Do Soda Taxes Create Healthier Communities?

[MUSIC] Recently there’s been a lot of policy
interest in so-called soda taxes, and in the US several cities have
started implementing such taxes. And quite a few other cities are thinking
whether to pass such taxes, and if they pass them,
how to exactly implement them. How to set the tax rate? Over which geographic
area to levy the tax? And which products should
exactly fall under the tax? And so we were interested in using data
from one of the cities that already implemented such a tax, in order to understand exactly
how that tax affected consumers. Whether it improve nutritional intake,
whether it was able to raise tax revenue. And to use those findings to then guide or thinking about how to design
soda taxes going forward. In our study, we are using data from
Philadelphia which is the first largest city that implemented such a soda taxa. And it provides us with a very detailed
information across many products and a large set of stores starting from
convenience stores to supermarket, to wholesale clubs. And we observe both the prices and the
quantities that were purchased of sugar sweetened beverages, before and
after the texts went into effect. [MUSIC] Philadelphia in our mind was
particularly useful testbed to look at the effects of soda taxes, and think about what effect sort of
taxes might have in other localities? So far, researchers have mainly use data
from Berkeley where the first sort of of tax was introduced in order to
study the effects of such a tax. But Berkeley is a relatively small place,
relatively homogeneous, and so it’s a bit of a question to what
extent those findings would extrapolate to other settings. Philadelphia instead, it’s much closer to
the US average in terms of its demographic profile, in terms of its obesity rate. And it’s also quite heterogeneous and
diverse city so it allows us to study how consumers in
different neighborhoods with different income profiles and different obesity
rates might react to the tax. [MUSIC] This tax was 1.56 cents per ounce, so
on the typical two liter bottle of Coke, the price would increase from
about a $1.50 to about $2.50, so that’s a very substantial
increase in prices. Now the tax was levied not on retailers
directly but on distributors. So the first thing to study is whether the
price increase was actually passed through to consumers. And we find that the answer
to that question is yes, it is essentially a 100% passthrough rate. [MUSIC] We find that quantity purchased in stores
in Philadelphia dropped quite dramatically by about 46% on average, with sometimes
even larger decreases in supermarkets, and some somewhat smaller decreases in
convenience stores to tend to sell smaller pack size of good. [MUSIC] We study in particular
two adjustment margins, we looked at do people
switch to untaxed beverages? And there’s really two classes of
beverages here, people could switch to bottled water, or they could switch
to natural juices which aren’t taxed, because they have no artificial
sweetener added to them. Interestingly, we find there’s almost no
change in demand for bottled water, so that doesn’t seem to be any
substitution towards those products. And there’s some modest amount of
substitution to its natural juices, which are presumably healthier
along other dimensions, but they’re actually still quite
high in sugar and calories, so it doesn’t improve things
along that dimension. And then finally, and
this is maybe the most interesting and striking finding that we
didn’t necessarily anticipate, is that we see a large amount
of what we call cross-shopping. A lot of consumers drive outside of the
city in order to buy the same beverages at stores that aren’t in the taxed area. Now, it’s important to bear in mind
that Philadelphia is still a relatively small area. So you’re never more than four
miles away from the city border, so it’s maybe just quite easy to engage
in that type of cross shopping. And so about half of the decrease that
we see in stores in Philadelphia, is compensated by a corresponding
increase in stores up to six miles outside of the city border. [MUSIC] Interestingly, what we find is that stores
that are located in lower income areas, there’s actually less of
a response to the price increase. And this was something that initially was
very surprising to us, because you would think that Lower income households
tend to be more price sensitive. Now, one possible explanation for that
is that low income households have less access to transport, so it’s harder for
them to cross shop at stores outside of the city, and hence they can’t react
on that particular adjustment margin. And so what happens is that they simply
continue buying the product at the higher price, whereas richer households drive
outside of the city to buy their soda at those stores where
the taxes not apply. [MUSIC] The fact that so many consumers decided
to drive outside of the city to buy sugar sweetened beverages, is a discouraging
fact along a few different dimensions. So what this large amount of cross
shopping means is that we don’t get an improvement in nutritional intake
because consumers continue to buy the same product. It leads to lower tax revenue because
purchases outside of the city aren’t taxed, and to inconveniences
consumers in the process. So regardless of whether you’re aiming at
improving consumers nutritional intake or you’re trying to raise tax revenue
that you can use for other purposes in the city, the cross shopping makes it
harder to achieve both of those goals. [MUSIC]. Depending on the policy goal you have, whether you want to improve nutritional
intake or simply raise tax revenue, you might address policy leavers
a little bit differently. If you wanted to raise tax revenue,
you want to make it very difficult for consumers to avoid the tax. So what you want to do is to tax
a broad geographic area, and to have a broad product coverage, so it’s
difficult for consumers to substitute to any other product in either geographic or
product space. If instead you are trying to
improve nutritional intake, you want to make it hard for consumers
to avoid the tax geographically, but you actually do want them specifically to
substitute towards different products in particular, healthier ones. And so if you are trying to improve
nutritional intake, my suggestion would be to tax a broader geographic area, but
tax a more narrow range of products that actually allows consumers to substitute
towards relatively healthier products. [MUSIC].

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