LIMPING FOREWARD ON ONE ECONOMIC LEG

The best thing about the future is it comes one day at a time. ~ Abraham Lincoln

Unemployment continues its steady, if marginal, decline when the Bureau of Labor Statistics reported this week that overall unemployment in October reached 5.8%. This is good news; however it's been a mostly wage-less recovery, as average hourly earnings (now $24.57/hr) have increased just 2% over the past year. Only 40% of the jobs gained last month pay more than this average wage. Furthermore, in 2013 (latest year available) real median household income had decreased 8% since 2007. No wonder many feel unsure about their economic futures.

The government has two broad economic policy means of influencing the economy; (1) fiscal policy (involving government expenditures and taxes), and (2) monetary policy (altering the money supply, and thus interest rates). Since 2009 there has been no effective fiscal policy by the federal government to keep the economy growing. We've relied almost exclusively on the Federal Reserve's execution of monetary policy to slowly emerge from the Great Recession. In this sense our economy has been limping along on only one economic leg (monetary policy).

For these and other reasons, the President and Congress quickly need to enact an expansionary, resuscitative fiscal policy (increase government spending, reduce taxes) to boost the US GDP beyond its all-too-normal anemic growth. According to the Wall Street Journal, our macroeconomy grew a measly 2.3% during the 12-months ending in September. Government (including federal, state and local) expenditures grew at a paltry, real (inflation-adjusted) rate of 1.8% - the first time government expenditures have grown at all since 2009. As it turns out, this increase was mostly due to increases in the Defense Department's expenditures. This is hardly expansionary.

The story of why federal fiscal policy is missing-in-inaction is well understood. Virtually every Republican in Congress refuses to consider the reality of genuine, lingering effects of the recession, especially for younger people and those of modest means. And they fraudulently proclaim that austerity and deficit-reduction are keys to a better future. Bafflingly, Democrats have yet to make sustained or frequent public announcements for their fiscal policy proposals to remedy the recession's persistent effects for anyone below the 90% income earners. The bottom 90%ers are those of us who make less than $120,136 in adjusted gross income (AGI) and despite our overwhelming numbers account for only 54.6% of the nation's total AGI. The Democrats seem scared to say anything about how they will make most Americans better off and feel more secure about the future. In large part that fear cost them the election.

The Democrats' feeble showing in last week's elections (with the fortunate exception of California) confirms their lack of vision and leadership in more than just fiscal policy. Why did Democrats – including President Obama – continue to believe that not actively countering the deceptive aggression of Republicans on economic policy would somehow give them a free ride for maintaining their electoral seats in the House and Senate? It's a mystery with unfortunate consequences.

In January, the Senate Budget Committee will be chaired by deeply-conservative Jeff Sessions, who wants to resurrect across-the-board sequester cuts to government spending this fiscal year. And the Senate Environmental and Public Works Committee will be chaired by James Inhofe, a 100% climate change denier who is in league with radical rightists who would be happy to defund the entire EPA. One often-cited quote of Sen. Inhofe illustrates his environmental views, “God’s still up there. The arrogance of people to think that we, human beings, would be able to change what He is doing in the climate is to me outrageous.” Oh my.

But back to fiscal policy. Although it may necessitate action by Executive Order (or action by the lame-duck Congress – I know, a pure fantasy), I believe a resuscitative fiscal policy should focus on one over-riding objective – increase the annual growth of our economy to 4.5% to 5% per year. Such growth would help vast numbers of people (beyond CEOs) find new, higher-paying jobs. Here are 3 ways revived fiscal policy can do this: (1) improve middle- and working-class income; (2) augment education spending, including changes in student loan debt; and (3) increase infrastructure spending.

(1) Improve middle- and working-class income. There are 2 direct fiscal means of achieving this needed goal, reduce relevant federal income tax rates and increase the federal minimum wage. Practically speaking, increasing the minimum wage is a lost cause at the federal level, especially after January when Congress will be ruled by Republicans. Auspiciously, we saw last week that 4 more States – including Republican stalwarts like Alaska, Nebraska and South Dakota –have gone where the Congress fears to tread and passed higher state minimum wages. The political movement to raise State and local minimum wages is fortunately continuing, so I don't propose changing the federal minimum wage – until so many states have increased wage minimums that multi-state corporations will pressure Republicans in Congress to revise the federal minimum wage so there's more consistency. Don't hold your breath, but it is a possibility.

Until that time, I propose lowering federal income tax rates. Lowering taxes is the life-blood of Republican dogma, so perhaps this proposal is an opportunity to unleash their dogma for the public benefit.

There are 7 different federal tax rates or brackets, depending on one's income level; ranging from 10% to 39.6%. My proposal is to reduce the bottom 4 rates – covering income levels up to and including the 28% rate and AGI of $186,350 (as a single filer). Also, I would increase the earned income tax credit (EITC). This tax credit is a refundable credit that depends on the number of children in the household. The EITC has been one of the most effective fiscal programs to assist low and moderate-income earners. I would increase the maximum EITC in 2015 by 10%, for example to a maximum of $6,006 (with 2 kids) from $5,460, and thereafter automatically adjust it annually based on the Consumer Price Index.

Finally, I would change the federal estate/inheritance tax. Granted, this doesn't have anything directly to do with improving middle-class income, instead it would help reduce the loss of federal tax revenues resulting from my proposed reductions in federal tax rates and EITC increase. Aren't the Republicans (overly) concerned about deficits? Here's a way to mitigate a possible deficit increase (before the resulting increased GDP growth reduces the deficit more) and at the same time make a meaningful contribution to reducing the hugely-significant wealth inequality present in the US. I suggest changing the minimum size of the estate subject to the tax to $4 million from $5.34M, and increasing the tax rate to 48% from its current 40% maximum rate.

Only a miniscule 0.14% of US estates pay any estate tax whatsoever, due to exemptions which have more than quadrupled since 2001. Because the effective tax rate on estates is far lower than the statutory maximum (according to the Tax Policy Center the overall effective rate is 16.6%), increasing the statutory 40% rate to 48% would likely increase the effective rate to about the same rate as the 20% long-term capital gains tax rate for the highest-income earners. Thomas Piketty and many others would clearly approve such a fiscal change.

(2) Augment education spending. Unlike changing tax rates, increasing education spending is not likely to have any short-term benefits to economic growth or incomes. But increasing education spending has long demonstrated significant improvements to people's and the nation's economic wellbeing over time. I propose 3 specific changes to education fiscal policy that will produce sustained and positive macroeconomic outcomes.

First, I would increase federal education spending for post-high-school education, especially in technical skills' training. A growing concern of business is the "skills-gap" for mid- and higher-level technical workers. I propose to add $15B to the Education Department's Federal Higher Education Student Aid work-study programs (that represents almost a 9% increase in the student aid programs' total FY2014 budget). This additional funding will support more technical apprenticeships and related programs after the students have completed either technical programs in high school or enrolled in technical disciplines at publicly-funded 2-year colleges.

Second, increase the post-secondary school tuition and fees tax deduction. Currently, a student (or a student's parents/guardians who claim the student as a dependent and pay the tuition/fees) can claim a maximum $4,000 deduction from his/her adjusted gross income per year. As we all know, college tuition and fees have dramatically escalated over the past decade. From 2003-04 to 2013-14 tuition and fees at public 4-year colleges/universities increased 50.7% in real (inflation-adjusted) terms, or a real yearly average increase of 4.2%. The maximum IRS deduction for educational tuition and fees has not changed. It should increase to $6,000 per year.

And third, unlike any other type of debt, outstanding student loan debt is very, very difficult get discharged, even through personal bankruptcy. There is no substantive reason for this ill-founded exception. This needs to change. So for unfortunate former students whose financial lives have gone off the rails, their outstanding student loan debt can be straightforwardly forgiven through a bankruptcy proceeding, like other liabilities. One step in making it easier to discharge student loan debt in bankruptcy is to remove the "Brunner standard" as a criterion for loan debt dismissal. Another step would be for Congress to amend the Higher Education Act, which allows the government to offer subsidized student loans, so student loan debt is considered just like all other forms of loan debts.

(3) Increase infrastructure spending. This third facet of resuscitative fiscal policy is time-tested and neither new nor controversial. In the past, both Republican and Democratic led Congresses and Presidents have implemented federally-funded infrastructure expenditures to good effect. But this 113th Congress has done next to nothing despite pleas from a wide range of politicians and people across the US. I am hopeful that when the 114th Congress begins on Jan 3, 2015 it will see the fiscal light and act to implement needed improvements in our country's infrastructure. The infrastructure that is most appropriate to first improve is our "data highway," the US internet infrastructure. US internet speeds rank 26th in the world, just behind Finland. Overall, US speeds are only one-third as fast top-ranked Hong Kong (97.63 mbps). We must do better if we want domestic commerce to grow substantially during the coming decade, so employment can rise along with GDP.

I propose that the Department of Commerce administer $43 billion of new spending to enhance our data highway. This will include requiring private and public telecommunications and internet providers (TIPs) to install at least 4G Wi-Fi and broadband fiber-optic cable directly to consumers' residences during the next 30 months. In return for making these electronic infrastructure investments, the TIPs will be provided with a 10% investment tax credit (a type of subsidy to increase business investment) on these new expenditures to incent the implementation of these needed improvements. This funding will be allocated based on the 2010 population of each state and its population density; the more populous and dense the state, the more funds will be proportionately allocated. With these subsidies, the TIP's individual customers' internet service charges will not increase more than the annual change in the CPI over the next 5 years. The cost of these government II expenditures will also be partially financed by increasing the Federal Universal Service Charge (telephone) tax and the FCC User Fee by 5%. By allocating this funding according to population and density internet infrastructure investment will be provided efficiently, more to those areas that serve the most people – rather than Alaska, Wyoming or North Dakota. Sparse, rural areas already receive Federal subsidies for telecommunications infrastructure. Their internet infrastructure may be enhanced in Phase II. This proposed infrastructure enhancement will provide the greatest good to the greatest number of people.

Onward, walking full stride on both legs to the future…

ALL OF ECONOMICS IN ONE GRAPH

A study of macroeconomics usually reveals that the best time to buy anything is last year. ~ Marty Allen

Economics has enjoyed more prominence and attention for several decades, especially in developing and assessing macroeconomic policies.  Whole troupes of economic experts make pronouncements that are reported 24/7; everything from inadequate GDP growth to the local price of kale. Economic precepts surround our everyday lives, but this expansion of economics has been accompanied by a fractured focus that mostly ends up explaining only small, individual facets of economic goings-on in our broad economy.

To counter this unfortunate lack of synthesis, please examine the following "All of Economics in One Graph." With a dollop of humor, this single graph combines many disparate parts of economics into one comprehensive amalgam. The diagram mingles Adam Smith and John M. Keynes with Janet Yellen and Fredrik Hayek as well as the answer to the ultimate question of life. Also illustrated are the relationships between Detroit, the demand for kale, Wall Street, Gourmet Ghetto restaurants and the Bottom 50% among other economic activities. All this is linked to the price of bliss, iPhones, college tuition and the dearly-departed Zimbabwean hyperinflation.

This  graph is founded on the standard textbook depiction of macroeconomic aggregate supply and aggregate demand to explain the relationship between the economy's overall price level (Price) and national output (Real GDP). If you're interested, here's more information about this model. [You can click on the graph to enlarge it.]

All of Economics in One Graph

 

 

Troy Gelobter provided graphical assistance.

Glossary for "All of Economics in One Graph"

42 – Douglas Adams' well-regarded answer to the "ultimate question of life, the universe and everything." 42 is mentioned in Adams' Hitchhikers' Guide to the Universe. If you seek more guidance, go here.

Bicycle – No, the bicycle is not a specialized form of a business cycle, but it is related (from afar). The first modern bicycle was introduced in 1817 by German Baron Karl von Drais. However, when visiting Vinci, Italy I saw a bicycle model based on drawings from this city's most famous son Leonardo that looked remarkably similar to a modern bike. What's 300 years or so? Since their introduction, bicycles have contributed to growth and good times in many business cycles beyond imperious messenger services. Bikes are important. Why else would Thomas Piketty mention in his best-selling book, Capital in the 21^st Century, that in terms of bikes' production advances, our purchasing power has increased an impressive 40-fold between 1890 and 1970. Speaking of which, after the first mountain bikes appeared in the San Francisco Bay Area in the late 1970s they soon were purchased (and ridden) around the globe. Those were the days; it's all downhill from here.  

Bliss – Economically speaking, bliss is achieved when the economy is in long-run equilibrium that occurs as short-run macro supply, long-run macro supply and macro demand all intersect with stable prices at full-employment real GDP. Unfortunately, economists rarely know when we are actually enjoying such a blissful state. Alas, it is only after the fact (when data become available) that we can hypothesize that the economy was in a blissful state. So it goes…

The Bottom 50% of taxpayers earned a mere 11.6% of total adjusted gross income (AGI) in the U.S. according to 2011 tax returns. The Top 1% received 18.7% of total AGI. All by themselves the Top 0.1% accounted for 8.9% of total AGI.

Fredrik Hayek was a prominent member of the Austrian School of Economics, best known for espousing classical liberalism in his book, The Road to Serfdom. He taught at the University of Chicago and received the Nobel Prize for Economics in 1974.

John M. Keynes – John Maynard Keynes was a British economist considered to be the father of modern macroeconomics. Unlike most of his predecessors, Mr. Keynes believed that aggregate demand – labeled Macro Demand in the graph – was also responsible for an economy's overall activity, not just supply. He also believed aggregate demand could be influenced by the government's use of appropriate fiscal and monetary policies. Mr. Keynes' ideas made him one of the most influential economists of the 20^th century.

Rolls Royce Wraith – Perhaps Rolls Royce's most beautiful car, the Wraith is a 2-door, 4-seat coupe with an uncommon legacy. The first Rolls Royce Wraith was produced in 1938; it was re-introduced in 2013. If you have to ask, you probably can't… However, for those who do ask, pricing starts around $285,000, but can easily reach $400,000 or more, depending on the owner's desires. It's not your father's Camry.

Adam Smith was a pioneering Scottish political philosopher who wrote the Wealth of Nations in 1776 that laid the foundation for modern, systematic inquiry of economic systems. [P.S., I'm pretty sure he's not a relative.]

Janet Yellen is the Chair of the Federal Reserve System. As the head of the Fed, she manages this nation's money supply (S_$), regulates the nation's banks and has responsibility for maintaining steady prices and full employment. This challenging, herculean job probably makes Dr. Yellen the single most influential economist on the planet now. Her realm is thus pretty vast.

Zimbabwe hyperinflation occurred in 2008-09 and is a distressing example of gross mismanagement of a nation's economy. The inflation rate (the rise in overall prices in an economy) in Zimbabwe reached an unfathomable 231 million percent in July 2008, and prices kept rising. The ever more worthless Zimbabwean dollar was finally abandoned and placed in dustbins by early 2009. Since then, Zimbabweans have used South African Rand and U.S. dollars as their currencies. Thus, there are now many Benjamins in Harare.

 

 

 

 

THE BERKELEY SODA TAX: ECONOMICS ON THE BALLOT

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"[2] 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"[3] 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.[4] 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.[5] 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.

We'll soon see if this notably progressive city's citizens will vote to raise the price of many of the sugared drinks they consume in the name of potentially-improved public health.

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.

---

[1] The reason the Berkeley proposition doesn't state its tax revenues will directly fund specific health programs in the city is that such specific tax propositions require a two-thirds yes vote; general-fund taxes like Prop D require only a simple majority. Initial surveys indicated that less than a two-thirds majority of Berkeley voters would likely support such a tax.

[2] Incidence of a tax is a measure of which market participant(s) – consumers and/or producers/sellers – actually pay the tax.

[3] Very small retailers, according to Prop D, are those that have annual gross revenues of less than $100,000. As defined, these Berkeley retailers are indeed very small, with total daily sales of less than $300 if they are open 7-days a week. A typical 7-11 store probably grosses at least 10 times that much each day.

[4] Changing habitual personal behavior – even if it's unhealthy – can take significant time and effort and require multiple methods. It's been 50 years since the first US Surgeon General's report on smoking was published. This report directly linked smoking to disease and shorter life spans. Substantial taxes have been imposed on tobacco products as well as wide-spread, multi-media anti-smoking advertising-public service campaigns. With these considerable activities, smoking rates for adult Americans have declined significantly over 5 decades. And the latest CDC report states that despite these efforts 42.1M Americans remain current smokers, representing 18.1% of our adult population.

[5] The proposed San Francisco soda tax is 2₵ per fluid ounce.