Why new taxes won’t stop us from guzzling soda

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Four cities will be voting November 8 on whether to tax soda and other sugar-sweetened beverages. Some proponents say the taxes would raise prices by exactly the amount of the tax, encouraging people to cut down on soda and improve their health.

But new research shows that prices might rise by only half that amount—or even less, says John Cawley, professor of policy analysis and management and of economics at Cornell University.

“Our research suggests that these taxes may be only partially passed on to consumers in the form of higher prices,” says Cawley, who studied a similar tax imposed in Berkeley, California, and found that prices there rose by only 43.1 percent of the tax.

This limited price increase is consistent with consumers being sensitive to prices, Cawley says. If consumers were insensitive to price, then suppliers would shift all of the tax to consumers. “So, the limited price increase resulting from the tax should not be seen as a failure but as evidence that consumers are responding to the policy.”

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The tax in Berkeley was the country’s first on sugar-sweetened beverages for public health purposes. It was seen as a bellwether for similar taxes now on the November ballot in the California cities of Albany, Oakland, and San Francisco, as well as in Boulder, Colorado.

The study, published in the Journal of Policy Analysis and Management, also found the closer a store was to an untaxed rival, the less it passed the taxes on to consumers. This may be due to store owners being concerned about customers shopping outside of Berkeley to avoid the taxes, Cawley says. “That may well be a factor for other city-level taxes as well,” he notes.

Researchers collected price information on various sizes of the most frequently consumed sugar-sweetened drinks—Coke, Pepsi, Mountain Dew, Gatorade, Red Bull, and Snapple iced tea—at stores in Berkeley before and three months after the tax took effect in early 2015. They also collected prices in San Francisco—which did not have a soda tax—as a control.

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The Berkeley tax, which is still in effect, requires soda distributors pay the city 1 cent per ounce whenever they deliver soda to a Berkeley store. That translates to an extra 20 cents for a 20-ounce bottle, and $1.44 for a 12-pack of 12-ounce cans. As in Berkeley, the tax in Oakland and Albany, California would be 1 cent per ounce. The tax in San Francisco and Boulder would be 2 cents per ounce.

Philadelphia has already passed a 1.5-cent per ounce tax on sugar-sweetened and also, interestingly, diet drinks. The tax is not as a public health measure but simply a way to raise revenue. That tax is slated to take effect January 1, 2017.

Taxes on sugar-sweetened beverages are a step in the right direction, Cawley says, if the goal is to reduce the societal costs associated with diet-related health problems such as obesity and diabetes.

But the design can be improved.

Narrow taxes like the one on soda allow consumers to switch to untaxed energy-dense foods. A better alternative is a broader tax that would include all high-calorie, low-nutrition foods, such as candy bars and cookies, Cawley says. And ideally it would take effect across the country. “In general, it’s harder to avoid a tax when it’s nationwide than when it’s just in one city.”

There should also be restrictions on how people can spend benefits from the Supplemental Nutrition Assistance Program (SNAP), formerly known as the Food Stamp Program. Energy-dense foods could be excluded, but people would have the same dollar benefit to spend on healthier items, Cawley says.

“When we have an obesity epidemic and high rates of diabetes, it doesn’t make sense for a government program to offer free soda.”

Source: Cornell University