A Soft Drink Tax Is Hardly A Sweet Policy Idea

Sugary drinks, and sodas in particular, are tasty. popular among people in the United States. About half of Americans drink a soda every day. The catch is that they are some of the unhealthiest drinks out there. In response to the unhealthy nature of sodas, municipalities have enacted soda taxes. The purpose of such a "sin tax" is to levy an excise tax in order to produce healthier outcomes for Americans.

Mathematica Policy Research, a nonprofit research firm, released a study a few weeks ago about the effects of such taxes in four cities: Oakland, Philadelphia, San Francisco, and Seattle (Cawley et al., 2019). The study's main finding is that a beverage tax rate of 1¢ per ounce, it translates into a reduction of 53 ounces consumed per month (or a 12.2 percent decrease).

I want to take the Mathematica finding at face value and find the impact of the soft drink tax. Let's walk through a back-of-the-envelope calculation of mine. The average American consumes 38.87 gallons annually, which is about the equivalent of eight 12-ounce cans in a week. With the average can of soda having 150 calories, that amounts to 1,200 calories a week (or 171 calories a day). The average American consumes 3,600 calories, which means that means sugary drinks account for 4.8 percent of daily caloric consumption. The soft drink tax reduces consumption by 21 calories per diem, which is 0.6 percent of caloric consumption.

Asking what optimal caloric consumption is tricky to determine since it depends on sex, height, current weight, level of activity, and metabolic rate. Plus, the quantity is different if you are trying to maintain current weight versus if you are losing weight. Even with the assumption that the average woman needs 2,000 calories to maintain and the average man needs 2,500 calories to maintain (and that's for maintaining weight, not losing weight), it illustrates how little the soft drink tax has done to cut caloric intake adequately to reduce obesity.

None of this factors in what economists refer to as the substitution effect. The substitution effect is when a change of prices of one good results in the increased consumption of another good, typically because the alternative good is cheaper. Much like I asked with trans fats, my question here is "When the tax is implemented, what gets replaced with soda?" As the Left-leaning Urban Institute points out:

While sugar is consistently identified as contributing to obesity, it is not the only factor. And the health effects and medical costs of obesity are not uniform. Some consumers with no risk of harm or medical cost will pay the tax. Meanwhile, others may substitute equally or more unhealthy options (such as  alcohol) to avoid the tax.

I bring up these questions and points because the truth of the matter is that the primary goal of the soft drink tax is not to reduce soft drink consumption per se, but rather to reduce obesity. This line of thought corresponds with the past research that has shown that taxing sugary products does not a) cause significant weight loss (Fletcher et al., 2014; Fletcher et al., 2010; Sturm et al., 2010), b) greatly shift overall caloric consumption (Epstein et al., 2015; Fletcher, 2011), or c) does not automatically cause consumers to purchase healthier options because they might be driven to purchase unhealthier options (Seiler et al., 2018; Wansink et al., 2012). Another fun finding with the Philadelphia soft drink tax is that enough people went to neighboring areas to purchase soft drinks, which offset the decrease of sugary drinks attributed to Philadelphia's soft drink tax by 56 percent (Roberto et al., 2019). And if that weren't enough, here is a literature review conducted for New Zealand's Ministry of Health. After examining 47 studies on sugar taxes, the conclusion of the authors was that "we have yet to see any clear evidence that imposing a sugar tax would meet a comprehensive cost-benefit test."

I am not here to cast doubt on Mathematica's methodology or its findings because Mathematica is a reputable research organization. What I would like to remind us is that we need to have a fuller understanding of the effects on a policy such as a soft drink tax, not simply one aspect that sounds nice but in reality has little to no bearing on the primary goal of obesity reduction.

2-24-2022 Addendum: In 2018, Seattle adopted a soda tax. A study found that people were substituting soda for beer (Powell and Leider, 2022). The people of Seattle were swapping out one calorie-heavy drink for another. In other words, we have another study that shows that the soda tax does next to nothing to help with obesity.