Pop Goes the Tax
Taxing soda is a key strategy for health advocates to reduce consumption of sugary drinks and tackle obesity. The idea is that retailers would pass the extra cost to consumers, who would drink less because of the increased price.
The tactic worked like a charm in Mexico, where a national 10 percent soda tax in 2013 decreased sales by as much as 12 percent.
Previous studies of beverage taxes in Mexico, Denmark and France showed that prices increased by the full amount of the tax.
But what if stores don’t increase soda prices?
Two economists, John Cawley at Cornell University and David Frisvold of the University of Iowa, compared soda prices in Berkeley, which imposed a 1-cent-per-ounce tax this spring, to prices in San Francisco, where a similar beverage tax failed to pass.
The results, published in the National Bureau of Economic Research, showed that prices rose by less than half of the tax amount in Berkeley. Only 22 percent of the tax was passed on to consumers for Coke and Pepsi.
So why isn’t the tax working as well as it did in places like Mexico?
For one thing, the Berkeley tax only affects a small area that is surrounded by stores where the tax is not in effect.
“The stores may not be increasing their prices by as much as they otherwise would have because they’re worried that’s going to decrease their sales significantly when nearby stores are offering the same products for much cheaper,” David Frisvold said.
He said the effect could have been very different if California had imposed a statewide tax, though that kind of speculation is outside the wheelhouse of this study.
Glass Half Empty
Reaction to results of the tax has been mixed, with health advocates focusing on $116,000 in the revenue raised during a one-month period, and the beverage industry pointing to the new study as a big “we told you so” aimed at policymakers.
“It’s funny how people can respond to results in such a varied fashion,” Frisvold said. “It’s interesting to see the emotion that has been expressed related to what I view as objective analysis of numbers.”
The study’s authors do not offer policy recommendations based on the research, but state that the results do not mean the idea of soda taxes should be dismissed.
“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 U.S.,” John Cawley said in a Cornell news release.
The study follows recent news that Coca Cola spent millions of dollars to back research suggesting that lack of exercise is a greater factor than diet in preventing obesity.
The New York Times published an editorial blasting its support for nonprofit Global Energy Balance Network (GEBN) and for paying bloggers to suggest drinking a mini can of Coke as a snack food.
GEBN states on its website that it does not “promote physical activity at the expense of diet.”
The Center for Science in the Public Interest recently found that Coca-Cola, PepsiCo, and the American Beverage Association have spent at least $106 million to crush public health initiatives since 2009.
In the shadow of these controversies, Frisvold was careful to point out that the beverage industry had no hand in supporting the team’s research on Berkeley’s soda tax.