Analysis of a Proposed Soda Tax

Read the attached article from the Wall Street Journal, entitled “Soda Tax Weighed to Pay for Health Care.”

You are expected to prepare your own assignment and create your own graphs. Any evidence that material was shared will result in a zero on the assignment.

problems

problem1. The likely impact of a soda tax on the consumption of sugary sodas

problem2. What is the supply curve likely to look like (upward or downward sloping, steeply sloped or shallow)?  describe.

problem3. On the demand side, what determines the demand for sugary sodas?  What are its major substitutes? What do you expect the demand curve to look like (upward or downward sloping? steeply sloped or shallow?)  describe.

problem4. What does the market for sugary sodas look like?  Provide a supply-demand graph with realistic prices.

problem5. Graphically show the impact of the tax on price and consumption.  Do you expect to be the impacts of a soda tax on prices and consumption to be large or small?  describe.

The policy context

problem1. Is there an externality involved in consuming sugary sodas?  Is there an economic argument for taxing the consumption of sugary sodas?  Is there an economic argument for government regulation?

The burden on customers and producers, and the effect on tax revenues:

problem1. What do you think is the likely impact on low income consumers?  On company profits?  Are these a problem?

problem2. What do you think is the likely impact on the amount of tax revenue the government will raiseto pay for health care?On the health of consumers?  describe.

“Soda Tax Weighed to Pay for Health Care.”Wall Street Journal, May 19, 2009

Senate leaders are considering new federal taxes on soda and other sugary drinks to assist pay for an overhaul of the nation's health-care system.

The taxes would pay for only a fraction of cost to expand health-insurance coverage to all Americans and would face strong opposition from beverage industry. They also could spark a backlash from consumers who would have to pay numerous cents more for a soft drink.
On Tuesday, the Senate Finance Committee is set to hear proposals from about a dozen experts about how to pay for the comprehensive health-care overhaul that President Barrack Obama desires to enact this year. Early estimates put the cost of the plan at around $1.2 trillion. The administration has so far only earmarked funds for about half of that amount.

The Centre for Science in Public Interest, a Washington-based watchdog group which pressures food companies to make healthier products, plans to propose a federal excise tax on soda, fruit drinks, energy drinks, sports drinks as well as ready-to-drink teas. It wouldn’t include most diet beverages. Excise taxes are levied on goods and manufacturers typically pass them on to consumers.
Senior staff members for some Democratic senators at the centre of effort to craft health-care legislation are weighing the idea behind closed doors, Senate aides said.

The Congressional Budget Office, which is giving lawmakers with cost estimates for each potential change in the health overhaul, included the option in a broad report on health-system financing in December. The office estimated that adding a tax of three cents per 12-ounce serving to such types of sweetened drinks would generate $24 billion over the subsequently four years. So far, lawmakers have not indicated how big a tax they are considering.

Proponents of the tax cite research showing which consuming sugar-sweetened drinks can lead to obesity, diabetes and other ailments. They say the tax would lower consumption, lessen health problems and save medical costs. At least a dozen states already have some type of taxes on sugary beverages, said Michael Jacobson, executive director of Centre for Science in the Public Interest.
"Soda is clearly one of the most harmful products in the food supply, and it's something government should discourage the consumption of," Mr. Jacobson said.

The main beverage lobby which represents Coca-Cola Co., KO -0.20%PepsiCo Inc., PEP +0.01%Kraft Foods Inc. and other companies said such a tax would unfairly hit lower-income Americans and wouldn't deter consumption.

"Taxes are not going to teach our children how to have a healthy lifestyle," said Susan Neely, president of the American Beverage Association. Instead, the association says it's backing programs that limit sugary beverage consumption in the schools.
Some recent state proposals along the same lines have met stiff opposition. New York Gov. David Paterson in recent times agreed to drop a proposal for an 18% tax on sugary drinks after facing an outcry from beverage industry and New Yorkers.
The beverage-tax proposal would apply to drinks that many Americans don't consider unhealthy -- such as PepsiCo's Gatorade and Kraft's Capri Sun -- based on their calorie content.

Health advocates are floating other so-called sin tax proposals and food regulations as part of the government's health-care overhaul. Mr. Jacobson also plans to propose Tuesday that the government sharply raise taxes on alcohol, move to largely eliminate artificial trans fat from food and move to reduce the sodium content in packaged and restaurant food.
The beverage tax is just one of hundreds of ideas that lawmakers are weighing to finance the health-care plans. They're expected to narrow the list in coming weeks.

The White House, meanwhile, is pulling together private health groups to identify cost savings that will help fund the health overhaul. Mr. Obama on Monday held a White House meeting with groups that represent doctors, hospitals, insurers, pharmaceutical companies and medical-device makers. They pledged to help restrain cost increases in the health-care system in an effort to save $2 trillion over the next decade.

"When it comes to health-care spending, we are on an unsustainable course that threatens the financial stability of families, businesses and government itself," Mr. Obama told reporters.