In 2014, Berkeley, CA passed the first tax on sugar-sweetened beverages (SSBs), or “soda tax.” Since then, such taxes have grown in popularity. They appear to work, inasmuch as consumption of SSBs falls after soda taxes are implemented. Still, as Laura Cornelsen and Richard D. Smith point out in a recent article, there are several things economists still don’t know about soda taxes.
Classroom presentations on the economics of soda taxes tend to focus mainly on elasticities, but, as Cornelsen and Smith point out, that is not the whole story. For example, how much of the drop in SSB consumption following a tax is attributable to elasticity of demand, in the conventional sense, and how much to framing effects? Part of the framing effect comes from the public debate over the introduction of such a tax, much of which focuses on the harm done by overconsumption of SSBs. Another framing issue concerns how the tax is imposed. Is it broken out in the price that consumers see on the shelf? Charged at the register, after the bottle is already on the checkout conveyor? Charged to the producer in a way that makes it invisible to consumers? If the goal is public health, we might want to maximize framing effects. If it is to raise revenue, we should minimize them.
Another question: Should soda taxes focus just on reducing consumption or also on encouraging reformulation? A tax with rates that varied according to sugar content might reduce total sugar consumption more—or less—than one based simply on sugary vs. sugar free.
Finally, as the authors note, some observers object to soda taxes because they are regressive, in the sense that low-income consumers spend a higher share of their incomes on SSBs. However, price elasticity of demand is probably inversely related to income. If so, lower-income consumers would get a disproportionately high share of health benefits. On balance, then, is the cost/benefit ratio of a soda tax higher or lower for low-income consumers? It would be nice to know, but we don’t.