Passed in Berkeley, California, the law puts a penny-per-ounce tax on manufacturers for soda, energy drinks and pre-sweetened teas, among other things.
Thus far, higher prices have not been passed onto consumers, economists John Cawley of Cornell and David Frisvold of the University of Iowa wrote in the paper, The Incidence of Taxes on Sugar-Sweetened Beverages: The Case of Berkeley, California, which appeared in the National Bureau of Economic Research.
The expectation was that this tax would raise prices for shoppers, thereby discouraging consumption of sugary drinks, but the economists say it has only raised retail prices on sugary drinks by less than half the intended.
Prices, on average, saw increases of less than half the tax amount.
For larger companies, like Coke and Pepsi, only 22% of the tax was passed to consumers.
Sin tax not working
Cawley said one reason this particular sin tax may not be working is due to it being limited to one city.
Companies likely don’t want to raise prices outside of Berkeley for a tax that does not impact them.
“Concerns about cross-border shopping could contribute to a low pass-through of the tax,” Cawley said.
Even though the tax is not working, Cawley wrote that the money it is raising for healthy living program – an expected $1.2 million for 2015 – certainly has merit.
He believes simply taxing sugar-sweetened beverages is a short-sighted way to fight obesity, as there are plenty of other products that contribute to obesity. Even so, he said there is “economic rationale” for this tax.
Sherzod Abdukadirov, a research fellow the Regulatory Studies Program at the Mercatus Center at George Mason University, wrote in a blog post on the Mercatus Center’s website that this tax may be too far in the background to be effective at stopping consumer soda consumption.
Sin taxes can work as a “nudge” to help stop a behavior, he said, but Berkeley’s sin tax is hidden from consumers and “evidentially designed to maximize revenues”.
“The city imposed the tax on soda distributors who may or may not decide to pass it on to the consumers,” he wrote. “Even if the distributors choose to raise the soda prices, the increase will be indistinguishable from the usual price volatility of food items. Nothing on the price tag or consumer’s receipt would indicate that part of the cost comes from the soda tax.”
Data from Governing.com shows that California isn’t high among the 50 states when it comes to sin taxes. Of the state’s total tax revenue, 0.9% comes from sin taxes. Rhode Island, on the other hand, gets 15.9% of its tax revenue from sin taxes. While not many states lean heavily on sin taxes, California is especially low on the list.
How it passed
The tax, passed during the November 4 2014 election, began on the first day of 2015.
This law has been seen as many as a litmus test for how a similar tax could work in other areas of the country and many had lofty expectations for its potential to spread outward into the rest of the US.
Michael Jacobson, executive director of the Center for Science in the Public Interest (CSPI), said on the evening the law passed that big soda companies “better keep their checkbooks out”.
“We expect that cities, towns and state legislatures all over the country are taking a closer look at what happened in Berkeley and many will be readying similar campaigns to tax soda in the years to come,” he said in a statement on November 4.
It may take a greater level of success for Berkeley before other cities start imposing their own sin tax on soda and sugary drinks.
As Elizabeth Crawford wrote on BeverageDaily in November 2014, this similar tax may not work everywhere. A similar measure was on San Francisco’s ballot and garnered 54.4% of the vote, but needed a two-thirds majority to win.
Larry Tramutola, a consultant who worked with the Berkeley campaign to pass the soda tax referendum, told Crawford that each local area will need to make a decision on this tax that works for the local community.