Editor's note: This story has been edited after Tuesday's election results.
Aside from the election of President-elect Donald Trump, one of the most controversial decisions that voters in San Francisco; Oakland, CA; Boulder, CO and Albany, CA made Tuesday concerned a tax on sugary soft drinks.
The soda tax, which has pulled in more campaign dollars in the San Francisco Bay area than the race for an open U.S. Senate seat, caused division everywhere it was proposed. Drafted by municipal governments, these proposals generally add a couple of pennies in taxes to the price of the sugary drinks to disincentivize consumers from purchasing them.
Historically, this type of tax always lost at the polls, though they have been proposed in dozens of cities across the U.S. But in 2014, voters in Berkeley, CA passed a one-cent per ounce of soda tax, paving the way for this kind of referendum to see success.
It seems the way a tax like this works is pretty straightforward. The tax forces soda prices up, which in turn makes consumers less likely to purchase them.
However, new research from Cornell University tells a different story. John Cawley, a professor of policy analysis and management and of economics, found that on average, Berkeley retailers only passed on about 43% of the tax to consumers. Meaning, if the tax would make a can of soda 10 cents more expensive, consumers were only charged an average of 4 more cents per can of soda.
Cawley, whose findings were published last month in the Journal of Policy Analysis and Management, told Food Dive that the research shows there is quite a bit of complexity to the issue.
“You shouldn’t assume that placing a penny per ounce tax on distributors means the price to consumers goes up by a penny now,” Cawley said. “That’s a pretty strong assumption.”
Cawley first became interested in research on soda taxes as the 2014 election results started coming in. He noticed that Berkeley passed its soda tax, while nearby San Francisco did not. Cawley contacted a friend — David Frizvold of the University of Iowa, the co-author of the paper — and discussed how to provide new insight into how the tax actually works.
Since Berkeley instituted the tax while nearby cities had not, Cawley realized he had a unique way to study its impact. He was able to collect pre- and post-tax pricing data from the affected area as well as nearby jurisdictions for comparison.
The results, which factored in things like inflation and general price changes, showed a great diversity in how the tax was being passed on to consumers. Cawley said there were some stores where consumers were charged the full brunt of the tax, while others showed no impact on price. Plotting those stores on maps also showed inconsistent results, which varied no matter where the stores were located — though more stores closer to the city limits passed along less of the tax to consumers.
Why did this happen?
Cawley believes several factors come into play. Other studies have shown that consumers will travel to another jurisdiction to get out of paying taxes — leaving a state, city or even a country where a certain item has a higher tax. Americans also typically drive several miles to do their shopping, he said, so it isn’t necessarily a hardship to go somewhere else to make purchases.
“At least the concern about that is something that could be limiting pass-through, the extent to which prices are passed on to consumers,” Cawley said.
If consumers are not paying the extra money, someone is taking a hit from the tax. Cawley said his research didn’t address whether retailers, distributors or manufacturers are the ones losing money.
Does a tax like this work?
The rationale behind soda taxes makes sense, according to Cawley: People who are in worse health are more of a drain on public resources.
Despite the mixed results, Cawley said the study actually shows that targeting price is an effective way to deter soda consumption.
“If consumers were completely insensitive to price — like, they would have paid any price for these beverages — then the tax would have been passed on 100%,” Cawley said. “The fact that it’s not being passed on 100% suggests that consumers are in fact price-sensitive. When the price goes up, consumers buy less at these stores.”
A better way to do it, he said, might be broadening taxes to cover other foods. Instead of only targeting soda, other unhealthy and sugary foods like chocolate or candy could also face the same sort of tax.
Reform to SNAP, the federal government’s food assistance program, could also be helpful, he said. Currently, the assistance dollars can be used to buy unhealthy items.
“When we’re struggling with epidemics like diabetes and obesity, it probably doesn’t make sense for a government program to be providing free soda pop and free cookies,” Cawley said.
Another way to make this sort of tax more effective is to widen its impact. If the tax were statewide or even nationwide, it would be harder for people to get around paying it, Cawley said. Instead, consumers might just react by changing their behavior.
Most of the soda taxes that were passed yesterday are similar to the one in Berkeley — limited to a small area and specific to soda. Now that the three California cities have passed the tax, they could all work with Berkeley to make the tax more enforceable.
“It could actually make cross-border shopping harder because now it’s a tax in all of those places,” Cawley said. “…That’s getting closer to this idea of taxing at a higher level of geographic aggregation.”