Economists call taxes “incentives,” by which they mean that taxes are intended to change the behavior and re-direct resources to other, more desirable outcomes. Taxes on cigarettes, for example, are intended to make the coffin nails too expensive for people to buy, and to fund the additional health problems that smokers are very likely to have.
The mere threat that the federal government will impose a tax on sugar, fat and other unhealthy ingredients in food is causing some of the largest food companies in the world to change what they’re putting in the foods and beverages the rest of us consume. Kraft Foods (KFT) has already announced a plan to reduce salt in its prepared foods by 10% over the next two years. Today, PepsiCo (PEP) announced that it would lower sodium, sugar, and saturated fat in many of its food products.
Pepsi plans to reduce sodium levels by 25% in “key global food brands” by 2015; saturated fat levels by 15% by 2020; and sugar per beverage serving by 25% by 2020. McDonald’s Corp. (MCD) has eliminated the trans-fat in the french fries sold in its U.S. stores, but it remains a high-profile target of consumer groups and politicians.
Sugar-spiked drinks from Pepsi and Coca-Cola (KO) could face a $0.15/can tax based on the amount of sugar in the beverage. Pepsi, which sells about $7 billion in soda a year, would pay more than $1 billion in sugar/sin tax, while Coke would pay somewhat less because 70% of its sales come from outside the U.S., where the tax wouldn’t apply.
Are soft drinks really the new cigarettes? Are the claims of harmful effects enough to justify the costs to a company of switching to other, more benign contents?
Food and beverage makers have a substantial incentive to get out in front of this issue. Having their products compared to cigarettes could have a chilling effect on sales. Worse, the U.S. now needs to come up with about $110 billion a year for the next ten years to pay for the health care reform bill. Because the effects of sugar, salt, and fat are well-documented, making consumers pay a tax to eat and drink this stuff is no different from making consumers pay a tax on cigarettes. What better way to raise part of the cost of health care than by taxing unhealthy behavior? That is, in fact, how it should work.
Like the cigarette makers before them, food and drink makers will look overseas for profits. That’s where market growth is likely to be anyway.
So far, changes to McDonald’s french fries and Campbell’s Soup (CPB), which reduced its salt content, have not caused any consumer backlash. Remember the introduction of “New” Coke? To now, at least, consumers don’t miss the trans-fat in McDonald’s fries or the salt in Campbell’s soup.
But what will happen as the sugar content of US food and drink drops? We are a country that loves its sweets, and there is sugar in just about everything we eat. Some of us will probably just close our eyes and pay the price for our sweet tooth.
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