Study finds that the taxes raise revenues, but may not decrease sales
California is home to four of the eight active soda taxes in the United States, but are these policies successfully decreasing the consumption of sugary beverages in these cities? New research out of UC Davis suggests that, in most cases, these soda taxes did not reduce retail sales. Further, while they successfully raised revenues to fund programs to reduce sugary beverage consumption and mitigate their negative health effects, a disproportionate amount of this revenue was generated from lower-income households.
With over $2 trillion in annual worldwide health-care costs resulting from the obesity epidemic, many municipalities are searching for ways to reduce its adverse effects on their citizens and economies. The World Health Organization (WHO) recommends a tax on sugar-sweetened beverages (e.g., sodas) to reduce the consumption of sugary beverages and prevent obesity-associated diseases. To assess whether this approach has been successful at a local level in California, UC Davis economists analyzed the price and sales effects of a one-cent-per-fluid-ounce sales tax on sugar-sweetened beverages taxes in three Bay Area cities: Berkeley, Oakland and San Francisco.
Co-author of the study Richard Sexton, distinguished professor in the Department of Agricultural and Resource Economics at UC Davis, said they found that “California soda taxes in the Bay Area communities have generally had little impact on sales of sugary beverages.”
There are a number of reasons why these taxes may not significantly affect the purchasing decisions of California consumers. Since the taxes are imposed on distributors, an important consideration is how much of the tax is actually passed along to consumers. Several factors could lead to very little of the final tax burden falling on consumers, including fixed-price contracts between distributors and retailers, and retailers' reluctance to pass forward price increases to avoid alienating consumers.
When the authors explored this “pass-through rate,” they found that, in most cases, it was fairly low. However, in the fourth and fifth years after the implementation of the Berkeley tax (home of the first U.S. soda tax), they did see pass-through rates of 45% and 77%, respectively, as well as significant reductions in retail sales on average. This may mean that it requires a longer time for these taxes to be passed forward and affect behavior. Or, it may have been influenced by the implementation of similar taxes in surrounding areas a couple of years later, suggesting that these taxes are more effective when implemented over a larger area to prevent customers from shopping outside the taxed region.
Since low-income households consume more sugar-sweetened beverages than higher-income households, they are often considered more at risk for the detrimental effects of high soda consumption. Thus, the authors also wanted to assess whether there was a difference in how these taxes affected the price and volume of sales in low-, middle-, and high-income neighborhoods.
Kristin Kiesel, who also serves as the co-director of the Diversity and Inclusion in Research, Education, and Career Training (DIRECT) program, noted that “California's soda taxes appear to hit low-income consumers the hardest. There is little evidence that lower-income households have reduced purchases of sugary beverages in response to these taxes, meaning they are bearing the burden of the portion of the tax passed forward to retail without gaining health benefits.”
To learn more about how sugar-sweetened beverage taxes have impacted California consumers, read the full article “How Well Are California's Sugar-Sweetened Beverage Taxes Working?” by Lang, Kiesel and Sexton, published by UC Giannini Foundation of Agricultural Economics in ARE Update 26(3): 1–4, free online at https://giannini.ucop.edu/filer/file/1676490133/20606.
ARE Update is a bimonthly magazine published by the Giannini Foundation of Agricultural Economics to educate policymakers and agribusiness professionals about new research or analysis of important topics in agricultural and resource economics. Articles are written by Giannini Foundation members, including University of California faculty and Cooperative Extension specialists in agricultural and resource economics, and university graduate students. Learn more about the Giannini Foundation and its publications at https://giannini.ucop.edu.