Wharton’s Benjamin Lockwood discusses his research on how ‘sin taxes’ affect consumer behavior

‘Sin tax’ is defined as a tax on a product that can be harmful to a person, such as cigarettes or sugary drinks. In many cases, these taxes are an incentive to lower consumption and improve health. But sin taxes can disproportionately hurt lower-income consumers, while wealthy shoppers enjoy tax breaks on items only they can afford, such as energy-efficient windows and appliances. A recent study by Benjamin Lockwood, a Wharton professor of business economics and public policy, and coauthor Dmitry Taubinsky from Dartmouth College examines the impact of sin taxes and whether there is a middle ground. The researchers also look at what is being called “revenue recycling,” where these taxes can be used to fund initiatives that benefit lower-income consumers. Lockwood recently spoke about their research on the [email protected] show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

Do 'Sin Taxes' Really Change Consumer Behavior?
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Sin Taxes

An edited transcript of the conversation follows.

[email protected]: Sin taxes are an important topic here in Philadelphia, where there is a tax on sugary drinks.

Benjamin Lockwood: Absolutely. It’s been happening in Philadelphia, and we’ve also seen these implemented in Chicago, San Francisco, Berkeley, Oakland and Boulder, Colorado. There’s a growing policy wave in favor of these kinds of policies, so it seems like a good time to be looking at it and trying to understand some of these implications.

[email protected]: What did you find in your research?

Lockwood: The way that economists generally think about these kinds of taxes is that sugary beverages have health consequences. They can give rise to things like diabetes or stroke or heart disease, and these are pretty big in magnitude. A couple of years ago, there was a study estimating that if people were to reduce their sugary beverage consumption by around 20%, then the health benefits that they would reap would be something akin to giving them each a check between $100 or $300 each year. These are pretty big numbers.

On the other hand, from an economist’s perspective, it’s not enough for something to have negative consequences to justify taxing it. Things like rock climbing have negative health consequences, potentially. Driving a car has lots of negative health consequences. The key question from an economic policy perspective is whether people are taking into account these negative effects when they’re making their consumption decisions. In particular, a reason for concern about sugary beverages is that often the negative health consequences come a long time after the date of consumption. You get diabetes or heart disease much later in life.

There’s a growing literature in behavioral economics that studies the tendency for people to underweigh distant consequences and overweigh the upfront benefits or costs of doing something. This can explain everything from why we save less for retirement than we should or intend to, or why we exercise less than we ought to. A reason for being interested in sugary soda and sugary beverages is that those [choices] also have this kind of discrepancy between the upfront joy of sipping a soda and this delayed health consequence that happens far down the road.

“From an economist’s perspective, it’s not enough for something to have negative consequences to justify taxing it.”

[email protected]: In a lot of urban areas, people financially may not have another option in terms of drinking a soda, compared with drinking bottled water. It becomes a life issue that a lot of these people are not able to overcome.

Lockwood: Right. Part of what you’re bringing up here is the question of what people can afford and how these kinds of taxes hit poorer consumers versus richer consumers. This question is the fundamental one of our research. There have been studies of how these kinds of taxes can have beneficial health consequences by reducing consumption. But there is also concern about an unintended side effect of that kind of policy — that it tends to fall heavily on poorer consumers. We know that poorer consumers tend to consume things like cigarettes and soda at higher frequencies than richer consumers do. Survey evidence suggests that at the bottom of the income distribution, people drink about twice as much sugary soda than at the top of the income distribution.

This paper looks at the regressivity consequences of these kinds of taxes and tries to get a handle on them. How do we weigh those consequences against the potential health benefits from imposing these kinds of taxes?

[email protected]: In your estimation, are sin taxes a good thing for the consumer in general?

Lockwood: This is the million-dollar question. What is the overall impact? And if we should have a soda tax, how big should it be? Philadelphia’s soda tax is 1.5 cents per ounce. I believe Boulder’s is 2 cents per ounce. Most of the others have been 1 cent per ounce. As cities go forward trying to weigh these policies, there is this question of what the magnitude should be and whether we should have this kind of tax at all.

The key thing that we explore in our paper is that what matters for these regressivity costs is how much people respond to these taxes when they are imposed. There’s often an initial intuition that these taxes must be really bad for poor consumers because then they have to pay more out of pocket. That’s exactly right, if people don’t respond to the tax at all — if they don’t reduce their consumption. Of course, poor people end up paying more.

On the other hand, if people end up reducing their consumption a lot in response to the tax, then things get a lot trickier and a lot more interesting. The people who get the greatest health benefits from that reduction are the people who were consuming the most sugar to begin with, which tends to be poorer consumers. So, if people are responding a lot to the tax, then these kinds of regressivity costs are actually a lot smaller. In fact, some of the health benefits can be really concentrated on poor consumers, which is something that the government is interested in.

To answer the question you raised — how should these taxes exist and how big should they be — the key question is how much people reduce consumption in response to the tax. Do they keep consuming the same amount and just pay more? Or do they actually reduce how much they’re consuming?

[email protected]:  Are you able to glean enough from what has happened in places like Berkeley and Philadelphia to say, “Yes, absolutely, there’s no question that the economic and health benefits are there for people to stay away from sugary drinks?” And are they doing it?

Lockwood: Again, this is an insightful question that cuts to the heart of the issue. In many cases, we still need more evidence to know the optimal size of these taxes. There’s some initial evidence from the tax that was imposed in Mexico, and the one that was imposed in Berkeley a couple years ago, that does

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