In this world,
nothing can be certain except death and taxes. – Benjamin Franklin
Berkeley made the front page
of the Oct. 7 National section of The New
York Times. Why? Because the November Berkeley city ballot will contain
Proposition D - A City of Berkeley
Sugary Beverages and Soda Tax – that, if passed by voters, will
add a 1-cent per fluid ounce tax on distributors of certain drinks sold in the
city. The additional tax on one, 20-oz bottle of Coke or Mountain Dew will be 20₵, which represents about 11% of the
current pre-tax retail price at a grocery store.
The stated purpose of this proposition is: "… is to
diminish the human and economic costs of diseases associated with the consumption
of sugary drinks by discouraging their distribution and consumption in Berkeley
through a tax. Specifically, the purpose of this ordinance is to tax the
distribution of sugary drinks and the products used to make them."
A growing list of localities has attempted, so
far unsuccessfully, to implement specific taxes on sugar-sweetened beverages
(SSBs), which include soda. This list now includes San Francisco and Berkeley
that have each placed different tax propositions for SSBs on their November
ballots. The debate about the tax is already bubbling up in Berkeley.
I discuss here economic information and
analysis results that can be relevant in assessing what the economic effects of
Prop D will be. To be clear, people decide to vote for or against a tax proposition
like this one on the basis of many factors. Such factors can include thoughts
about socio-economic equity and improving public health, to name but two that
transcend economics. But here's the economics.
Like many tax-oriented propositions, Prop D is
intricate, citing what beverages and distributors are subject to and exempt
from the tax and what entities will directly pay for the tax. The language of
Prop D includes the following:
"Shall an ordinance imposing a 1¢ per ounce
general tax on the distribution of high-calorie, sugary drinks (e.g., sodas,
energy drinks, presweetened teas) and sweeteners used to sweeten such drinks,
but exempting: (1) sweeteners (e.g., sugar, honey, syrups) typically used by
consumers and distributed to grocery stores; (2) drinks and sweeteners
distributed to very small retailers; (3) diet drinks, milk products, 100%
juice, baby formula, alcohol, or drinks taken for medical reasons, be adopted?"
The website of a major proponent of Berkeley's Prop D, Berkeley vs. Big Soda,
states "The link between sugary
drinks and diseases like diabetes
is undeniable, and 40% of kids will get
diabetes in their lifetimes unless we do something about it." The
proponents argue that the tax will reduce the incidence of obesity and diabetes,
especially in kids.
Unlike the soda tax on San Francisco's ballot,
the Berkeley soda tax revenues will be put into the city's general fund, and
perhaps spent on new or expanded health programs in the city at the sole discretion
of the City Council, as advised by the proposition's newly-formed Panel of
Experts. The fact that the resultant soda tax revenues will not necessarily
fund such health programs is something the opponents prominently mention.[1]
I will address 3 questions about Prop D's proposed
tax. (1) Who will pay the Berkeley soda tax? (2) How much will the tax reduce
the consumption of SSBs? And (3) Can soda taxes reduce obesity and diabetes?
1) Who will pay the soda tax? The "incidence"
of an excise tax like one based on sales of certain SSBs is determined, in
economic terms, by the price elasticity of demand (PED) and price elasticity
of supply (PES) of the taxed good. The more inelastic the good's PED (the more
insensitive consumers' demand is to changes in a good's price) is and the more elastic
is its PES (the more sensitive producers are to making more of the good as
price increases), the greater proportion of the tax is paid by the ultimate
consumer rather than the producer (or in Prop D's terms, the
"distributor"). Using the information cited below, Berkeley consumers
of soda are very likely to be paying more for SSBs should the tax be approved,
despite what city officials have said.
I could find no specific information about the
value of SSB producers' PES. Nevertheless, it is logical to assume that the PES
for SSBs could be moderately elastic (PES> 1.0) since key inputs are readily
available (e.g., water, "secret" soda concentrate-syrup) and marginal
input and production costs are fairly low.
The second important measurement for assessing
Berkeley's soda tax incidence is the value of SSB consumers' price elasticity –
their price elasticity of demand. I found references to over a dozen studies
that calculated soda consumers' PED. Soda demand is moderately price- inelastic
(PED < 1.0), with a pooled (composite average) elasticity of -0.80, according
to one analysis that
reviewed many of these econometric studies. In non-economist
language, this means an 11% increase in the price of soda would effect, on
average, a 9% reduction in the quantity of soda being purchased by consumers.
Because soda's PES is likely to be greater than its PED, it is virtually
certain that Berkeley consumers of SSBs would be paying more of the proposed
tax than distributors. This expected result is contrary to the Berkeley city
attorney's statement accompanying the proposition: "The tax would be
payable by the distributor, not the customer." The city attorney's
statement is a legal statement based on the proposition's language. It has
nothing to do with market realities, nor is it based on the economics of the
soda/SSB market. Distributors subject to the tax will do what they can to pass
along the tax to retail stores, who in turn will do what they can to pass the
tax to consumers. Given SSBs relatively price-inelastic demand, Berkeley customers
of SSB-taxed products will pay a higher price for soda, energy drinks and other
taxed beverages. Without retail SSB prices increasing due to the tax,
consumption of these drinks will not change.
2) How much will consumption of taxed
drinks be reduced in Berkeley? This question, like the first one, depends on what the SSBs' PED
is. Unlike some other cities' proposed soda taxes, Berkeley's proposition appropriately
names several substitutes that also will be taxed (energy drinks and
presweetened teas), and several that will not be taxed (diet drinks, milk
products, 100% juice drinks). Are drinks like chocolate milk really substitutes?
Maybe, but probably not too close. Exempting milk products likely had much more
to do with perceptions of healthful drinks rather than their actual sugar content.
As mentioned above, the more price-inelastic
the demand of a good is (e.g., sugared drinks), the less the quantity demanded
will change and the more tax revenue
will be generated as its retail price rises. The substitution effect is the key
driver of these conclusions. If the substitution effect is relatively large and
Berkeley consumers don't buy as much 7-UP or other SSBs because of the tax but
instead buy chocolate milk or apple juice or other drinks that aren't taxed,
then the consumption of taxed drinks will be reduced more than expected (as
many proponents of the proposition hope), but
revenues accruing from the tax will be reduced (something that proponents may
not be pleased with since this will reduce the possible funding for
health-related programs). Using the PED value from above and the tax-induced
price increase of at most 11% for consumers, the purchases of taxed SSDs in
Berkeley might be reduced by at most 9%. Higher soda tax rates could produce
greater decreases in SSB consumption, but such tax levels are probably not
politically feasible.
It is worth remembering that SSB purchasers in the city can avoid
the tax completely either by buying at "very small retailers"
in Berkeley (who are exempt from the tax) and/or buying them outside Berkeley's
city limits – for example in surrounding Oakland, Albany or El Cerrito. These
geographic challenges typify the large difficulties of small areas
(Berkeley is less than 18 square miles) in creating effective policies that
their neighboring communities do not endorse.
3) Can soda taxes reduce obesity and
diabetes? This
last question is more than an economic question; it asks whether Prop D can
achieve its underlying, important and needed public-health objective – to
reduce obesity and the prevalence of Type 2 diabetes. Unfortunately, available
information and evidence for using soda taxes as a fiscal means of reducing
America’s growing obesity epidemic is fairly dispiriting. For one reason, no
matter what intervention mechanism is used be it a tax or something else, changing
people's ingrained behavior is a challenge and can take a long time.
The Prop D soda tax is scheduled to end in 11 years.
The Prop D proponents directly link this proposed
soda tax to the extant federal and state taxes on tobacco, as a comparable tax
to discourage "bad" behavior. Regardless of whether drinking Coke can
be rightfully compared to smoking a cigarette (something that seems a stretch
to me); the Prop D tax is far lower than the current tobacco tax. The federal
cigarette tax is $1.01/pack; the California tobacco tax is now 28.95%, which
averages to about 87₵/pack. Thus, for California smokers
the tobacco tax is about 38% of a pack's pre-tax price. Berkeley's proposed soda tax is less
than one-third the tobacco tax. Is this sufficient to reduce obesity? It's impossible
to say at this point. But the Prop D tax rate is politically expedient because
citizens are highly unlikely to vote for a 35%+ tax rate on SSBs.
Speaking of tobacco, the Prop D proponents probably don't want the fact known that the 46
states that signed the 1998 Tobacco Agreement, which provided for a minimum of
$208 billion in payments through 2023, will
spend just 1.9% of their settlement payments and tobacco taxes on prevention
programs. This doesn't engender much confidence in how politicians actually
spend assigned money.
Another issue in using a soda tax to reduce
obesity is that people who reduce drinking SSBs as a result of the tax don't
usually switch to drinking water; they mostly consume other drinks that also may have
many calories. The effectiveness of a soda tax on obesity would rest in large
part on what the net caloric
reduction is between previously-consumed soda and the new substitute drink.
Also, there are many factors – like lifestyle
– that contribute to obesity and diabetes beyond SSBs. These particulars are
not mentioned by Prop D's supporters, who spotlight "Big Soda" as the cause of obesity. And, although these
facts shouldn't by themselves diminish the rationale for taxing SSBs, they will
make achieving the tax's health objectives, which at a minimum require a net reduction
in one's consumed calories as mentioned above, quite difficult. Appreciably
reducing obesity will require a sustained, substantive, multi-faceted series of
actions, but not limited just to SSB taxes.
To its credit, Prop D would also tax sugared
drinks beyond soda that soda aficionados might substitute for if only soda were
to be taxed. But the proposition won't tax other high-calorie, high-sugar
substitutes like milk (including chocolate milk which is more nutritious, but
on a per-serving basis has more calories, far more fat and almost as much sugar
as soda and is more expensive) and 100% juices (also more nutritious, and also
high-calorie and high-sugar).
An interesting consequence of taxing
substitutes beyond just soda, is that prior research has indicated if you design the tax to include a broader
number of potential soda substitutes, you are more likely to make people just
stick with their original SSB, since they won't be able to "escape"
the tax. This will cause SSB consumption not to fall as much and thus raise tax
revenues, but not achieve hoped-for health benefits. Ironically, higher tax
revenue may allow the Berkeley City Council to fund more obesity-focused health
programs, but these revenues are the result of folks not decreasing their
consumption of taxed SSBs as much as hoped for. There is also evidence from some studies that have examined how soda taxes have affected
consumers, which found that the effects on weight loss were quite modest.
A Soda Tax Postscript: Who is paying for the tax?
Summary: After comparing pre-soda tax and post-soda
tax prices for Coke sold in Berkeley, I found in January that distributors and retailers
are passing along 100% of the tax to consumers.
I visited a Safeway store in Berkeley
on January 2, 2015 to see what prices were being charged for Coca-Cola products
sold in the store. As an empirical economist, I wanted to see how the prices of
Coca-Cola have changed after the imposition of the now-renowned Berkeley soda
tax, passed by citizens on November 4 and enacted on New Year's Day.
I compared these Jan. 2 prices with
the pre-tax ones I gathered on Dec. 30 from the same store. In this way I
calculated what percentage of the tax is now being charged to and paid by
consumers of these sodas and how much is paid by the distributors and/or
retailers (like Safeway). Economists call this percentage the "tax
incidence".
My results of the tax incidence for
several sizes of Coke products sold at Safeway are shown below. This analysis
isn't sophisticated or "representative" of all Coke prices now being
charged in Berkeley; it simply shows how this Safeway store is pricing many of
its Coke products 2 days after the tax went into effect. Nevertheless, it is
insightful and offers an unsurprising result, given the dynamics of the retail
food market.
Coca-Cola Item
|
Soda Tax Incidence for Consumers
|
6-Pack (@16.9oz)
|
100%
|
8-Pack (@12oz)
|
100%
|
1.25 L bottle (42.2oz)
|
100%
|
1 20oz bottle
|
100%
|
The price increases I found on Jan. 2
were exactly equal to the tax.
Consumers are paying 100% of the tax; the entire price increase induced by the
tax. This is diametrically different to what the City Attorney's office said in
the proposition statement, "The tax would be payable by the distributor,
not the customer." Although the statement is probably legally correct,
consumers are paying for the tax. Welcome to the marketplace.
So it seems the Coca-Cola Bottling Co
of California - the distributor of Coke products in the East Bay - and Safeway
have decided that the demand for Coke and other sugared-sodas they provide to
soda drinkers is so inelastic (price-insensitive) that they can simply pass
along ALL the tax they are now paying to the City of Berkeley. Perhaps they're
right and the marginal impact of the tax is relatively small in terms of
changing consumption levels. From a public health perspective, this result may
be fine, since if the distributors end up paying for most or all of the tax,
then retail prices of sugared-soft drinks wouldn't change much, and neither
would consumption patterns.
This result may also be good news for
the folks who are counting on soda tax revenues to be distributed to worthy causes
(but not before July!); perhaps even to programs that can reduce youth obesity,
if the City Council allows it. In the
next few months, we hopefully will learn how sales are affected. All I
determined here was the price change and tax incidence, not how consumer sales
are changing because of the tax-induced price increase. How sales actually
change with these increases will establish how much revenue is available to the
city, and ultimately whether the health of Berkeley consumers of sugared-soda
may be improved. Time will tell.
Stop the presses. Another assessment of the effects of the soda tax was published
in August that offers a much different result than what I show above. This
analysis apparently gathered price data from all Berkeley’s groceries,
supermarkets, pharmacies, convenience stores and gas stations. Prices in these
stores were then compared to a sample of shops in San Francisco. Why San
Francisco stores were selected doesn’t make much sense,
San Francisco’s economic marketplace is very distinct from Berkeley’s. The
study should have gathered information from Oakland or El Cerrito stores to
offer a more appropriate apples-to-apples (or is it Coke-to-Coke)
comparison.
Nevertheless, this assessment
found that just 21.7% of the Berkeley soda tax was passed along to customers. The Daily Caller stated that Berkeley’s store owners have refused to play ball and have
only passed on a fraction of the price increase to consumers. “These results
imply that the Berkeley soda tax, because it is passed through to consumers to
a lesser extent than anticipated, will result in less of a reduction in
consumption, and thus less health improvement, than anticipated,” the study
said.
The Daily Caller's characterization makes it seem that it’s
the store owners’ public responsibility to raise the price of sugared-soda the
entire amount of the tax. The stores here being blamed for
only raising the price 21.7%, not 100% (as I found). But if this study is correct, then the City of Berkeley will have a lot less funds to spend addressing the city's perceived public health care needs.
