Monday, June 7, 2010

Harvard vs. Cornell economists on soda taxes

Public health experts from around the country (University of Arkansas, City University of New York, Harvard, University of Illinois, University of North Carolina, Yale) published an influential article in the New England Journal of Medicine last year calling for a soda tax.

A growing number of politicians at all levels, federal, state, and local, are looking hard at that option. New York Governor Paterson, a Democrat, is a strong advocate. So is New York City Republican Mayor Bloomberg, a pragmatic (and financially successful) businessman. He thinks it's an idea worth trying.

“In these tough economic times, easy fixes to our problems are hard to come by,” he said. “But the soda tax is a fix that just makes sense. It would save lives. It would cut rising health care costs. And it would keep thousands of teachers and nurses where they belong: in the classrooms and clinics.”

What do the economists think?

Harvard economist Greg Mankiw raised doubts about the the wisdom of soda taxes in his NYT op ed this past weekend:

To what extent should we use the power of the state to protect us from ourselves? If we go down that route, where do we stop?

Taxing soda may encourage better nutrition and benefit our future selves. But so could taxing candy, ice cream and fried foods. Subsidizing broccoli, gym memberships and dental floss comes next. Taxing mindless television shows and subsidizing serious literature cannot be far behind.

Even as adults, we sometimes wish for parents to be looking over our shoulders and guiding us to the right decisions. The question is, do you trust the government enough to appoint it your guardian?

Ivy League economists are not of one mind on this subject, however. Cornell nutritionist Jennifer Wilkins writes in today's Albany Times Union that she asked her economist colleague, Professor Robert Frank, and was surprised by his answer:

I asked my friend, Cornell economics professor Robert Frank, at a recent dinner party, what he thought of proposals to tax soda. I prepared myself to settle in, eyes glazed over, for some dense econ-speak about why it shouldn't be done and why it wouldn't work. Instead, I was surprised.

Without missing a beat and with a calm, matter of fact demeanor, Frank responded, "We have to tax something. It might as well be soda."

Perhaps the difference in perspectives on the soda tax is due to differences in the fiscal conditions of their two respective home states, Massachusetts and New York. The reality is that both states are facing fiscal shortfalls, but New York's fiscal gap is 15% of last year's budget, while Massachusetts' gap is 8.5%, according to the Center on Budget and Policy Priorities.

Harvard's Professor Mankiw asserted that there's a stronger case for taxing gas than taxing soda. That may be true in a neoclassical economist's first-best world.

But, as Cornell's Professor Frank must be acutely aware, the current situation in New York State is far from a first-best world. New York has a highly dysfunctional state government leadership, caught up in a legislative logjam.

The Legislature is failing to face reality. The state constitution requires a budget by April 1. It's now 67 days past that deadline and there's no prospect of a budget any time soon.

Wall Street, at least for now, is happy to enable New York's budget procrastination by lending it money. State agencies are engaged in pennywise-pound foolish inefficient exigencies to deal with the failure of the legislature to pass a budget. School districts across the state are facing cuts in state aid, laying off teachers, AND raising property taxes to make up for the shortfall.

The beverage industry promotes statistics from polls saying that Americans don't want soda taxes, but the polls cited by the beverage industry never seem to ask participants what specific alternative tax increases or budget cuts they would prefer to a soda tax. The results of polls about soda taxes can be very different depending on how the questions are worded.

It's easy for New Yorkers to adapt to a soda tax. Soda is not a necessity, and if the cost becomes a burden, there are inexpensive substitutes readily available. Minor cutbacks in soda consumption are an easy way to hold down costs without forcing a drastic change in lifestyle. Property taxes, by contrast, are a heavy and inflexible burden on many taxpayers. It's difficult for taxpayers in the short run to do much to adjust to that burden without a major change in lifestyle. To a lesser extent, the same is true of increases in the broader-based sales and income taxes that Professor Mankiw advocates.

Although Harvard's Professor Mankiw apparently prefers a gas tax to a soda tax, I suspect that very few of those questioned in the beverage-industry-touted polls would agree--nor are New York's legislators (all of them up for reelection in the fall) likely to agree to pass increased gas taxes any time soon.

Professor Mankiw's colleague, Edward Glaeser, has warned that "All soda drinkers, even the rail-thin ones, suffer when soda consumption is either taxed or demonized."

The reality is that all taxes cause "suffering," and I don't think soda needs to be "demonized," but the net "suffering" imposed by a soda tax seems relatively small compared to the alternatives realistically available, given our dysfunctional legislature.

I acknowledge there could be implementation challenges, as Villanova Professor Maule has pointed out, but those seem to be surmountable. There's already considerable infrastructure in place for soda sold in bottles and cans.

Although a soda tax may not be a first-best solution, but we're far from in a first-best world, we're not likely to get there any time soon, and it strikes me as an experiment worth trying. If the alternative is closing state parks and public libraries, or laying off teachers, or raising our (already relatively high) broad-based taxes, a penny per ounce soda tax looks like a relatively less painful way to raise a billion dollars a year in revenue for a cash-strapped New York State.

A Quinnipiac poll conducted earlier this year suggests that a soda tax is a tax that has broad public support, when framed primarily as a revenue-raising measure. It's hard to imagine any other taxes would get the kind of public reception the Quinnipiac poll found.

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