By Joshua Ravichandran
When was the last time you bought a coke? Depending on where you live, you may have had to pay a lot more for one recently. Throughout the United States, various cities have been implementing a tax on soda and other sweetened beverages under the premise of achieving two goals. Reducing the amount of soda people drink and also revenue for the city. Here’s why that sweet promise doesn’t always deliver.
Philadelphia was the first city to implement this type of tax. When it was introduced, policymakers loved explaining how it will do great things for Philadelphians. The growing rates of obesity in the United States has had serious economic and health costs, and these effects will only continue to get worse as the rate of obesity rises. It is understandable why policy makers have attempted to reduce obesity by reducing the amount of soda Americans consume. While not the sole cause of obesity, the consumption of soda has been shown to contribute to it. The goal in Philadelphia was to reduce the amount of unhealthy sugar sweetened beverages (SSB) that were consumed by Philadelphians by making them more expensive, and then to use the revenue raised by the tax to fund pre-K programs. The issue with this thinking is that these two goals aren’t aligned.
Philadelphia wanted to use this tax as an important source of revenue, and that does not align with the goal of having people drink less soda. If the tax deterred people from buying the drinks, then it wouldn’t be an effective way to raise revenue since no one would be buying soda. On the other hand if the tax raised a lot of revenue it means that people didn’t stop buying soda.
In Philadelphia, the statutory burden of the tax was on the distributors of soda. Other cities have followed suit, like in Berkley. Berkeley has implemented a 0.01 cents per ounce tax on the distribution of soda and other sweetened beverages. The issue with this thinking is that the statutory burden of a tax, who the government says should pay the tax, is not the same as the economic burden of the tax, which is who actually pays it. In these cases, the data shows that consumers ended up paying anywhere from 60% to 99.9% of the tax.
Philadelphia made their tax apply to an incredibly broad range of beverages. Coke’s included. So is Pepsi. And so is, diet soda, teas, coffees, energy drinks, sports drinks, and more. Elasticity determines who actually pays the tax, and broad categories of goods tend to be more inelastic than a specific brand. And the tax in Philadelphia went far beyond one or two of the worst offenders, it basically included everything that’s not water, 100% fruit juice, or milk. That means if a consumer was faced with choosing between a Coke with 35 grams of sugar or a Bai with only 1 gram, the tax would be applied the same to both. And this means the relative price increase of the unhealthy coke would be offset by an equal price increase in the healthy fruit drink, leading to no change in buying something healthier instead.
One way to revise this issue would be to implement a tax on the grams per sugar in the beverage. That way drinks loaded with sugar will appear to be a worse deal than something with less sugar, incentivising buyers to drink healthier drinks and manufacturers to use less sugar.
Since elasticity determines who actually pays the tax, making a soda tax on the entire category of soda means that consumers will end up bearing it. One way to have tweaked this tax is to have picked a particular goal, either reducing the amount of soda consumed or trying to raise revenue for the city and then stick with it. If the city was purely focused on making revenue, then this would be an effective way to do it. The issue is that it was framed in a way that it was designed to encourage consumers to make healthier choices. While drinking water is the healthiest choice, this tax made it harder to switch from bad to better.
If we’re trying to improve public health, it’s better to make gradual steps in the right direction. Soda taxes that are to broad don’t accomplish this goal, and as a result solely raise money for the city. When it comes to campaigning for a soda tax, it’s important to pick a goal, either raise revenue or improve public health, and design the tax around it.
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