Next week, the Senate Finance Committee will hear arguments about proposals to cover the cost of President Obama’s $1.2 trillion health care plan, one of which is a tax on soft drinks.  Most soft contain high-fructose corn syrup, which if consumed in high quantities can contribute to obesity and diabetes.  The Congressional Budget Office estimates that a three-cent tax on a 12 oz. can would raise $24 billion over four years, or 2% of the cost of the entire health care plan.  Those who support the tax want to use it as a tool to reduce consumption, thereby reducing soft drinks’ contribution to health problems.

During the hearing, the Finance Committee should consider what purpose the proposed tax should achieve.  It can raise revenue for the government or it can reduce the consumption of soft drinks, but it cannot do both at the same time.  If consumers don’t buy soft drinks, then they don’t pay the tax.  The price elasticity of demand for soft drinks, the change in quantity consumed as a result of a change in price, will determine whether or not a tax on soft drinks can effectively raise revenue.  If the price elasticity is high, then consumers will switch to substitute drinks like diet soda or water to avoid paying the tax.  If the price elasticity is low, then most people will just pay the three-cent tax instead of reducing consumption.  Since there are plenty of substitutes (Coca-Cola and Coke Zero are about as good of an example of perfect substitutes as I can think of) and the low-income consumers who predominantly purchase soft drinks will look to stretch their budget as far as they can in the tight economy, I will bet that the elasticity of demand is high.

So if the tax will reduce consumption more than it will raise revenue, we have to ask if good public policy implies that we should limit the consumption of soft drinks.  For this to be the case, the consumption of soft drinks would need to inflict a cost on people who neither produce nor consume soft drinks, which economists call a negative externality.  It’s only fair that the people who benefit from the transaction, the consumer who enjoys the drink and the producer who receives money for making it, bear all the associated costs.  If the link between soft drinks and obesity and diabetes is clear and definite, then an excise tax to impose the increased costs of health care on soft drink producers and consumers is fair, provided that at present levels of consumption, each additional can increases the government’s cost of providing health care by about three cents. 

To me, the link between soft drinks and obesity and diabetes is tenuous at best.  Plenty of other factors contribute to the incidence of those diseases, such as exercise and genetics.  A serious effort to reduce obesity would include a government subsidy for exercise.  Or why beat around the bush with a tax on soft drinks?  Why not just tax people for being fat?  Every county can update its fat tax information at the same time it updates its property tax assessment.   This tax will reduce the cost of health care about as much as it will raise revenue – hardly, if at all.

I prefer the more direct route to make people bear the cost of health care – let them pay full price for it in a market.  Currently, almost everyone pays for health care through employer-provided insurance, which is subsidized by a code that exempts it from the income tax (don’t expect that to last for long).  For someone who has insurance, the health-care-related costs of his exercise and nutrition decisions fall on his insurance company, which economists describe as moral hazard.  President Obama’s “new era of responsibility” should make individuals, not insurance companies, responsible for their own health decisions.  The government cannot expect to effectively manage the health care decisions of more than three hundred million Americans – no human can.  Congress should decline to enact this meddling tax and others like it.