Impact of tax on soft drinks/sugar-sweetened beverages

In this superb short note, Leslie McGranahan and Diane Whitmore Schanzenbach assess the impact of taxation on soft drinks/ sugar-sweetened beverages (Pepsi, coke  etc).

In US states have already imposed taxes on these sugar-sweetened beverages (SSB) via various ways. In 2009, US Federal government also planned to impose a tax but is still in pipeline.

The states impose taxes in variety of ways and accordingly SSB are taxed:

Forty-five of the 50 states have a sales tax on general merchandise. In most states with sales taxes, food for home consumption is taxed at a lower rate than other items. In some states, soda for home consumption is treated as general
merchandise rather than as food and is subject to the normal, higher rate.2 Food consumed at restaurants or fast-food establishments is usually subject to the regular sales tax or a higher restaurant meal tax. In most states, vending machine sales of soda are subject to the same tax as grocery store sales of soda.

Independent of all these laws, soda purchased with benefits from the Supplemental Nutrition Assistance Program (SNAP, formerly called the Food Stamp program) is not subject to the sales tax.3 The Food Security Act of 1985 (Public Law 99-198) declared that a state would not be able to participate in the Food Stamp program if sales taxes were collected on food purchased with food stamps. As a result, no state currently collects sales tax on soda (or any other good) purchased with SNAP benefits.

How can economic theories be used to understand this taxation? There are various ways:

  • Kind of Pigovian tax: As there are negative externalities from their consumption (obesity, sugar content etc) imposing a tax might help in lowering demand. As people by themselves may not lower the consumption, better to tax them. It helps in three ways – rise in tax revenue, reduce sugar content and obesity in people, reduce health care bill.
  • Public finance theory: It says though it does not matter whether tax is based on consumption or production/distribution. But in case of SSB, we have both value-based (sales tax) and volume based tax (excise). So, it would matter whether states increase excise tax or sales tax on SSBs.

Then how will the tax impact different population groups? They look at two kinds of data:

  • Average household spending on SSBs
  • Average calorie intake from SSBs

In both they divided people based on ethnicity -Hispanics, whites, blacks etc; By education and by poverty status. The summary of this analysis is that people spend a lower % of income on SSBs but get a larger % of calories from SSBs. Hence, SSBs serve as a cheap source for calories. Within income groups, lower-income group get larger calorie intake from SSBs

In general, less educated and poorer population groups concentrate a higher proportion of their total spending on SSBs and get a larger fraction of their daily caloric intake from these relatively inexpensive sources. In the absence of substantial differences in the elasticity of demand across groups, this implies that increased soda taxation would primarily affect these disadvantaged groups.

How would the soda tax impact?

Two conditions would need to be met in order for an expanded soda tax to affect the rates of overweight and obesity. First, increased taxation would need to lead to reduced consumption of soda. Recent research suggests that soda consumption is modestly responsive to price changes. According to a recent study by Andreyeva, Long, and Brownell, an increase in soda price of 10% would decrease consumption by somewhere between 2.7% and 8.1%.11 Second, lower soda consumption would need to result in a reduction in overall caloric consumption.

But people might respond differently to the taxes. They might purchase items with more sugar or to drinks not subject to taxes. This will depend on different consumer preferences.

Excellent stuff. Takes you back to classes on microeconomics/public finance. Infact, this could be used as a case study to explain these theories to the class. SSBs are a big hit with the college crowd and might help them understand better than the oft-used widgets example.

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