produce unhealthful foods.
However, a one-time spike in the price of sodas, burgers or candies isn’t going to change much, whether that price increase is caused by cuts to subsidies or a new tax.
If financial incentives are going to play a role in the battle against obesity, we need to accentuate the positive instead. We need to design substantial incentives into health insurance plans to help people take a long-term approach to healthier diets. And we need to stop fixating on small disincentives that aren’t likely to do more than change the public’s choice of drive-throughs, all California dreaming aside.
David Gratzer, a physician, is a senior fellow at the Manhattan Institute.