Berkeley Soda Tax Gives Government Revenue a Sugar High

Published July 13, 2015

Residents of Berkeley, California are paying more for all sorts of items as a 1-cent-per-ounce sin tax on soda and other sweetened beverages took effect on March 1.

Voters approved the sin tax in November.

Instead of passing the health-related tax along to consumers as a price increase, local retailers are offsetting the added cost by raising prices on other products, an unintended consequence of the sin tax.

The effects of the tax on consumer purchasing decisions are negated by the fact it’s not being passed along directly to consumers, says William Shughart II, an economics professor at Utah State University and a policy advisor for the Independent Institute, a non-partisan organization sponsoring in-depth studies of critical social and economic issues affecting Californians.

“It looks like the revenue projections are on track, but it’s all being paid by retailers,” Shughart said. “Retail sales of soft drinks, which you can buy pretty much anywhere, is a pretty darned competitive industry. Sellers find it very difficult to pass on any of the tax to the consumers in the form of a higher price.”  

‘Kind of a Smokescreen’

Shughart says sin taxes are a sweet deal for boosting government revenue and little else.

“It’s kind of a smokescreen,” Shughart said. “Supporters of these kinds of taxes say they’re going to cure Type II diabetes or prevent tooth decay, but they aren’t doing that. They’re using those arguments as smokescreens for sin taxes, selective excise taxes, sales taxes, and the like to generate revenue.”

Consumer Responses

Julian Moore, vice president of research at the Reason Foundation, says Berkeley’s use of tax policy to improve public health is unlikely to succeed even if the tax could be passed on to consumers directly.

“It seems likely that this is a result of two different responses,” Moore said. “First, some consumers continue to consume the same amount of the same brand of sugary beverage because they are loyal to that brand and are willing to pay a little more. Second, some consumers switch to a lower-price brand while continuing to consume the same amount.”

Substituting for Sugar

Moore says consumers respond to sin taxes by replacing discouraged drinks or snacks with other sugary treats.

 “It is not clear that such taxes are actually a good thing even from a health perspective,” Moore said. “The Danish tax on fat almost certainly reduced demand for Danish butter, but Danes substituted other calorific foods, including foods produced in neighboring countries, so it didn’t have much impact on rates of obesity.

“The same is likely to happen with taxes on sugary beverages,” Moore said. “Consumers are likely to substitute other products that provide them with similar amounts of energy.” 

Jeff Reynolds ([email protected]) writes from Portland, Oregon.

Internet Info

Victor Fleischer, San Diego Legal Studies Paper No. 14-151, “Curb Your Enthusiasm for Pigouvian Taxes”: