Should Governments Tax Sugary Drinks?

By ·December 5, 2018
University of Michigan

The Issue:

Sugary drinks are the primary source of added sugar consumed in America. Consumption of these drinks is associated with obesity, which contributes to a range of diseases that are responsible for premature deaths. A public health response to this connection is to tax soda and other sugary drinks in order to reduce their consumption by raising their prices. This is one example of a “sin tax”, a policy that taxes goods or activities that society deems harmful to individuals or to society as a whole. A number of cities, including Philadelphia and Berkeley, have taxed sugary drinks. Can a tax on something that people are better off not consuming be effective? Are these taxes fair?

Recent evidence suggests that a tax on sugary drinks does change people’s buying habits.

The Facts:

  • There is a growing percentage of people who are obese in the United States. Nearly 40 percent of U.S. adults were obese in 2016, according to the Centers for Disease Control and Prevention. This is a public health problem because obesity is linked to preventable and premature deaths — increasing the risk of heart disease, stroke, diabetes and some cancers. Research shows a clear and consistent association between people’s consumption of sugary drinks and obesity. And, as the share of Americans who are obese has increased, so too has the consumption of sugar-sweetened beverages: it rose markedly among children 2-18 and more than doubled for adults since the late 1970s (see here).
  • It is not necessarily the case that a tax on sugary drinks would result in less consumption. The extent to which a tax on sugar-sweetened beverages can impact how much people drink will depend on how sensitive consumers are to changes in prices. For example, if sugar is addictive, a point of debate among medical researchers, the amount consumed might not respond much to price. Moreover, even if consumers respond to prices, the price itself might not change if sellers just absorbed the cost of the tax.
  • However recent evidence suggests that a tax on sugary drinks does change people’s buying habits. A study of examples from different countries by the World Health Organization found that taxes on sugary drinks were consistently associated with a reduction in consumption that was proportional to the size of the tax. In the United States, an analysis of the effect of the sugary drinks tax in Philadelphia found that, on average, sellers passed on to consumers the full amount of the price increase due to the tax — and that this resulted in lower consumption. The Philadelphia study found the tax of 1.5 cents per ounce caused the price of sugary drinks to increase by 1.6 cents per ounce. This price increase was associated with a reduction of about 30 percent in the amount consumed by adults: an average of 10.4 fewer sodas per month. Also, the probability that an adult consumed sugary soda every day decreased by 31 percent.
  • The effect of the Philadelphia tax differed by location and by demographic group. African-American adults who, as a group, consumed more sugary drinks than other adults had a larger reduction in consumption, an average decrease of 14.6 times per month. The tax did not have a meaningful effect on the consumption of sugary drinks for children as a whole, but there was a substantial reduction of 22 percent in the consumption of sugars from sugary drinks for children who consumed the most sugary drinks before the tax (see here). The extent to which the tax was passed on to consumers depended on the type of store. The researchers found that independent retailers tended to increase prices by a larger margin than chain stores. As a result, consumers living in high-poverty areas — where they were more likely to shop at small neighborhood stores — faced higher price raises relative to consumers in more affluent areas (see here).
  • Opposition to taxes on sugary drinks focuses on freedom of choice and that these taxes disproportionately hit the poor. One argument against these taxes is that people should be allowed to decide for themselves what to purchase without the government using taxes in a paternalistic manner to influence their decision. There is mixed political support for this view. In the state of Washington, voters recently passed a measure that blocks local governments from imposing new taxes on sugary drinks, but voters in Oregon did not pass a similar measure. Another argument against sin taxes on sugary drinks, but also on cigarettes and alcohol, is that sin taxes are regressive, that is, they affect people with low income the most. People spend more on a good if a sin tax causes the price of that good to rise substantially while purchases fall only slightly. The evidence points to taxes on addictive items like cigarettes and alcohol raising expenditures on those goods. As mentioned above, however, a tax on sugary drinks may be associated with lower consumption and lower overall expenditures on these drinks. Another viewpoint is that sin taxes are the most favorable to the poor since they reap the most health benefits from smoking less, drinking less alcohol, and drinking fewer sugary beverages.
  • Too high a tax can result in unintended consequences. Differences in the price of a product across locations may change people’s shopping habits or may result in illegal sales. The soda tax in Philadelphia caused people who live near the city’s boundary to buy soda outside the city where it was cheaper. This response is also found with other sin taxes, notably with respect to taxes on cigarettes. Cigarette taxes differ by state (as shown in this map) and locality. For example, New York State has the highest tax, $4.35 per pack, and New York City adds an additional tax of $1.50 per pack. One estimate is that nearly 56 percent of all cigarettes consumed in New York City in 2016 were illegally smuggled into that market. This offers a cautionary tale; taxes that are too high can result in the sale of smuggled goods and a loss in tax revenue.

What this Means:

So-called sin taxes represent an effort to tilt consumption away from items that are harmful, such as tobacco, alcohol and sugary drinks. The revenues generated by these taxes could also benefit health outcomes if they were dedicated for that purpose. Evidence on taxing sugary drinks from the experience in Philadelphia and elsewhere suggests the policies do reduce people’s consumption of these drinks. Additional research would be needed to show concrete beneficial health outcomes from the reduction in the consumption of sugar due to the tax.


Tax Policy
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