A soda tax passed last fall by voters in Berkeley, California, has so far fallen flat. The law, the first such city ordinance in the country, took effect this past March and imposes a penny-per-ounce tax on distributors of sugar-sweetened beverages, such as soft drinks, energy drinks, and pre-sweetened teas.
Distributors pay 20 cents per 20-ounce bottle of Coke, for instance. Tax proponents expected the extra cost to result in higher prices for shoppers, which would discourage soda consumption.
To date, however, consumers have been largely spared from higher prices. On average, prices for beverages covered under the law rose by less than half of the tax amount. For Coke and Pepsi, only 22 percent of the tax was passed on to consumers.
“In light of the predictions of the proponents of the tax, as well as in light of the previous research, we expected to see the tax fully passed through to consumers,” says John Cawley, professor of policy analysis and management and of economics at Cornell University.
“In contrast, we find that less than half, and in some cases, only a quarter of it is. This is important because the point of the tax was to make sugar-sweetened beverages more expensive so consumers would buy, and drink, less of them.”
So-called “sin taxes” are designed to improve public health by discouraging people from purchasing unhealthy products. Smoking rates, for instance, have plummeted in the United States in recent decades partly due to federal, state, and local taxes that have driven up cigarette costs.
Officials in Berkeley hoped that the soda tax would raise prices and lead residents to avoid energy-dense sugar-sweetened beverages, considered a culprit for high rates of obesity and chronic disease.
“The reason for this surprising result could be related to the fact that it’s a city tax and therefore store owners have to be concerned about the ability of consumers to shop at stores outside of Berkeley,” Cawley says. “Concerns about cross-border shopping could contribute to a low pass-through of the tax.”
For the study, published as a National Bureau of Economic Research working paper, researchers visited nearly all Berkeley groceries, supermarkets, pharmacies, convenience stores, and gas stations and recorded prices for a wide variety of products.
They collected data from a comparable sample in nearby San Francisco, where a ballot initiative to impose a soda tax failed last fall. The researchers compared price changes for regular and diet drinks—which were not taxed—in both cities from before (Dec. 2014) and after (June 2015) the tax took effect.
Idea still has merit
Researchers say the study is the first to collect extensive store-level data on prices before and after a tax on regular and diet drinks and includes a neighboring control location to account for trends in prices over time.
Revenue collected from the tax—projected to be $1.2 million in the first year—goes into a Berkeley general fund, part of which has been earmarked for healthy living programs. While the tax doesn’t yet appear to be raising prices, the authors note that the idea still has merit.
“There is an economic rationale for taxes when consumption of the good imposes negative externalities, and obesity costs taxpayers billions each year in medical care costs in the US,” Cawley says.
“A sugar-sweetened beverage tax is a very narrow approach to internalizing the external costs of obesity, because there are many other food and drink items that are also energy dense and lack nutritional value. But to the extent such a tax helps internalize the external costs, there is an economic rationale for it.”
David Frisvold of the University of Iowa is a coauthor of the study.
Source: Cornell University