In this world, nothing is certain, except for death and taxes — and those are both hot topics, especially lately, on this podcast. Last week, we talked about Tax Day itself — which is normally April 15 or thereabouts — and how the stress or incentives surrounding that day can make us change our behavior, consciously and unconsciously. Sometimes, changing behavior is the point of a tax. For centuries, so-called “sin taxes” have been put on products like alcohol and tobacco, which are bad for us as individuals, and also as a society.
When the government wants us to stop doing something, it can ban that thing altogether —like we do with assault rifles and copyright infringement. Lots of recreational drugs are banned, and we tried to ban alcohol in the 1920s, but banning products has its downsides. For one thing, it can create a black market, which causes all sorts of other problems. Another approach is to tax the behavior: Whatever it is, you can still do it, but it’ll cost you more. The purpose of sin taxes is to get us to use less of those things that are bad for us. To change our behavior in ways that will eventually improve our own health, and sometimes the health of others.
But — do these taxes even work? And do they work how we want them to?
From the Freakonomics Radio Network, this is Freakonomics, M.D.
I’m Bapu Jena. I’m an economist and I’m also a medical doctor. Each episode, I dissect an interesting question at the sweet spot between health and economics. Today on the show — we’re going to talk about sin taxes that have been around for a while.
MACLEAN: The goal of that tax really was to, uh, support debt payments for the Revolutionary War.
As well as another, more recent tax…
ROBERTO: This didn’t gain serious traction until the last decade or so. They got a lot of pushback.
And whether all of this taxing — or any of this taxing — is worth it.
ALCOTT: We want to set a tax at a level that might still allow people who really value the consumption to keep consuming, but reduce consumption by people who aren’t getting as much value out of it.
Sin taxes are an excise tax, collected on top of other local or federal taxes, and meant to discourage the purchase and consumption of certain items. They’re hardly a new idea.
MACLEAN: Cleopatra taxed alcohol to fund some of her wars. The first sin tax of which I’m aware in the United States started at the very beginning of our country with a whiskey tax, as it was known. It was a tax on distilled spirits. And the goal of the tax really was to support debt payments for the Revolutionary War.
That’s health economist Catherine MacLean.
MACLEAN: I’m an associate professor in the department of economics at Temple University in Philadelphia, Pennsylvania.
You may remember Catherine from a 2021 Freakonomics Radio episode called, “Let’s Be Blunt: Marijuana is a Boon for Older Workers.” Her research focuses on tobacco, alcohol and illicit drugs, and the public policies that might help reduce the use of these items. Policies like: taxes.
MACLEAN: So, generally sin taxes — you might think about them as taxing products that have what economists call “externalities.”
Externalities are when a transaction has effects that extend beyond the people participating in it. If you go to a bar and you order three beers in a row, that’s a transaction between you and the bartender. They get money, you get alcohol. But you may not be the only two people affected.
MACLEAN: For example, with alcohol, we might think about drunk driving as being a negative externality. I consume the alcohol, I become intoxicated or impaired, and I drive my vehicle. And when I’m driving my vehicle, while I’m impaired, I may get in an accident where I might injure another person. I might damage property. So, my behavior is impacting other people and in a negative way.
The idea of an externality is central to whether and why a sin tax is levied on an item. These taxes force us, in theory, to pay for the literal and figurative health costs associated with using tobacco or in this case, alcohol. All of this factors in when researchers and government officials decide which sins to tax, and by how much.
MACLEAN: A big argument that’s made about cigarettes in particular is that people who smoke have higher healthcare costs, and those higher healthcare costs are going to impose costs either on the public, through the use of public insurance, like Medicaid and Medicare— when we’re thinking about private insurance, we might think about costs being passed through to non-smokers through overall higher private healthcare expenditures that have to be financed in some way.
So, sin taxes have two effects: They make us do less of the thing being taxed, and they raise revenue.
MACLEAN: those are kind of competing goals, if you think about it. If we expect the revenue to be increased due to the tax, this kind of implies that people need to keep smoking while the tax is hot — while we have this higher tax, so we can reap these revenues. However, if our tax is successful and we reduce the amount of smoking, then we have less revenue to obtain from this tax.
In other words, to reap the financial rewards of a sin tax, we need some people to continue to do the thing — like smoking cigarettes — that we are actively trying to get them to stop doing. For their own health benefit, sure. But also, for everyone else’s. Still, from the government’s perspective, that’s a tradeoff between two positive things, right? Less smoking, or more revenue. But sin taxes can have clear downsides, too.
MACLEAN: If we look back to 1964 — this is before the first Surgeon General’s report, which was really the first announcement that cigarettes may be harmful to health. Prior to that, about 42 percent of people in the United States smoked.
That first Surgeon General’s report on smoking and health, published in January of 1964, changed everything. It confirmed that smoking cigarettes was really bad for you. Today, around 12.5 percent of adults still smoke traditional cigarettes. This group of people that continues to smoke — despite knowing the risks, despite the hefty taxes — they’re serious about it.
MACLEAN: More recent studies, including some of my own work, suggest that remaining smokers are very hardcore smokers, or they’re very attached to smoking. We think that the taxes may not work as well because we have a different composition of smokers at this time.
Okay, so these hardcore smokers may not be likely to quit just because cigarettes are being taxed. But they are going to change their behavior in other ways.
MACLEAN: When you increase the tax of a cigarette, you actually can change the way that people consume the product. There’s a really interesting study from about, say, 15 years ago, that shows when you increase the tax, smokers smoke the cigarette more intensely. That is, they smoke it right down to the butt where you’re consuming the most harmful portion of the cigarette. What we see is that we’re not really improving health. People are just getting more bang out of each cigarette and maybe those last draws are even more harmful to an individual’s health.
Research has shown that tax increases on cigarettes do encourage some people to quit smoking. But the price increase also leads committed smokers — those who weren’t going to quit — to maximize each cigarette. They want to get their money’s worth. And that’s not all.
MACLEAN: There’s a study from the 2000s showing that people will substitute cheaper cigarettes — which tend to have more tar in them — when cigarettes are taxed.
That’s a perverse effect of cigarette taxes — encouraging behavior that actively harms smokers’ health. So, if cigarette buyers will switch to a dirtier substitute, is there a way to get them to switch to a potentially healthier one?
MACLEAN: Cigarettes and e-cigarettes are what are referred to as economic substitutes. That means that a consumer will view them as substitutable. That is, if I can’t smoke the cigarette, I can use the e-cigarette
Electronic cigarettes were introduced in the U.S. in 2006. A recent Federal Trade Commission report found that between 2015 and 2018, e-cigarette sales soared: from around 304 million dollars to over 2 billion dollars in just three years. Needless to say, these devices are here to stay. But just because one product might be a substitute for another, doesn’t mean they are the same.
MACLEAN: These products exist along what I would call a risk continuum, where you might think about cigarettes as being the most risky, and e-cigarettes potentially being less risky, or less harmful to your health.
What Catherine says is true. While they’re certainly NOT harmless, research has shown that e-cigarettes are probably safer than combustible cigarettes, and that they might even help some people quit smoking altogether. Of course, there is still a lot we don’t know about the health effects of using e-cigarettes, and they can also be a gateway to cigarette smoking, especially in young adults.
So, should they be subject to sin taxes? On the one hand, they’re harmful, and there’s good reason to discourage them. On the other hand, for smokers who can’t quit nicotine, they’re not as bad as tobacco. Ideally, we’d want to encourage people who already smoke to switch to e-cigarettes and discourage everyone else from taking them up. Currently, 30 states and the District of Columbia levy a tax on e-cigarette sales. In 2020, Catherine and her colleagues wondered how a national tax on e-cigarettes might influence smoker behavior.
MACLEAN: We found that if that tax had gone into place, that would have increased the number of smokers in the United States — adult smokers — by 1 percentage point. What does that mean in terms of numbers? We calculated there would be 2.5 million additional daily adult smokers from imposing that level of tax on e-cigarettes. That would be people transitioning from the e-cigarette to the cigarette. So, moving from a less harmful product to a more harmful product, and this can be concerning from a public health perspective, because generally the reason why we’re thinking about taxing e-cigarettes is because we want to improve public health.
We’ve been talking about sin taxes — policies that penalize people for doing things that are harmful to their health. But what about the opposite — rewarding good behavior? Like giving people a tax credit for buying more fruits or vegetables, or joining a gym?
MACLEAN: The stick and the carrot is often the way I’ve heard it described. So, where the stick might be a penalty and the carrot might be a reward. We think that people respond more so to the stick than to the carrot. If I was to gain a hundred dollars, versus if I was to lose a hundred dollars, I am going to change my behavior to greater amount for the loss. People who are responding to the carrot — they’re going to behave well anyway. So, you’re not really moving the needle.
Improving public health through sin taxes is tricky. They work, but they also have unintended consequences.
Coming up — what happens when a new sin is identified?
ROBERTO: I think it’s really important for the public health community to think carefully about some of the opposition
I’m Bapu Jena and we’ll talk more about that after the break.
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As we discussed before the break, alcohol and tobacco have been subjected to sin taxes for longer than most of us have been alive. Gambling also gets hit with sin taxes. But more recently, another item has fallen into the sinful category.
ROBERTO: For a long time in the U.S. we’ve had really an epidemic of chronic diseases and many of those are related to nutrition. Unhealthy diets contribute to obesity, type two diabetes, tooth decay
That’s Christina Roberto.
ROBERTO: I am the presidential associate professor of health policy. I’m at the University of Pennsylvania. I study food policies to try to promote healthy eating. And sugar-sweetened beverage taxes have gained a lot of traction lately.
One of the first people to propose a tax on so-called “low nutrition” foods — like sugar-sweetened beverages — was Kelly Brownell, a public policy and food policy expert who just happens to have been Christina’s mentor. In a 1994 op-ed in the New York Times, Brownell made the case that rising obesity rates were driven by the widespread availability of fatty, sugary foods, and that higher taxes on those items would help Americans lose weight.
ROBERTO: It got a lot of pushback, but I think that was the time where it sort of entered the national discourse and had been sort of floating around as — as something to think about. But this didn’t gain serious traction until the last decade or so.
In 2015, Berkeley, California was the first U.S. city to tax sugar-sweetened beverages: things like soda, sports and energy drinks, and fruit punch. Since then, several other cities have followed suit — including Philadelphia, where Christina lives and works. As with other sin taxes, the tax on sugar-sweetened beverages is meant, in a way, to save us from ourselves.
ROBERTO: So, we now have a good sense that when you implement these taxes, people buy fewer sugary drinks. And that seems good, but there’s this question of: are people just substituting, right? So, you buy less soda, but then you eat more Snickers bars. And we actually don’t see evidence that people are substituting to other sugary snacks. So, I think that’s really encouraging
Christina’s research has shown that sales of sugar-sweetened beverages have gone down in Philadelphia — by nearly 40 percent — since 2017, when the city imposed a 1.5 cent-per-ounce tax on those products. In Berkeley, water sales jumped by 29 percent in the three-year period after the sugary drink tax was enacted there. Whether this has translated to better health outcomes is harder to know.
ROBERTO: The truth is we don’t have great data on that yet. These taxes haven’t been around for that long to know how they’re going to really move the needle on things like type two diabetes.
Information from other countries may offer some insight, though.
ROBERTO: So, in Mexico, they implemented a country-wide tax on sugary drinks, and they were able to look at how price has changed in different cities and see how that translated to changes in body mass index among adolescent girls and adolescent boys. And what they found is about a 3 percent decline in body mass index among adolescent girls. No significant decline among boys. And that’s really the only data that we have at this point to suggest that these taxes may lead to some improvements in health.
The motivation for imposing sugar-sweetened beverage taxes is obesity, which is a major health issue in the U.S. Around 43 percent of adults — and 20 percent of children in this country — are obese, according to the C.D.C. Like alcohol and tobacco, sugary drinks have externalities. They just look a little different.
ROBERTO: the first one to think about is parents making choices for kids, right? So, the parent tends to be the gatekeeper, who’s bringing the food into the house and serving food, particularly to young kids. Kids aren’t making their own choices and presumably they would like to be healthy in the future. The other one that comes up a lot is the cost to the healthcare system. I think it’s easier to imagine sort of someone blowing smoke into your face. This one feels more abstract but it is a reality, right, that these diet related diseases do generate a lot of costs.
Sin taxes are designed to target the people who consume those items the most. But research has found that the lowest income Americans consume about two and a half more sugar-sweetened beverages per week than the highest income group. Similarly, C.D.C. data shows that adults living below the poverty level are about twice as likely to smoke cigarettes as those living well above the poverty level., which means that sin taxes hit hard a group of people who can least afford to pay more.
ROBERTO: If we put a tax on these beverages — on sugary drinks — and lower income individuals are more likely to drink these drinks, then shouldn’t we be concerned that there’s this kind of undue burden placed on that group of people? And I do think we should be concerned about that.
Many sin taxes are regressive, meaning that they hit poorer people harder than wealthier people. That’s one of the primary reasons that taxes on sugar-sweetened beverages are controversial. And it’s true that sin taxes can be regressive — but, so can illness.
ROBERTO: The reality is that these diet related diseases affect low-income people more than they affect other groups in the population.
Putting this revenue back into the communities potentially most harmed by higher taxes can try to offset some of their regressive nature.
ROBERTO: For example, a good portion of the revenue from the tax is actually being invested in Black and Brown communities in Philadelphia to foster and push forward initiatives that those communities really want. So, an example is expanding access to pre-K, or rebuilding different parks or funding rec centers.
This isn’t the same, though, as putting money back into the hands of specific people affected by the taxes. But, it turns out that if you include the health benefits in your calculations, soda taxes don’t look regressive at all.
ALCOTT: In our quantitative estimates, we find that soda taxes are actually progressive because the health benefits that accrue to low-income people outweigh the fact that they pay more in tax payments.
That’s Hunt Allcott. He’s an economist at Microsoft research and a visiting professor at M.I.T. He studies the intersection of behavioral economics and public economics. Or, as he puts it:
ALCOTT: When people don’t always act in their own best interests.
Hunt’s research has looked at how we can optimize taxes on sugar-sweetened beverages.
ALCOTT: We want to set a tax at a level that might still allow people who really value the consumption to keep consuming, but reduce consumption by people who aren’t getting as much value out of it.
He’s also interested in whether it’s even worth it to tax these items. Generally, the answer is yes. He finds that the benefits of sugary drink taxes outweigh the costs. But, he has a wish list.
ALCOTT: If I could wave a magic wand, the first thing that I would do to change how we tax sugary drinks in the U S is to tax the sugar, not the liquid.
In the U.S., sugar-sweetened beverages are taxed per ounce of liquid, but Hunt believes these drinks should really be taxed per gram of sugar.
ALCOTT: Some drinks have a lot of sugar per ounce and other drinks have a lower sugar concentration. And it’s the sugar that’s actually bad for our health. And so, our group has estimated that if we set taxes that are of like one cent per gram of sugar, as opposed to 1 cent per ounce of liquid, that would really supercharge the effects of sugary drink taxes. It would generate much more bang for our buck.
Hunt has another item on his wish list.
ALCOTT: Another thing that I could do — if I could wave a magic wand — is to have taxes set at wider geographic areas.
Because it turns out tax evasion is perfectly legal when it comes to sin taxes. In many cases, it’s easy enough for people to cross the border — to a neighboring state or city — to avoid paying higher prices. Here’s Catherine Maclean.
MACLEAN: We call this cross-border smuggling. It sounds a bit more nefarious, but it’s traveling to an area where the product is not taxed, purchasing the product, and consuming it. So, it really comes down to how much money will I save?
With sin taxes, nothing is perfect. We try our best to get it right, to do the most good for the most people. To reduce the likelihood people will engage in behaviors — like smoking, or drinking sugary beverages — that can harm themselves, and also, possibly, in different ways — harm other people too.
But there are tradeoffs, like in so many areas of medicine and public health. So, as we think about new and interesting ways to encourage people to be healthier — to make better choices when it comes to their diet and other habits — it’s hard not to wonder what could be next after sugary drinks. Candy and cookies have added sugar. Will those be taxed eventually? Will we start taxing meat products, because they’re high in saturated fat? What about processed foods? And will we tax activities that make us more sedentary? A lot of people believe we have the right to make these choices — good or bad — for ourselves. Because in the end, we pay for the choices we make, not just in dollars and cents, but in our health, in how long we live, which is the real price.
Our ability to make those choices for ourselves boils down to a simple but incredibly difficult question: how much control do we really have? Christina Roberto again.
ROBERTO: The idea that we are making decisions freely is not understanding the reality of what’s happening. The food industry is motivated to get you to buy a lot of unhealthy food that isn’t going to be in your best interest. So, I just want to level the playing field. I think we need to step back and really think about: “Am I making these choices? Who’s influencing me?” Because someone is, and right now it’s the food industry.
I know I’ve left you with a lot to consider but hopefully you’ll share your thoughts with me and other listeners on Twitter @DrBapuPod, that’s D-R-B-A-P-U-P-O-D. Or shoot me an email at email@example.com. Anyway, that’s it for today’s show. I want to thank my guests — Catherine Maclean, Christina Roberto, and Hunt Allcott. I really hope you enjoyed our two-part series on taxes, and that you didn’t let the stress of Tax Day get to you this year. Coming up next week:
When it comes to our healthcare — are we checking the price tag first?
MEHTROTRA: The No. 1 financial concern for Americans is not their education, food, housing — it is healthcare. And so, it’s not unreasonable to think that there would be a lot of interest in this kind of information, so that they could choose where to go.
LEVITT: If I buy a car and one car costs $50,000 and another car costs $550, I can almost guarantee you that the $50,000 car is going to be much better. But in healthcare? I wouldn’t be so sure.
That’s next week on Freakonomics, MD. And, as always, if you want to learn more about the research I talked about today, or if you want to read a transcript — that’s at freakonomics.com. Also, we’re working on an episode and we need your help. We get a lot of fascinating emails from listeners, full of provocative questions. In a few weeks, I’m going to do my best to answer some of them on the air. So, if you’ve got something you’ve always wanted to ask me — this is your chance! Send a voice memo to firstname.lastname@example.org. Make sure to record somewhere quiet, and please keep your thoughts to under a minute. Thanks for listening.
Freakonomics, M.D. is part of the Freakonomics Radio Network, which also includes Freakonomics Radio, No Stupid Questions, and People I (Mostly) Admire. All our shows are produced by Stitcher and Renbud Radio. This episode was produced by Julie Kanfer and mixed by Eleanor Osborne. Our staff also includes Alison Craiglow, Greg Rippin, Gabriel Roth, Rebecca Lee Douglas, Morgan Levey, Zack Lapinski, Ryan Kelley, Mary Diduch, Jasmin Klinger, Emma Tyrrell, Lyric Bowditch, Jacob Clemente, Alina Kulman, and Stephen Dubner. Our music was composed by Luis Guerra. To find a transcript, links to research, and a newsletter sign up, go to Freakonomics.com. If you like this show, or any other show in the Freakonomics Radio Network, please recommend it to your family and friends. That’s the best way to support the podcasts you love. As always, thanks for listening.
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ROBERTO: I don’t think if you asked an average person on the street, are you outraged that you cannot get trans fat in your food? You know, people are like, “No, my McDonald’s French fries tastes the same. Whatever. I’m fine with that.”
- “Changes in Weight-Related Outcomes Among Adolescents Following Consumer Price Increases of Taxed Sugar-Sweetened Beverages,” by Tadeja Gračner, Fernanda Marquez-Padilla, and Danae Hernandez-Cortes (JAMA Pediatrics, 2021).
- “Association of a Sweetened Beverage Tax With Purchases of Beverages and High-Sugar Foods at Independent Stores in Philadelphia,” by Sara N. Bleich, Caroline G. Dunn, Mark J. Soto, Jiali Yan, Laura A. Gibson, Hannah G. Lawman, Nandita Mitra, Caitlin M. Lowery, Ana Peterhans, Sophia V. Hua, and Christina A. Roberto (JAMA Network Open, 2021).
- “The Effects of Traditional Cigarette and E-Cigarette Tax Rates on Adult Tobacco Product Use,” by Michael Pesko, Charles Courtemanche, and Catherine Maclean (Journal of Risk and Uncertainty, 2020).
- “The Association Of A Sweetened Beverage Tax With Changes In Beverage Prices And Purchases At Independent Stores,” by Sara N. Bleich, Hannah G. Lawman, Michael T. LeVasseur, Jiali Yan, Nandita Mitra, Caitlin M. Lowery, Ana Peterhans, Sophia Hua, Laura A. Gibson, and Christina A. Roberto (Health Affairs, 2020).
- “Three Years Into Soda Tax, Sugary Drink Consumption Down More Than 50 Percent in Berkeley,” by Kara Manke (Berkeley News, 2019).
- “Should We Tax Sugar-Sweetened Beverages? An Overview of Theory and Evidence,” by Hunt Allcott, Benjamin B. Lockwood, and Dmitry Taubinsky (Journal of Economic Perspectives, 2019).
- “Do Higher Tobacco Taxes Reduce Adult Smoking? New Evidence of the Effect of Recent Cigarette Tax Increases on Adult Smoking,” by Kevin Callison and Robert Kaestner (NBER, 2012).
- “Taxes, Cigarette Consumption, and Smoking Intensity,” by Jérôme Adda and Francesca Cornaglia (American Economic Review, 2006).
- “Higher Cigarette Prices Influence Cigarette Purchase Patterns,” by A. Hyland, J. E. Bauer, Q. Li, S. M. Abrams, C. Higbee, L. Peppone, and K. M. Cummings (Tobacco Control, 2005).
- “Get Slim With Higher Taxes,” by Kelly D. Brownell (The New York Times, 1994).
- “The Whiskey Rebellion,” (Mount Vernon).
- “What Do a Full Moon, the Super Bowl, and Tax Day Have in Common?” by Freakonomics, M.D. (2022).
- “Let’s Be Blunt: Marijuana Is a Boon for Older Workers,” by Freakonomics Radio (2021).
- “The Truth About the Vaping Crisis,” by Freakonomics Radio (2019).
- “There’s A War On Sugar. Is It Justified?” by Freakonomics Radio (2017).