Would you purchase a soda if it cost a few cents more? How about a dollar? Curbing consumer appetites for unhealthy foods and drinks by increasing prices has been continuously debated aEUR" and the goal has been taken up by the Mexican government, which is likely to raise taxes on junk food and sugary drinks. With an obesity rate of 32.8 percent among adults, one of the highest in the world, Mexico surpasses even the United States. WhataEUR(TM)s more alarming is that Mexico also holds the record for per-capita soda consumption. Given that the Mexican Senate recently approved an excise tax on junk food and a tax on soda, public health officials, health-minded consumers, political leaders and industry lobbyists are watching to see whether this effort to improve health and reduce obesity will work. The question has also come up: Should the United States follow a similarly aggressive approach? Not surprisingly, the answer is complicated.
Obesity is a global epidemic that affects more than 200 million men and nearly 300 million women. Health care costs skyrocket as a result of obesity and related conditions. Among OECD countries, an obese person costs health care systems 25 percent more each year than a person of normal weight. In the United States, the aggregate annual medical cost of obesity is estimated at $150 billion. Though such costs are lower in Mexico (due in part to lack of access to health care and lower per-capita health care spending overall), they are still substantial. In 2008, obesity cost the Mexican health care system about $3.2 billion, a figure projected to rise to nearly $8 billion by 2017.
In response, the Mexican government is hoping to put a cost on expanding waistlines. The proposed junk food and soda tax has now passed both houses of Congress, and President Enrique PeA?a Nieto is expected to sign the bill into law. The food levy, originally proposed as a 5 percent excise tax, was recently increased to 8 percent and applied to packaged food items that have 275 calories or more for every 100 grams. There would also be a tax of one peso (8 cents) per liter of soda, a 10 percent increase. ItaEUR(TM)s estimated that the soda tax would bring in 12.5 billion pesos ($960 million) per year, and the junk food tax 3.5 billion pesos ($270 million).
While the proposed taxes have dismayed some businesses, the main issue to most observers is whether the taxes will change consumer behavior. Purchasing decisions and price sensitivity often depend on the type of tax imposed. For example, sales taxes, added at the point of purchase, may not greatly affect a consumeraEUR(TM)s choice because he or she has already decided to buy a candy bar before reaching the register. On the other hand, excise taxes are levied per unit of good being taxed, as in the case of MexicoaEUR(TM)s junk food tax. These are indirect taxes the producers are likely to pass along to consumers in the form of higher prices. A customer may think twice if that candy bar has a higher actual price tag.
There is much speculation around the price increases that would be needed to shift demand. Among the most effective aEURoesin taxesaEUR? is the one on tobacco in the U.S. Because cigarette smoking is a leading risk factor for several preventable diseases, many studies have shown that significant increases in tobacco taxes have reduced smoking rates and improved public health. The Congressional Budget Office estimates that a 10 percent increase in cigarette prices would lower smoking rates among young people by 5 to 15 percent and 3 to 7 percent for adults. At a current federal tax rate of $1.01 per pack, there is room for cigarette prices to rise substantially, particularly when state taxes are also factored in. For example, New York has the highest taxes on cigarettes, adding an additional $4.74 to the price of a pack. Such policies are most likely to influence price-sensitive populations, such as youth and people with low incomes.
Similar to tobacco taxes, levies on junk food and soda would likely have to be high to affect health outcomes. Currently in the U.S., 35 states impose a soda tax in stores and 40 also put a soda tax on vending machines. The average is 5 percent, with the maximum soda tax standing at 7 percent. If a can of soda costs $1, even a 7 percent tax doesnaEUR(TM)t add substantially to the price. Following New YorkaEUR(TM)s failed ban on soda sizes and DenmarkaEUR(TM)s failed policy taxing saturated fats, it is difficult to say whether MexicoaEUR(TM)s taxation policy will be an effective tactic against obesity. At any rate, as would be the case if such measures were adopted in the U.S., backers should consider expanding public support through an aggressive anti-obesity campaign and cultivating an understanding of how price increases shift consumer demand. After all, altering behavior is no piece of cake, and a comprehensive approach raises the odds of success.