Tax Analysts Blog

Mexico Is Having Second Thoughts About the Soda Tax – And So Should Everyone Else

Posted on Oct 22, 2015

For fans of taxing soda, Mexico is the object lesson. Last year, the country imposed a stiff new tax on sugary drinks. And according to the early data, it’s working: The 10 percent tax seems to have cut soda consumption by about 6 percent.

You’d think results like that would embolden Mexican lawmakers, encouraging them to stand firm – or even double down – on their commitment to public health through punitive taxation.

But you’d be wrong. Mexico’s lower house of Congress recently approved a measure to cut the soda tax, at least for drinks with reduced sugar. The revision would reduce the tax by 50 percent for products with less than five grams of sugar per 100 milliliters.

Supporters of the tax cut say it will encourage manufacturers to offer more low-calorie products. Public health advocates, however, are not convinced. “This measure weakens the tax and could weaken its effects,” one official of Mexico’s National Institute of Public Health told The Guardian. “The way to safeguard public health is to increase the tax … then reduce it on the products that have less sugar.”

Cynics say the tax cut was engineered by the beverage manufacturers. And maybe the cynics are right. But it’s also possible that Mexican lawmakers are starting to have second thoughts about the soda tax. And even if they aren’t, they should be.

Fans of taxing soda – including, most recently, celebrity chef Jamie Oliver -- promise that it will slow the obesity epidemic afflicting so many countries. But voters in the United States have been notably cool to the idea. Plans to tax soda have failed repeatedly in jurisdictions around the country. So far, only Berkeley, California has actually enacted one.

Fans of the soda tax attribute their losses to the power of Big Soda -- the handful of powerful beverage companies that consistently oppose the levy. And there’s something to that explanation. Certainly, drink manufacturers have poured a lot of money into the fight.

But there’s another reason the soda tax keeps failing: it’s a bad idea. The tax is well-intentioned and maybe even effective at curbing soda consumption (although I’m dubious about its ability to combat obesity). But what’s good for public health can be bad for public finance.

Sin taxes aren't always a bad idea. When certain products pose a real and disproportionate threat to public health – like tobacco – then regulatory taxation might be justified. But that sort of punitive taxation should be reserved for truly noxious products. And even then, they represent the first step onto a slippery slope.

Once you agree that some products are bad enough to tax into oblivion, then levies on other, less pernicious but still undesirable items start to seem reasonable, too. Eventually, one sin tax will breed another. Hence the calls we’ve seen in recent years for new taxes on meat, snack foods, and bottled water.

History offers precedent for sin taxes – including some that have targeted distinctly minor vices. Alcohol and tobacco taxes have been a fixture of public finance for centuries. (They didn’t call it the Whiskey Rebellion for nothing.) Soda taxes, too, have been levied for more than a century. And lawmakers in Washington and various state capitols have experimented with a huge variety of narrow excises on socially suspect products, including playing cards and chewing gum.

Sometimes those taxes have been justified as a sort of luxury tax, especially when applied to, say, fur coats. But more often, they have been levied on items deemed (a) unnecessary or (b) morally questionable. Ideally, a taxed item will be both, making it an especially easy target for punitive taxation.

But one thing is certain about sin taxes: they are arbitrary. Supporters often defend them in high-minded scientific and economic terms, with much talk about negative externalities and social utility. But in practice, sin taxes are a product of legislative whim and caprice. Lawmakers slap them on products (and industries and consumers) that are unlikely or unable to defend themselves. And in the process, they leave other, equally noxious products untaxed.

Soda is a case in point. Fans of taxing sugary drinks argue that sugary drinks are a prime culprit in the obesity epidemic. But clearly, other calorie-dense foods are problematic, too. If a big tax dissuades people from drinking Mountain Dew, maybe they will lose weight. But maybe they will continue to scarf down their Twinkies with a cupful of untaxed water – and keep packing on the pounds.

Also, sin taxes are inherently regressive and paternalistic, as the data from Mexico confirm. As Wired reported:

    • In the first year of the tax, it was the poorest people who cut back on soda the most, averaging a 9 percent decline and peaking at 17 percent in December. That gap between the rich and poor leaves a bad taste in many people’s mouths, especially considering Mexico’s high poverty rate and lack of nationwide access to free, clean drinking water.

Of course, obesity and diabetes are also regressive. Such conditions “disproportionately affect the poor, who can least afford the healthcare that these diseases demand,” one expert told Wired. “If this part of the population is responding most strongly to the tax, then they are likely to benefit most from reduced healthcare costs.”

So just to be clear, the argument here is that government should wield its fiscal power to save poor people from their own unchecked desires. Rich people, on the other hand, will be free to binge themselves into an early grave.

Fine. But that just means that paternalism is regressive, too. Personally, I’m not comfortable with regulations that apply only to poor people – even if those people end up healthier.

When it comes to regulating personal behavior, if government is going to do it at all, it has to do it for everyone.

Read Comments (1)

david brunoriOct 22, 2015

Joe, excellent post. I could not have said it better. Excise taxes wreck the
poor. As an aside, most excise tax proponents are -- to quote Mencken, haunted
by the "fear that someone, somewhere, may be happy."

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