TAXING SWEETS: SWEETENER INPUT TAX OR FINAL CONSUMPTION TAX?

I. INTRODUCTION Obesity has become a major public health concern in the United States, with relatively high obesity rates persisting among adults (Regal et al. 2010). Obesity is most often a result of an imbalance between excess calorie intake and corresponding physical activity, although food technology innovations and the food environment have likely contributed (Cutler, Glaeser, and Shapiro 2003; DGAC 2010). In the last four decades, per capita calories available for consumption in the food supply have increased by more than 500 calories daily in the United States. (1) The main contributors to the increase have been fats and oils, grains, and caloric sweeteners (USDA 2010). Policymakers have debated various policies and programs to change the consumption of high-calorie foods and reduce the prevalence of obesity. The Dietary Guidelines for Americans Committee (DGAC) 2010 recommends significantly reducing the intake of foods containing added sugars and solid fat (DGAC 2010). In this article, we focus on policies targeted to reduce added sweetener consumption, including sugar, corn sweeteners, and other caloric sweeteners, and investigate the effect of alternative tax policies to reduce sweetener intake. (2) Among policies considered, one approach is to use price penalties and incentives such as a soda tax or a subsidy on healthy food to change consumption. Alternative incentives might encourage consumers to follow a healthy diet even though they might discount the longrun health costs of unhealthy food (O'Donoghue and Rabin 1999). Because fats and oils, refined grains, and sugar and sweeteners are the major contributors to the higher-calorie consumption, proposals to tax these products are popular as a means to reduce their intake (Boizot-Szantai and Etile 2005; Cash, Sunding, and Zilberman 2005; Chouinard et al. 2007; Fletcher, Frisvold, and Tefft 2010; Gustavsen 2005; Kuchler, Tegene, and Harris 2005; Richards, Patterson, and Tegene 2007; Schroeter, Lusk, and Tyner 2008; Smed, Jensen, and Denver 2007). However, most of the recent analyses of taxes and other incentives find that consumption reductions are more limited than expected, especially in the short run, principally because food demand is price-inelastic and substitution among foods compromises the abatement of high-calorie consumption. In addition, food taxes tend to be regressive because low-income consumers spend a larger share of income on food than do high-income consumers (Cash, Sunding, and Zilberman 2005; Leicester and Windmeijer 2004). An alternative approach, less often discussed, is that taxing sweets can be undertaken at the processing levels. Applying a consumption tax to a specific sweetener-intensive food directly changes its price and thus, reduces the consumer demand for that food item. In contrast, applying a sweetener tax on inputs induces manufacturers to reduce their use in food processing. The U.S. food industry uses various sweeteners as ingredients in the manufacturing process. Manufacturers choose among available technologies and ingredients in order to substitute among different sweeteners in the production process. Corn-based sweeteners are relatively cheaper compared to sugar, and high fructose corn sweetener (HFCS) is widely used in the beverage, breakfast cereal and bakery, and dairy industries. A tax on sweetener inputs increases the unit cost and price of foods intensive in sweeteners. Faced with a higher price, consumers reduce their consumption of final products as well. The extent to which the extra costs are transmitted along the food chain affects the final market price and ultimately determines the overall effectiveness of the tax imposed on manufacturers as a means of reducing caloric intake from sweetener consumption. In this article, we explore the effect of taxes on inputs and on final goods designed to reduce intake of sweeteners. We evaluate the level of each of these taxes required to achieve a given reduction in sweeteners, and we compare the allocative and distributional effects of both instruments (the taxes on final consumption and manufacturing ingredients). …