The Twinkie Tax

Mayor Bloomberg threw his weight behind the soda tax today, signaling to NY lawmakers that up to $1 billion in tax revenues annually would be worth the fizzy battle with soda producers and cola aficionados alike. The revenues would go toward the healthcare budget, likely targeting obesity and diabetes initiatives.

Love the subtlety...

Governor Patterson explained, “We’re trying to take dangerous substances out of the hands of children,” likening soda to cigarettes and other publically condemned but legal vices. Most coverage highlights that the tax has gained momentum and credence in light of two converging trends: rising obesity and an increasingly gaping budget deficit. The evidence is pretty clear for the health argument and should be particularly popular given all the talk around the high costs of chronic disease. So long as the bubblier topic of diet soda is addressed properly to ensure that consumption doesn’t shift to potentially cancerous drinks, the health benefits could be realized over time.

The economic argument is proving to be the less palatable of the two, with attacks coming from all fronts. First, unless a national tax was levied, some local businesses worry about lost revenues as consumers could cross state lines in desperate attempts to get their fix (seems unlikely, but Jersey is quite close, as NYers know too well). Second, the economic threat to American beverage companies is politically unsettling in a time of increased job nationalism –not to mention the backlash expected by the soft-drink industry. Third, the long term prospects for the tax are potentially bleak — Veronique de Rugy, a tax scholar with the libertarian Cato Institute, explains that “if the tax succeeds in dissuading consumption, the funding stream constricts” (according to Triplepundit.com). This argument has its flaws — from the health perspective, if the tax succeeded, the economic and societal benefits of lower obesity rates would likely outweigh the lost potential revenue — but is interesting nonetheless.

Current debate aside, this Pigovian tax (just re-learned this word today, thank you Wikipedia!) has the potential to incite a slippery slope of sin taxes.Β  Pigovian taxes, like those on cigarettes, pollution or even Bloomberg’s congestion pricing, seek to correct negative externalities. Taking the soda tax to its logical-ish next step, the question arises: If you’re going to tax a Twinkie, why not tax a tan? Backed with the proper scientific data, one could easily make the argument that tanning booths should be taxed due to their cancerous side effects. Or does the short-term positive benefit of having bronzed beauties frolicking around snow-clad cities outweigh the long-term negative health effects, thus making this a less attractive option? More likely, the number of tanning bed users is not high enough to accrue the same revenues as a soda tax.

In a time when “quick wins” are heralded as the last beacons of hope, it makes a lot of sense for the NY state government to consider the soda tax in one of its variants. A slippery slope of well thought out “sin taxes” (such as the tanning tax) could even have positive health and economic effects. That said, Patterson is facing an uphill battle if he is unable to align economic incentives in time.

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