00:00:00
Ben Lockwood: My read
of the current evidence
00:00:02
is that that tax reduced total
00:00:05
soda purchases in the city of
Philly by close to 50%, and then
00:00:11
around half of that reduction
reappeared outside the city as
00:00:16
sort of cross-border purchases.
So you go into Jersey, or you go
00:00:19
outside, you go up to the Main
Line or wherever those taxes
00:00:22
aren't in effect, and you buy
your soda there instead. So some
00:00:25
of it gets offset by that kind
of cross-border shopping. But
00:00:28
still, that's something like a
25%
00:00:30
reduction in total
purchases.
00:00:32
- Welcome to <i>The Ripple Effect</i>,
the podcast that takes you on a
00:00:36
journey through the minds of
Wharton faculty. I'm your host,
00:00:39
Dan Loney, and in each episode,
we'll be diving deep into the
00:00:42
inspiration behind the
groundbreaking research that
00:00:45
Wharton professors have
conducted and exploring how
00:00:48
their findings resonate with the
world today.
00:00:52
Dan Loney: Have you
ever heard
00:00:53
of a sin tax? It's a type of tax
put forward by a city or a state
00:00:58
primarily to add a cost to
something that may not be the
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healthiest or the best for us.
There have been sin taxes on
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things like soda, tobacco
products, alcohol and others,
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and they may even be growing in
use to raise needed revenues.
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But do these sin taxes actually
impact the public's thought
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process enough to change their
behavior in using them? This is
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research conducted by Wharton's
Ben Lockwood, who's an Assistant
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Professor of Business, Economics
and Public Policy, and he joins
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me here in the studio.
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Great to see you, Ben.
Thanks for your time.
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Sure thing. Thanks for
having me on, Dan.
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So the research looks in kind of the
mindset of the people as these
00:01:39
sin taxes are implemented, and
whether or not they actually
00:01:43
have an impact on their
purchasing habits?
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Yeah, that's the idea. So I've
done a couple of research papers
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in this area, sort of ranging
from the general theory and an
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understanding of how sin taxes
work and how effective they
00:01:55
might be, when you might want to
use them. Obviously, they're
00:01:58
pretty— they're used on a bunch
of different products, from
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alcohol to cigarettes to— to
other forms of tobacco, to now
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sometimes gambling or soda. And
then more specifically, I've
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kind of zeroed in on a couple of
particular types of sin taxes—
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one big set of projects on soda
taxes, specifically, another set
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of projects on gambling in the
form of state-run lotteries— to
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kind of understand what the
trade offs were and what the
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behavioral effects were in those
specific areas.
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And so with the sin tax— and we've
talked about it in the past,
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with here in Philadelphia, with
the sin tax that was put into
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place, what kind of research do
we know or impact do we know
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from having that on soda, and
whether or not it had an impact
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on sales here in Philadelphia?
- Sure.
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So now— it's been several years
ago now, maybe close to a decade
00:02:49
ago, Philadelphia implemented a
1.5 cents per ounce tax on
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sweetened beverages. So soda,
but also diet soda, and also
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some other kinds of, you know,
non-carbonated sweetened drinks.
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And 1.5 cents per ounce might
not sound like a very large
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amount, but actually, the
average cost of soda in the US
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is something like 4 to 5
cents per ounce, so something
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like a 30% tax. It's actually
pretty substantial. Now there's
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enough of a track record, enough
evidence over these last several
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years, to kind of see what sort
of effects that's had. My read
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of the current evidence is that
that tax reduced total soda
00:03:29
purchases in the city of Philly
by close to 50%. And then around
00:03:36
half of that reduction
reappeared outside the city as
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sort of cross-border purchases.
So you go into Jersey, or you go
00:03:43
outside, you go up to the Main
Line or wherever those taxes
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aren't in effect, and you buy
your soda there instead. So some
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of it gets offset by that kind
of cross-border shopping. But
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still, that's something like a
25% reduction in total
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purchases. So it's not trivial,
regardless. - But
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that's the interesting thing, is
that people would even consider
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the fact of not buying their
soda within the city limits, but
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they actually would go outside
the borders. And I guess it's
00:04:08
probably people who are probably
close to the borders in general,
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go a mile, go two miles,
whatever, to buy their soda and
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then bring it back into their—
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into their residence
in the city limits.
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Yeah, I think that's right. So
it's people who sort of live
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close to the edges. I think
there's some evidence for— for
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sort of being geographically
close to the edges, and also
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being people who kind of chain
their trips together and do a
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large set of purchases, you
know, at the Costco nearby or
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something, and then that's when
you get all your— all your soda.
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In the research that we do, one
implication of them is, if you
00:04:40
do want to do this sort of sin
taxation, it can be beneficial
00:04:45
to try to implement those taxes
at sort of a larger geographic
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area, because the smaller the
area is that these taxes are
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confined in, the more you just
lose any of their revenue-
00:04:55
raising ability, and also any of
their sort of desired behavioral
00:04:59
effects, to people who are just
cross-border shopping.
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So it's interesting you said that
the amount of soda went down as
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much as it did. And again, that
component of how much the tax is
00:05:09
in comparison to how much a
person might spend on a soda is
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very unique. And you wonder
whether or not there's actual
00:05:16
recognition by the public of the
difference in cost because of
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that sin tax component itself.
- Yeah,
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so you might wonder about this.
And you know, often— this is not
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specific to sin taxes. Often in
economics generally, people are
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sort of surprised to find out
that small price changes can
00:05:33
nevertheless generate kind of a
change in total behavior. So you
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know, the price of a $30,000 car
goes— or these days it's
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probably a $60,000 car, goes up by
$1,000 and it's like, does
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anyone pay attention to that?
But you can see in the data, you
00:05:48
know, demand curves slope down,
just like they— just like we
00:05:51
teach in our MBA classes. And
you can see in the data that
00:05:54
there were some people who were
a little bit on the margin
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between this and something else,
or between buying now or— or
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waiting till next year,
whatever. And you do see some—
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some effect in response to that.
So this is sort of echoing
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those— those general results,
that even small price changes do
00:06:08
create changes in how much
people purchase.
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Can you determine, then, maybe even
larger-scale impact on health
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and maybe other components
because of a lowering in the
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consumption, or at least the
purchase, of soda
00:06:21
within the city
of Philadelphia?
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So, you might be able to see this
sort of thing eventually. Now,
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from the— from the way that we
think that, you know, health
00:06:29
consequences of sugar
consumption operate,
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you might not actually expect these
things to materialize for, you
00:06:36
know, 10 years down the road or
something, with reductions in
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diabetes contraction. And even
then, you know, many people who
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lived in Philadelphia at the
time might now live in Florida
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or somewhere else. So I would be
surprised if we're able to pick
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up very much direct effect for
sort of the— this quasi-
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experiment of the soda tax being
implemented here. But there is
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evidence, more generally, of,
you know, the effects of sugar
00:06:59
consumption on health down the
road and other types of
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consumption. Certainly in the
case of cigarettes, for example.
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There's a lot of evidence about
the linkage between smoking and
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cancer.
- But because
00:07:09
of the connection that seemingly
cities and states will have to
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these taxes, I guess it's
probably not a surprise that— you
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kind of alluded to before— the
types of products that they may
00:07:21
put a sin tax on is growing in
the last few years as well.
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Yeah, I think that's true,
partly because there is this
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sort of growing realization that
some products might have these
00:07:32
health consequences or— or what
have you. From an economics
00:07:37
perspective, the way I think
about this is not necessarily
00:07:40
that you need to tax things just
because they have harmful health
00:07:43
consequences. I mean, there are
lots of things that might be
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harmful for one's health, but
people are aware of those harms,
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and they're interested in doing
the thing. You know, we don't
00:07:50
necessarily tax mountain biking
or rock climbing just because
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they can be dangerous. The way I
think about this is, if there is
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some aspect of a cost, a health
cost, or whatever else, that
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people aren't thinking about or
aren't taking into account,
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either because of behavioral
biases or because they aren't
00:08:06
aware of the information or
whatever, then what you want to
00:08:08
try to understand is, you know,
if they were fully informed and
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if they really understood the
context and the consequences and
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everything of all their actions,
would they be consuming less
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than they currently are? And if
so, that's a situation where you
00:08:22
might want to impose a tax to
try to get— sort of bring their
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actual consumption into line
with what they might kind of
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rationally do if they took all
those costs into account, in
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pretty much the same way that,
you know, we have this rationale
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for imposing a gas tax so that
people take into account the
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negative externalities, the
pollution consequences or the
00:08:39
congestion consequences of— of
buying gas,
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and bring it into line with—
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But from a public policy
perspective, this— these have
00:08:46
become important revenue drivers
for cities and states to be able
00:08:52
to have them in the mix of their—
of their need to try and bring
00:08:56
revenues to provide services in
other areas as well.
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It's true. And in a way, this is
sort of one of the ironies of
00:09:02
sin taxation generally, as I
think they're sometimes looked
00:09:05
to as a potential source of
revenues. But of course, if part
00:09:09
of the goal of the tax is to
reduce people's consumption of
00:09:13
something that might be harmful
for them, then if the tax works
00:09:16
well and people reduce their
consumption a lot, then it
00:09:19
necessarily doesn't bring in as
much in in revenue, right? So
00:09:22
the way I think about the
revenue question is that, you
00:09:25
know, whether you're talking
about Philadelphia or the state
00:09:27
of Pennsylvania, or whatever
jurisdiction, fundamentally, the
00:09:30
taxes that you bring in, that
you need to bring in, are
00:09:33
determined by the jurisdictions'
spending decisions and their—
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their priorities. And then
you're going to have to raise those—
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you're going to have to cover that
spending one way or another. If
00:09:41
you don't raise it via a soda tax,
you're going to have to raise
00:09:43
the sales tax or the personal
income tax or something else.
00:09:46
And really, it's a question of
which different things are we
00:09:49
going to tax, rather than, you
know, should we tax soda at all?
00:09:52
What do you think, then, the
00:09:53
larger discussion is—
and maybe it's—
00:09:54
it's a little bit of the health,
a little bit of the taxation
00:09:57
side— of the impact that— that
sin taxes are having in
00:10:02
communities around—
around the country?
00:10:04
So I think there are a couple
pieces to this. One is the kind
00:10:07
of behavioral consequence piece.
Are people changing their
00:10:10
behavior? Is that making them
healthier or not? To what extent
00:10:14
is it— is it having an effect
there? Another piece of it is,
00:10:17
you know, are there
distributional consequences to
00:10:19
this, which is sort of the
fancy way that economists talk
00:10:22
about, you know, being— being
really regressive or progressive
00:10:25
with your tax choices. Are you
going to tax poorer people much
00:10:28
more heavily, or richer people
more heavily? One thing that we
00:10:31
know about lots of these goods—
soda, cigarettes, to some
00:10:35
extent, alcohol— is that they're
more heavily consumed by people
00:10:38
who are sort of lower in the
income distribution. And so a
00:10:41
thing you want to be aware of, a
thing you want to be want to be
00:10:43
careful of, is, are you
increasing taxes that are going
00:10:46
to sort of fall most heavily on
people who are poorer? Now, there
00:10:50
are ways of offsetting that with
like, you know, making the
00:10:52
income tax a little more
progressive at the same time
00:10:55
that you impose some sin taxes
that may, in a way— that sort of
00:10:58
offsets that distributional
impact. But it is something that
00:11:01
you want to have in mind when
00:11:02
you're deciding on these kinds
of tax policies.
00:11:03
So you're not really doubling
up on the— on the component of
00:11:07
the tax. There's not a doubling
of the impact on the people's
00:11:10
wallets because of the tax being
included as well. - That's right.
00:11:13
- Yeah. What's your expectation,
then, for looking at this
00:11:16
research and taking it forward?
00:11:18
It's a good question. So
00:11:20
there are a number of
kind of increasing
00:11:23
future areas of potential
sin taxation that I think are
00:11:26
becoming relevant. So some of
these are— you know, there's
00:11:29
been an explosion in various
forms of online gaming, sports
00:11:33
betting, this kind of stuff.
There's also increasing
00:11:36
marijuana legalization, and
that's viewed as a potential
00:11:38
sin tax base. And so with those
sorts of areas too, my question
00:11:45
would be, to what extent are
people buying those things or
00:11:48
doing those activities more than
they would if they were sort of
00:11:51
fully rational or fully aware of
the costs or— or fully cognizant
00:11:55
of this stuff? A flip side of
that is that I think that, you
00:11:58
know, sort of for political
reasons, there's sometimes a
00:12:01
drive to tax these new markets,
just because they don't have an
00:12:04
entrenched body of stakeholders
already that are existing and
00:12:07
that can oppose a tax. Now, from
an economist point of view,
00:12:11
that's not really a good reason
to tax them, just that nobody is
00:12:14
currently— currently consuming
them a whole lot. Really, you
00:12:17
want to think about whether
there are these, you know,
00:12:18
behavioral biases, and what the
revenue trade offs are and that—
00:12:21
that that sort of thing.
- But are
00:12:22
we at a point right now where
you do see sin taxes in a
00:12:25
majority of states, or a lot of
communities or cities within
00:12:30
states right now?
- Yeah.
00:12:31
I mean, most states have, if you
if you look at the set of
00:12:33
different sin taxes that are
available from— lots of states
00:12:36
have alcohol excise taxes,
cigarette taxes. Many states
00:12:40
have state-run lotteries, which
I do think of as sort of a taxed
00:12:43
good, in the sense that the— you
know, portion of the revenues
00:12:46
are withheld before the prizes
are paid back out, and that goes
00:12:49
into the state's coffers. So
between those things, you're at
00:12:52
a point where most states and an
increasing number of localities,
00:12:55
of cities and smaller areas,
00:12:56
are imposing these
kinds of taxes too.
00:12:59
Ben, great to have you here.
Thanks very much for your time.
00:13:01
Thanks for having me on.
- Thank you.
00:13:03
Ben Lockwood, Assistant Professor
00:13:04
of Business, Economics
and Public Policy,
00:13:06
here at the Wharton School.
00:13:08
Thank you for
listening to <i>The Ripple Effect</i>.
00:13:10
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00:13:13
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