1. Obesity in America and the “Twinkie Tax”: An Analysis of a Proposed Policy to Encourage Healthier Food Choices Emily Kearney June 4, 2007

2. The Obesity Pandemic United Nations, 2000 United Nations, 2000 For the first time, more people are obese (1 B) than malnourished (800 M) For the first time, more people are obese (1 B) than malnourished (800 M) In just two decades,1980-2000... In just two decades,1980-2000... Obesity rates doubled for American adults and tripled for children. Obesity rates doubled for American adults and tripled for children. Obesity is a risk factor for many diseases Obesity is a risk factor for many diseases Costs to the individual and society Costs to the individual and society $117 B ($61 B direct costs, $56 B indirect) $117 B ($61 B direct costs, $56 B indirect)

3. Economic Perspectives on Obesity Economic Perspectives on Obesity Why are we suddenly so obese? Why are we suddenly so obese? More calories consumed, less burned, or both More calories consumed, less burned, or both Technology (lower food prices and less exercise) Technology (lower food prices and less exercise) U.S.- 10% of disposable income on food U.S.- 10% of disposable income on food lowest in industrialized world, cheapest food lowest in industrialized world, cheapest food Economic view- obesity is efficient for individual? Economic view- obesity is efficient for individual? People will maximize utility WRT budget, time People will maximize utility WRT budget, time Behaviors will change when benefits exceed costs Behaviors will change when benefits exceed costs Do we need financial incentives (tax) to internalize the costs of obesity to create behavior changes? Do we need financial incentives (tax) to internalize the costs of obesity to create behavior changes?

4. Policy Measures: Theory and Practical Considerations Several states already have/had a tax but face industry pressures to eliminate Several states already have/had a tax but face industry pressures to eliminate Similar to other “sin taxes”: internalize cost Similar to other “sin taxes”: internalize cost In theory… In theory… Will induce behavior change by providing incentives to eat healthier foods (cheaper relatively) Will induce behavior change by providing incentives to eat healthier foods (cheaper relatively) Tax revenues could be earmarked for nutrition education programs Tax revenues could be earmarked for nutrition education programs So would a tax induce behavior change and raise revenues? What does evidence suggest? So would a tax induce behavior change and raise revenues? What does evidence suggest? would it be equitable? efficient? effective? would it be equitable? efficient? effective?

5. Elasticity of Demand for Snack Foods …there are four practical economic questions that must be addressed (Kuchler et al. 2005) First, how would such taxes change diets? First, how would such taxes change diets? Second, how much of a tax would be collected? Second, how much of a tax would be collected? Third, how big is the excess burden? Third, how big is the excess burden? Finally, on which consumers would the burden be imposed? All four questions depend on the price elasticity of demand for snack foods (2005:9) Finally, on which consumers would the burden be imposed? All four questions depend on the price elasticity of demand for snack foods (2005:9)

6. Poverty, Energy Cost and Obesity Multiple studies on effect of income level on diet quality… Multiple studies on effect of income level on diet quality… Disproportionate rates of obesity among poor Disproportionate rates of obesity among poor Drewnowski and Specter 2004- Drewnowski and Specter 2004- inverse relationship between energy costs and energy density inverse relationship between energy costs and energy density “the association between poverty and obesity may be mediated…by the lower cost of energy-dense foods and reinforced by the high palatability of sugar and fat” (2004:6) “the association between poverty and obesity may be mediated…by the lower cost of energy-dense foods and reinforced by the high palatability of sugar and fat” (2004:6)

7. Poverty, Obesity, and Energy Cost

8. Elasticity and Income Level Consumers with higher incomes are less responsive to changes in prices

9. Empirical Evidence: Kuchler et al. 2005 Two regressions Two regressions 1) Establish elasticities of demand for different foods (potato chips, all chips, all salty snacks) 1) Establish elasticities of demand for different foods (potato chips, all chips, all salty snacks) 2) Predict decreased consumption and tax revenues at different tax rates (1, 10, 20%) 2) Predict decreased consumption and tax revenues at different tax rates (1, 10, 20%)Results: Demand is inelastic (potato chips, -.45) Demand is inelastic (potato chips, -.45) Even high taxes would not change consumption much. Low taxes would still generate considerable revenue. Even high taxes would not change consumption much. Low taxes would still generate considerable revenue. Question the effectiveness of education programs Question the effectiveness of education programs

10. Empirical Evidence: Schroeter et al. 2005 Criticize Kuchler et al. Criticize Kuchler et al. Increased price may reduce demand but won’t lead to weight loss if substitutes available Increased price may reduce demand but won’t lead to weight loss if substitutes available what would the tax have to be to reduce weights to 1960 levels? Use “price-weight elasticities” what would the tax have to be to reduce weights to 1960 levels? Use “price-weight elasticities” Results Results A 1% tax would lower female weight by.44% and male weight by.31% A 1% tax would lower female weight by.44% and male weight by.31% 0.72 lbs; 0.59 lbs for avg female, male 0.72 lbs; 0.59 lbs for avg female, male To reduce to 1960 levels, men’s consumption of snack foods would have to be taxed 41% and women’s 34%. To reduce to 1960 levels, men’s consumption of snack foods would have to be taxed 41% and women’s 34%.

11. Conclusions Would have an impact if…. Would have an impact if…. Well-targeted Well-targeted Demand is elastic Demand is elastic Consumers have a choice to switch to healthier foods Consumers have a choice to switch to healthier foods More studies needed of elasticities of demand for foods potentially taxed More studies needed of elasticities of demand for foods potentially taxed Especially important is to investigate how people at different levels of income would be affected Especially important is to investigate how people at different levels of income would be affected Potential for subsidies to low-income consumers to offset burden of tax? Are substitutes available? Potential for subsidies to low-income consumers to offset burden of tax? Are substitutes available? More studies needed on effectiveness of nutrition education programs More studies needed on effectiveness of nutrition education programs

12. Conclusions “In the worst case (elastic poor and inelastic rich consumers and large income disparities), a tax on food may do little about obesity and increase undernourishment…. In the best case (high level of equality, low food demand responsiveness), it will have a small impact on obesity…and be an effective means to collect money that could be used to finance programs for nutrition education” -Schmidhuber 2004: 282 -Schmidhuber 2004: 282

13. References Drewnowski, A. and S.E. Specter, “Poverty and Obesity: The Role of Energy Density and Energy Costs,” American Journal of Clinical Nutrition, 79, 2004, pp. 6-16. Drewnowski, A. and S.E. Specter, “Poverty and Obesity: The Role of Energy Density and Energy Costs,” American Journal of Clinical Nutrition, 79, 2004, pp. 6-16. Kuchler, F., Tegene, A., and J.M. Harris, “Taxing Snacking Foods: Manipulating Diet Quality or Financing Information Programs?” Review of Agricultural Economics, 27(1), 2005, pp. 4-20. Kuchler, F., Tegene, A., and J.M. Harris, “Taxing Snacking Foods: Manipulating Diet Quality or Financing Information Programs?” Review of Agricultural Economics, 27(1), 2005, pp. 4-20. Schmidhuber, J., “The Growing Global Obesity Problem: Some Policy Options to Address It,” Electronic Journal of Agricultural and Development Economics, 1(2), 2004, pp. 272-290. Schmidhuber, J., “The Growing Global Obesity Problem: Some Policy Options to Address It,” Electronic Journal of Agricultural and Development Economics, 1(2), 2004, pp. 272-290. Schroeter, C., J. Lusk, and W. Tyner, “Determining the Impact of Food Price and Policy Changes on Obesity,” Ph.D Dissertation in Department of Agricultural Economics, Purdue University, 2005. Schroeter, C., J. Lusk, and W. Tyner, “Determining the Impact of Food Price and Policy Changes on Obesity,” Ph.D Dissertation in Department of Agricultural Economics, Purdue University, 2005.