Sales Effects of High Taxes on Fast Food

Increasing taxes on fast food can be a tempting target for those looking to change eating habits or raise revenue. It creates a disincentive to consume a generally unhealthy product and increase the money earmarked to defray healthcare costs associated with obesity and related health problems. However, even with the market’s price sensitivity, small tax increases are unlikely to have a major sales effect.

Arguments for raising taxes on fast food are two-fold. Basic economic theory states that when prices rise, demand generally falls. Rising prices would theoretically cause consumers to eat fast food less often, preferably replacing that with healthier fare (though obviously that’s not guaranteed). In addition, given the relationship between the mere existence of fast food restaurants and obesity, some favor fast food taxes directed toward healthcare costs. This would presumably make those more at risk for health problems shoulder a greater share of their future cost of care.

Fast food may be susceptible to sales declines when taxes rise, because its consumers tend to be price-sensitive. The vast majority of restaurant patrons consider price when making their decision where to go. When prices rise, some customers either limit their fast food trips or order more from “value” meals. In addition, if fast food taxes at your restaurant are higher than those in an adjacent town under a different tax system, customers may go there to eat instead because of the lower cost.

One issue with fast food taxes is that research indicates they would have to change the prices significantly in order to have an effect. In one 20-year study, a 10 percent rise in prices led to the consumption of pizza dropping 11.5 percent and soda declining by 7 percent. These larger increases may have a more measurable health effect on children and adolescents, and disproportionally economically impact those of low socio-economic status. Smaller taxes can be effective at raising tax revenue, but with less of an effect on sales.

Ironically, one effect of high taxes on fast food might be to make the less-healthy fare more popular. Because it is more efficient to tax food by category as opposed to separating out individual items on a menu, higher-priced but healthier fare at fast food restaurants may become less attractive than the burgers and small fries on the dollar menu. Many fast food restaurants are offering a wider variety of healthier options to satisfy increasing consumer demand, but increasing taxes may offer fast food restaurants less incentive to chase that market.