Path dependence and the sugar tax

John Cawley, one of Cornell's many economists, doesn't think NY State's proposed tax on sugared soda will amount to much. At 1 penny per ounce, he says it won't change prices enough to change behavior significantly, it won't raise enough money relative to the state's budget deficit, and it won't cause unemployment because "consumers that stop drinking soft drinks tend to switch to diet drinks, juices and even water often bottled by the same company." In econ-speak, even if the change is statistically significant, he argues it isn't economically significant: 1) a small drop in a big ocean; 2) the demand for sugared sodas is extremely price inelastic.

I tend to doubt #2. So I can buy a 20 ounce Real Coke for $1.95 or a 20 ounce Diet Coke for $1.75 that's sitting right there next to it with their price tags right next to each other. Is Diet Coke such a poor substitute for Real Coke that the sugar is worth more than 10 percent price premium? Even he admits that customers switch to products by the same company, and price is one of those factors that moves people.

But if #2 is true, that means it generates more revenue and undermines his other point. New Yorkers drink a lot of sugared soda. A couple million here, a couple million there, pretty soon you're talking about real money.

Even granting that both arguments could exist simultaneously, there is an institutional reason for going for this. Policy tends to be pathway dependent. Taxes in the door may go up, they may go down, but they rarely leave the building. I doubt that 1 penny per ounce is going to suddenly stop the spread of obesity. But it's a much easier sell to go for 1 penny per ounce now (it's so little) and then 2 pennies and then 5 or 10 or whatever the socially optimal value (t*) is than to go from 0 to t*.

In fact, it's arguments like Cawley's that will help get it passed: it's so small, what harm could it do? So those of us in favor of it (like Adam Smith) should ... probably stop criticizing his argument.

Yes, the effect will be small. Very small. Miniscule. You won't even notice.


[Edit: I since spoke with Cawley and asked him for his more nuanced views than news will provide. Yes, he understands all these points very well. He has yet other concerns that the news didn't even touch.]