A Tobacco-Style Tax on Fattening Drinks

A shopper passes cartons of Coca-Cola in a grocery June 13, 2006 in Des Plaines, Ill. Tim Boyle/Images

The idea for "A Tobacco-Style Tax on Fattening Drinks" came from BusinessWeek reader Charles Weber, a U.S. Navy veteran and retired electrical contractor in Hendersonville, N.C.

Can taxing junk food solve the obesity crisis? This controversial idea has never been given a real-world tryout, but the combination of a budget busting fiscal crisis and a citizenry that keeps getting fatter is causing legislators and executives around the world to give a so-called "obesity tax" serious consideration. New York Governor David Paterson is the most serious of all, proposing in his 2009 state budget that an 18% sales tax be levied on non-diet soda and sugary juice drinks. Such a tax, he says, would raise $404 million in the fiscal year starting in April, and $539 million in the year after that—all to be earmarked for obesity-fighting public health programs.

If Paterson succeeds—and he's already run into vociferous opposition from the soft drink industry—it would likely be the first such broad tax in the world. But the concept of a so-called obesity tax is slowly gaining support, floated by such disparate public figures as British Conservative Party leader David Cameron, San Francisco Mayor Gavin Newsom, French tax authorities, and politicians in regions of Canada, Australia, and Ireland.

Paterson's proposal wouldn't, in fact, be completely precedent-shattering. A recent study by the Institute for Health Research Policy at the University of Illinois at Chicago found that at least 27 states impose taxes of 7% to 8% on junk food such as candy, soda, and baked good snacks, usually imposed when the products are sold through vending machines. Such levies are barely noticeable on food items that cost only a dollar or two.

15 Years of Debate

But with state budgets facing steep deficits in the wake of the recession, much larger taxes on soda and unhealthy foods could become more appealing, says Kelly D. Brownell, director of Yale University's Rudd Center for Food Policy & Obesity. "I've been contacted by a number of state legislators recently," he says. "I think it's only a matter of time before it happens."

Brownell isn't the most objective observer, since he was one of the first to give prominence to the idea of an obesity tax, having floated the concept 15 years ago in a New York Times op-ed essay. His proposal has generated heavy debate in food policy circles ever since. Opponents say such a tax would disproportionately fall on the poor, punish thin people who merely happen to like soda and candy, and fail to address the many complex factors that contribute to obesity. The American Beverage Assn., which says it will aggressively fight Paterson's proposal, calls the soda tax "a money grab that will raise taxes on middle class families and threaten thousands of jobs across New York State."

Nevertheless, the thought of raising the price of unhealthy foods in order to discourage consumption has slowly gained currency on the strength of two developments: the documented success of a similar consumption tax on cigarettes and the alarming increase in obesity rates. In 1995 about 14% of U.S. adults were considered obese (defined as having a body-mass index—a calculation based on height and weight—of 30 or above). Today that number is over 30%.

Obesity Mortality Gaining On Tobacco

A full two-thirds of American adults are overweight or obese, as are 33% of children and adolescents. The Centers for Disease Control and Prevention (CDC) estimates that obesity costs the nation over $90 billion in direct medical costs. And in April 2008, the Conference Board estimated that obese employees cost U.S. businesses $45 billion a year in medical expenditures and work lost.

Obesity is now closing in on smoking as the leading cause of preventable death in the U.S. But unlike obesity, smoking rates have been declining since 1964, when 42% of American adults smoked. In November, the CDC reported that the U.S. smoking rate had dipped below 20% for the first time on record, and public health experts give much of the credit for that decline to extremely high taxes enacted over the last 15 years on tobacco products.

But Economist Frank J. Chaloupka, director of the Health Policy Center at the University of Illinois at Chicago, says there is no certainty that an obesity tax would have the same impact. "If you raise the tax on soft drinks, people might just switch to other beverages or foods that are just as high in calories. There isn't an easy alternative to cigarettes." Still, says Chaloupka, "an 18% tax is high enough where you would likely see some noticeable impact on consumption."

What About Orange Juice?

Whether it would have a noticeable impact on obesity is another question with no clear answer. In 2007, Yale's Rudd Center published an analysis of 88 studies that looked at soft drinks and health, finding a clear association between soft drink consumption, increased body weight, and poor health outcomes. The analysis also found that "studies funded by the food industry reported significantly smaller effects than did non-industry-funded studies."

Still, any consumption tax on so-called junk foods would run into considerable objections over how exactly to define junk food. Liz Morrill, founder and chief executive officer of Fizzy Lizzy, a brand of sparkling juices, complained in a statement that Paterson's proposed tax is "completely irrational" because it would tax her product while not taxing 100% orange juice, which is also high in calories and sugar. "Even more perplexing is the fact that diet sodas, laden with artificial sweeteners, artificial flavors, and preservatives—which numerous scientific studies have shown actually increase one's yearning for sweets—get a pass, but all non-diet carbonated beverages, regardless of calorie and nutritional content, are heavily taxed," she says.

Morrill suggests that an obesity tax should be based on criteria such as calories and sugars per ounce. The proposal given to French Budget Minister Eric Woerth in July proposed a value added tax of anywhere from 5.5% to 19.6% on all foodstuffs considered "too rich, too sweet, too salty, and which are not strictly necessary." Selling a sweet- and salt-loving American public on such a tax won't be easy, however. A Quinnipiac University poll released in late December found that 60% of New York State residents oppose Paterson's proposed tax on sodas, including 58% of those who say they prefer diet drinks over regular soda. And in November, Maine voters overturned a wholesale tax on bottled sodas as well as on the syrup used to make soda, which was signed into law the previous April.

Brownell suggests that such tariffs would be more palatable if they were labeled a "nutrition tax" rather than an obesity tax. "Ideally the money raised would then be used to subsidize healthier foods such as fresh fruits and vegetables. That would get around the issue of it being a regressive tax."

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