The $70 Billion A Year American Obesity Tax

No matter what legislation comes out of the frenzied health care debate, economists say that it will cost the American taxpayer a great deal. Estimates run the gamut from the Obama administration’s claim that it will be paid for by cuts on existing programs to the conservatives’ assertion that reform will cost us close to a trillion dollars over the next ten years. The public will probably spend several hundred billion dollars over the next decade or so to make the necessary changes that have been highlighted over the course of the debate, with or without the reform bill. Alternatively, the current rise in health care use will inflate national costs nearly as much as the price of any reform would.

A large number of the infirmities and chronic and fatal illnesses in the United States are based on behavior, rather than accidents or genetics. This is the reason we have a “sin tax” on tobacco and alcohol: to compensate the costs in the health care system for the damage these products do. One of the proposals to cover health care costs is to impose a  sin tax on the foods that increase the epidemic of obesity, diabetes, high blood pressure and heart attacks, and cost the health care system billions of dollars per annum.

24/7 Wall Street analyzed the four most dangerous ingredients in food (sugar, trans fat, saturated fat, and sodium) and estimated a sin tax for each of these. The tax could serve to curb consumption  of disease-causing substances and as a way to make those who make bad choices compensate the government and responsible citizens who have to pay higher insurance premiums. These proposals will have an enormous impact on the major producers and distributors of foods if Congress passes any of these measures. 24/7 Wall Street evaluated the companies that produce and distribute the foods and beverages that are likely to make people unhealthy. We analyzed the impact a sin tax would have on these 12 corporations and estimate the amount in taxes their products would produce for the government to be use to finance the health care reform.

Conclusion:

24/7 Wall Street estimates the government could collect $17.54 billion dollars each year from the four proposed sin taxes from these 12 companies that produce the most unhealthy substances in our foods. Making the reasonable assumption the 12 corporations comprise no more than ¼ of the total sales of sugar, salt, trans fat and saturated fat in the United States, this means the total collected sin tax each year will come to over $70 billion.

Trans Fats

The foods that are the absolute worst for people normally have some dietary function.  People need calories, cholesterol, and even fat in some measure. According to the USDA, the FDA, and most other nutritional guidelines, the only  substance or chemical commonly found in food that shouldn’t be eaten in any amount is trans fat.  It contributes to heart disease, obesity, increases “bad” cholesterol, and has no notable benefit whatsoever. Some studies have also linked transfats to Alzheimer’s, liver dysfunction, some forms of cancer, and infertility in women. It is effectively illegal in both Denmark and Switzerland to sell food products containing trans fat. In 2006, New York City banned restaurants from using anything greater than .5 grams per serving. Other major American cities, including Philadelphia and Chicago, have followed this example.

Using the NYC ban as a template, any food that contains .5 grams of trans fat or more is taxed 15% of the price.

1) Yum Brands – YUM owns a sizeable chunk of America’s secondary fast food chains with $10.8 billion in sales and nearly 350,000 employees. Almost all the trans fat Americans consume comes from artificially hydrogenated vegetable oils used in frying fast food, snack foods, and baked goods. Several of the biggest names on its roster rely especially heavily on fried food (KFC, A&W, Long John Silvers, and Taco Bell.) While you can find it in most fast food, deep-fried meat is one of the biggest ways we get trans fat into our systems.

Despite a portfolio entirely in fast food, Yum Brands owns KFC, which has a trans fat-free menu. However, their other major divisions – Long John Silvers and A&W – still have a menu full of items with 4-5 grams of the dangerous substance. Yum! had 3.7 billion in domestic sales last year. 24/7 Wall Street calculates the sin tax will yield $636 million each year from Yum! Products.

2) McDonald’s (MCD) – The largest fast food corporation in the world is also the target of health proponents and politicians. The chain has had many novels and several feature films made about  the health consequences of consuming their products. McDonald’s might be the single largest culprit for trans fat distribution in the United States with its $22 billion in revenue in the last year.

McDonald’s has begun to modify its menu, and the company’s french fries are now trans fat-free in the states. This evolution towards healthy foods doesn’t extend to most of the chain’s meat-containing products, and an extra 15% tax for some of the popular items may limit the popular “dollar menu” to salads and yogurts. Because of its size and profitability, if any fast food chain is going to survive a cultural nutrition shift, it’s MCD. $4.2 billion domestic sales. Annual sin tax: $1.17 billion.

3) Wendy’s/Arby’s Group Inc. (WEN) – This is one fast food company that might be severely damaged by the fallout from the trans fat tax. The most popular menu items at Wendy’s and Arby’s (the burgers and roast beef sandwiches, respectively) all exceed the minimum of .5 grams.  With a relatively small 67,000 employees and $3.5 billion in sales, the conglomerate can’t afford to take a hit based on a new domestic tax and afford to compete with Mickey D’s. $3,198 billion in domestic revenue – sin tax revenue: $432 million.

Sodium

An estimated 75% of Americans consume well over the AHA-prescribed 2.3 grams of sodium per day. The overconsumption of salty foods has caused a disproportionately large percentage of the population to have high blood pressure, which contributes to hundreds of thousands of heart attacks each year along with its impact on kidney disease and osteoporosis.

According to a recent Stanford study entitled “Population Strategies to Decrease Sodium Intake and the Burden of Cardiovascular Disease: A Cost-Effectiveness Analysis,” the abundance of sodium in our diets costs the government billions of dollars each year in medical costs. The report claims that if Americans cut their salt intake by only ten percent, the health care system would save $32 billion over the next ten years, and likely hundreds of thousands of lives as well. Sodium is much more prevalent in food, and is also a necessary part of our diet in small quantities, and so a tax on salt would be more lenient than the trans fat tax. For each half gram of salt per serving (.5 grams = approximately 20% of our recommended daily value) in a single item, a fifteen percent tax could be added to the price.

1) Campbell Soup Company (CPB) – at $7.5 billion in sales last year and 18,000 employees, Campbell is the world’s largest soup manufacturer. Soup, as it turns out, is one of the secret villains of American salt overconsumption. Campbell, however, has cut down on the sodium content of its products, and so regular soups have only .8 grams per serving. Campbell has done an impressive job marketing low-sodium alternatives, and if a salt tax were implemented, they have the infrastructure in place to make a transition. $5.55 billion in domestic sales. $866 million from the sin tax.

2) Burger King (BKC) – $1.3 Billion in annual sales and 41,000 employees. The fast food chain belongs on the trans fat list as well; the four fast-food companies could fill a slot under the four killer ingredients. However, BKC deserves special mention for having particularly high levels of salt in their products. A Steakhouse XT burger and medium fries contain 2.6 grams of sodium (more than 110% of the safe daily value. That may be an extreme case, but one of the more popular meal combos, a whopper and small fries still has 1.5 grams, about 60% of the daily recommended amount.  This may affect the margins more at a company that needs to keep prices low much more than it would a soup company.  $1.3 Billion in annual domestic sales. $253 million from the sin tax.

3) K+S AG– (On the Frankfurt Stock Exchange) Not an American company, but still worth noting. With $3.7 in annual sales, the world’s biggest producer of edible salt recently became even bigger: the German company acquired Morton’s in April from Dow Chemical (DOW.) If the American food industry were to start making major cutbacks in salt imports, K+S would be hit hard. Approximately $1 billion domestic edible salt sales. $150 million from the sin tax.

Sugar and Corn Syrup

If there’s anything that’s more prevalent in food in excess than salt, it is sugar, “the other white mineral.” Cane sugar and artificial sweeteners are found in nearly everything: baked products, processed foods, and every commercially sold drink but water. Humans actually need to consume reasonable levels of sugars to keep up our caloric levels, which would be fine if people didn’t consume their recommended share of calories many times over each day. Sugar consumption has been one of the greatest causes of our national obesity and diabetes crisis, more than any other single ingredient.

Mayor Bloomberg recently endorsed a proposed soda tax in New York. The plan would charge $0.01 per oz. in containers of sugary beverages which are less than 70% juice. A similar plan is being considered in congress now as part of the health care reform bill. 24/7 Wall Street used the proposed soda tax as a guideline, but is including all products containing sugar. A fifteen percent tax will only apply to foods with at least 20 grams (1/4 recommended daily value for an average body size.)

1) Archer Daniels Midland (ADM) – This agribusiness giant , with $62 Billion in sales and 28,000 employees, supplies most of America’s corn syrup demands , much of it to the sugared beverage industry.  A tax like this might be a double-edged sword for ADM: because the legislation wouldn’t discriminate between cane sugar and corn sugar.  However, more businesses might make the switch to corn syrup, which is cheaper, and preserves food longer. Despite this possible benefit, an across-the-board tax affecting soda companies is likely to do significant financial harm to the corn syrup industry as well. $3.5 billion sold in U.S. corn-based sweeteners. $525 million from the sin tax.

2) The Coca Cola Company (KO) – Coke is the second-largest soft drink company in the world at $31 billion in sales and 92,000 employees. Many point to soft drinks as the single greatest cause of our obesity problem. This might have something to do with the fact that there are nearly 40 grams of sugars in a 12 oz. can, equal to about 12 packets of sugar. At 15 extra cents a can, the soda and sugary drinks market would take a serious hit in the states. Unfortunately for KO, nearly its entire product line is sugary drinks.  The good news for KO  is that 70% percent of their revenue comes from outside North America. Approximately $6 billion in domestic sales. $855 million from the sin tax.

3) PepsiCo (PEP) –  The largest soda company in the world, with annual sales of $43 billion and more than 200,000 employees, like Coke, would probably take a serious hit at 12 cents a can. Fortunately for Pepsi, it has sugarless products to fall back on, most notably  Frito-Lay brands (unless that sodium tax we mentioned is imposed.) Unfortunately, 50% of its revenue is domestic, meaning the soda tax would affect a bigger part of  its products. Approximately $7 billion in domestic sales on soda, $13.2 billion in domestic sales from Frito-Lay. Total sin tax: $5.46 billion.

Dishonorable Mention:

The Hershey Company (HSY) – The tax wouldn’t only affect the soft drink industry. Most candy bars would cost at least an extra 15-20 cents, which could be devastating to companies like Hershey and Mars.

Saturated Fats

Saturated fats are not as bad for you in reasonable amounts. Consuming more than the AHA-recommended 20g per day results in obesity, as well as high levels of “bad” cholesterol and a variety of cardiovascular conditions including heart disease. Some studies have linked saturated fats with prostate and breast cancer. Saturated fat can be found naturally in foods that are part of a balanced diet, including poultry and eggs. But it is also contained in unhealthy quantities in nonessential items, including butter, coconut and palm oil, and processed baked goods (e.g. cookies, cakes, and muffins.)

Any food which contains more than 20% of the recommended daily value (4 grams) could be taxed an extra 15%

Kraft Foods (KFT) The largest food and beverage company in the United States, with $40 billion in sales and 97,000 employees, sells some of the least healthy food marketed to American consumers, all of which would be hit hard by a saturated fat tax. These include notoriously bad for you Oscar Mayer, Philadelphia and Oreo brands.  Kraft would be forced to make some major changes with these hits.  52.5% of Kraft’s $40 billion in revenue comes from its  U.S. Cheese, snacks and groceries. $3.6 billion from the sin tax.

Tyson Foods (TSN) –  Tyson is the largest American marketer of pork, chicken and beef, at $26 Billion in sales and 117,000 employees.  All of these products contain moderate levels of saturated fat. While it has its own supermarket brand, it also supplies most of the major restaurant chains that have chicken on the menu, including fellow partner in crime YUM! Brands. While KFC may be trans fat-free, it is definitely not saturated fat-free (2 chicken strips have 4 grams of fat, for example) Not all of Tyson’s business would be affected, but the tax would be still be a minor blow to some of their major customers, which would certainly hurt them as well. 24/7 Wall Street estimates about 13 billion in domestic sales. 1.69 billion from sin taxes.

Sarah Lee (SLE) – $11 billion in sales, 41,000 employees. If you made a composite list of American food products with the highest levels of saturated fat, the name Sara Lee pops up over and over. No single large company would be affected more by a sin tax. The company owns Ball Park Franks, State Fair, Jimmy Dean, and on top of that sells a variety of baked goods and confectionaries with saturated fat levels in the double-digits. $5 billion from domestic sales. $1.84 billion from the sin tax.

Dishonorable Mention

Chipotle Mexican Grill (CMG) – A Chipotle chicken burrito with basic fixings and chips has more saturated fat than you should eat in an entire day. Many people go to Chipotle because they believe it’s a healthy alternative, an extra buck per meal will probably change their minds.

Methodology:

24/7 wall street based these four 15% sin taxes on existing sin taxes, both proposed (the 12 cents/can NY soda tax) and in practice (liquor and tobacco taxes, which come to between 10 and 20 cents on the dollar per item. We calculated the estimated taxes accrued per company by comparing SEC earnings data and by surveying nutritional information of the major products of each company. We then multiplied the estimated percentage of the total domestic sales of the company with the actual figure, and then factored in the 15% tax for each ingredient. See the tables below for estimated values and figures.

-Michael B. Sauter

Tables:

YUM! Brands

* based on 2009 SEC earnings data

MCD

*based on 2009 SEC earnings data

WEN

*based on 2009 SEC earnings data

CPB

*based on 2009 SEC earnings data

BKC

*based on 2009 SEC earnings data

K+S

*estimate of K+S U.S. revenue in edible salt – based on a conservative percentage of annual revenue.

ADM

*2009 ADM corn-based sweetener sales, U.S.

KO

*based on 2009 SEC earnings data

PEP

*based on 2009 SEC earnings data

KFT

*KFT Domestic revenue in 2009, U.S. Snacks, Cheese, Convenient Meals, and Groceries

TSN

*based on 2009 SEC earnings data

SLE

*based on 2009 SEC earnings data

Total Annual sin tax for 12 companies: $17.54 billion

Assuming 12 companies represent ¼ of total tax revenue: $17.54 x 4 = $70.16 billion

-Michael B. Sauter