Fiscal policy: principles and economic effects

Tax

Federal 'sin taxes:' to raise revenue for healthcare, 'Coke is it!'

America is currently in the midst of a healthcare crisis. As the numbers of uninsured Americans continues to grow, Congress is faced with the need to expand coverage beyond the narrow base of the elderly, young, and very poor Americans currently receiving federally subsidized care. Because healthcare coverage is contingent upon employment for most Americans, the fact that unemployment is on the rise means that in the coming months more and more Americans will lack basic primary care. Also, healthcare costs continue to drain the resources of employers, making American companies less competitive with European and Asian companies from nations with universal, single-payer systems. However, the question remains: how to provide coverage for Americans during a time of reduced government resources and escalating debt? Estimates of the Obama Administration's proposed healthcare plan hover around $1.2 trillion (Adamy 2009).

One of the proposed fund-raising solutions for the plan has been to create a federal excise tax or 'sin tax' upon unhealthy products, including sugary soda, fruit drinks, energy drinks, sports drinks, flavored beverages and bottled ice teas. Much like the recently proposed and rapidly killed proposed state sin tax in New York State, it would not include diet sodas. "New York Gov. David Paterson recently agreed to drop a proposal for an 18% tax on sugary drinks after facing an outcry from the beverage industry and New Yorkers" (Adamy 2009). One of the reasons New York legislators failed to pass the bill, they stated, was its arbitrary nature. However, in defense of their failure to target non-caloric beverages, the bill's supporters noted that reducing sugar consumption was the primary aim of the bill (as well as generating revenue) given the role sugar plays in contributing to obesity, diabetes and other health problems.

The rationale behind this particular federal excise or 'sin' tax seems sound -- to finance healthcare and to promote healthy behaviors, tax an unhealthy product. Healthcare costs will be reduced overall, as well, if people drink less soda. This is the principle behind the sin taxes that exist in every state of the nation upon cigarettes and alcohol. "Excise taxes are levied on goods and manufacturers typically pass them on to consumers" (Adamy 2009). The more expensive goods and services are, the higher the opportunity cost and the greater the disincentive not to purchase them. However, there are always some innate contradictions that arise regarding sin tax policy. For example, red wine may possess a small or great health benefit (depending on conflicting studies) but diet soda with no health benefits and potentially questionable artificial sweeteners would not be taxed under the bill. Fruit drinks would be taxed, but Skittles candy would not be taxed. But a supporter of the bill, the Center for Science in the Public Interest notes that, "soft drinks are nutritionally worthless…[and] are directly related to weight gain, partly because beverages are more conducive to weight gain than solid foods" (Montopoli 2009)

A similar argument could be made for table sugar, however, which is not satiating, high in calories, and nutritionally worthless. Hypocrisy seems inevitable regarding sin taxes: Cigarettes are taxed and deemed a public health hazard but many senators come from states that produce tobacco, and strive to protect tobacco companies because they deem them vital to their state's prosperity. Sugary sodas contain corn syrup, but the American Agricultural Department subsidizes American farmers for growing corn, and this is one of the reasons that high-fructose corn syrup is so ubiquitous in the food supply. We are taxing corn syrup and subsidizing it at the same time, in other words. "The bigger issue, which the industry neither can nor particularly cares to rebut, is that the product [corn syrup] exists at all. We pump absurd quantities of cash into subsidizing corn (we also have a huge tariff on Brazilian sugar cane, incidentally). Over the past 10 years alone, Congress has appropriated more than $50 billion to encourage farmers to grow the stuff. But people don't want to eat $50 billion in subsidized corn. And if the cobs just sat around developing mold, Congress would cut off the spigot. Enter high fructose corn syrup, which sucks up the subsidies and created a world in which calories from a sweet, highly caloric additive have become the cheapest of all energy sources" (Klein 2008). One hand of the government 'slaps' the public for drinking liquefied corn, while the government continues to subsidize corn and an industry that generates a highly sweetened, dangerously processed product.

A final, general criticism of sin taxes is that they are regressive -- poorer people tend to smoke, gamble, consume alcohol, and eat processed foods more than the wealthy, in terms of the percentage of income these products claim. All consumption taxes, including sales taxes are regressive as the poor tend to spend a larger percentage of their income on goods and services, as they do not have the luxury of saving it in the bank. The idea that the poor are being discouraged from buying soda 'their own good' seems paternalistic. However, it is also possible to argue that the working poor and lower middle-class might benefit more from healthcare reform.