The Limited Effects of Taxes on Sugar-Sweetened Beverages

Sugar-sweetened beverage taxes have been a topic of debate, seen as a potential solution to combat rising obesity rates.

Here’s the case for imposing a tax on sugar-sweetened beverages: 1) Obesity is a major public health problem, through its effects on diabetes, cardiovascular diseases, asthma, certain cancers, and mental health; 2) Consumption of sugar-sweetened beverages is an outsized contributor to obesity; 3) Taxing sugar-sweetened beverages will raise the cost that consumers pay, and thus diminish their consumption. This logic is sufficiently powerful that taxes on sugary drinks have been imposed, sometimes locally and sometimes at that national level, in 50 countries. The average American (average!) consumes about 200 calories per day in the form of sugar-sweetened beverages, among the highest of any country in the world.

So how is it going? Kristin Kiesel, Hairu Lang, and Richard J. Sexton discuss the evidence in “A New Wave of Sugar-Sweetened Beverage Taxes: Are They Meeting Policy Goals and Can We Do Better?” (Annual Review of Resource Economics, 2023, pp. 407-432). Here are a few of their findings:

1) The effect of taxes on sugar-sweetened beverages (SSBs) on calories consumed is often pretty small. They write:

Eating two extra fries, chips, gummy bears or a single teaspoon of ice cream on a given day cancels out the calorie effect of reduced purchases of SSBs due to taxes measured by Dickson et al. (2021) for the United Kingdom. SSBs have been identified as a major contributor to obesity by many, including the World Bank (2020), but it is unhealthy diets overall, a lack of exercise, a variety of environmental factors, and genetics that determine gaining and retaining excess weight (NICHD 2021).

2) Details of the tax matter considerably. For example, a tax imposed at the city level means that sellers in the city will be aware that, when selling sugar-sweetened beverages, they are competing against untaxed sellers of such beverages outside the city limits. Thus, national taxes will tend to have larger effects than local ones., because sellers will be less likely to pass on a large share of the tax to consumers. Some taxes exclude “fruit drinks,” even though they may have added sugar , while others tax diet soda. Consumption of some types of sugar-sweetened beverages seems more responsive to price increases, like sodas, while consumption of others is less responsive, like energy drinks.

3) If drinking sugary beverages is in part a self-control problem, there are lots of alternative sources of calories that can readily replace sugary drinks, from candy bars to fast food.

4)Unsurprisingly, the revenues from taxes on sugar-sweetened beverages are not especially large compared with other tax sources. The authors write:

The estimate that $133.9 million in tax revenue is collected annually across the seven US cities with local SSB taxes amounts to about $33 per capita within the taxing jurisdictions (Krieger et al. 2021b). A tax implemented nationally that generated similar per capita revenue would amount to 0.32% of the US total tax revenue. Thus, revenues generated from current SSB taxes are rather trivial as a share of revenues, and beneficial purposes to which these funds are devoted could be supported from a modest redirection of funds from more broad-based taxes.

5) The taxes on sugar-sweetened beverages are probably regressive: that is, they cost a greater share of income for the poor than the rich. Indeed, such taxes tend to be less favored by the poor than the rich.

It is well documented that it is easier to be in favor of policy measures that mainly affect others (e.g., Diepeveen et al. 2013) and that at-risk groups whose behaviors are targeted by SSB taxes remain strongly opposed to them (Hagmann et al. 2018). Lang (2022) showed that tax pass-through for local SSB taxes was higher and demand was more inelastic in low-income and more racially diverse neighborhoods than in wealthier and predominantly white neighborhoods. These outcomes exacerbate the disproportionate burden on low-income consumers of raising revenue via SSB taxes. Even when modeled to be socially optimal under consideration of heterogeneous and time-inconsistent preferences (e.g., Allcott et al. 2019a,Dubois et al. 2020), SSB taxes remain mildly regressive at best.

This study isn’t the final word. As the authors are careful to point out, some studies of this literature suggest more optimism about carefully designed taxes on sugar-sweetened beverages as a policy tool. Those interested in more positive estimates might begin with Hunt Allcott, Benjamin B. Lockwood, and Dmitry Taubinsky, “Should We Tax Sugar-Sweetened Beverages? An Overview of Theory and Evidence,” in the Summer 2019 issue of the Journal of Economic Perspectives, or with the 2020 World Bank study, “Taxes on Sugar-Sweetened Beverages: International Evidence and Experiences.”

But I suspect that even those who are more optimistic about the virtues of taxes on sugar-sweetened beverages would agree that they are best-viewed as part of a broader effort to reduce obesity, not as a substitute for a broader effort. Kiesel, Hairu , and Sexton conclude in this way:

Indeed, it will take the knowledge and expertise of public health officials and scholars, economists, psychologists, and those most affected by health inequities and SSB taxes to carefully design multifaceted policies that alter our food environments and nudge both producers and consumers toward improved behavioral responses, health outcomes, and greater social welfare. Carefully designed taxes on added sugars and unhealthy foods implemented countrywide could be part of combined policies aimed at reducing the obesity epidemic and related health harms.Given their regressivity, limited impact on consumption of SSBs, and failure to incentivize product reformulations, we find little basis to support further implementation of local SSB taxes.