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Berkeley’s Soda Tax Fail: Consumers Paying Less Than Half What Was Expected

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Guy Bentley Research Associate, Reason Foundation

Berkeley’s pioneering soda tax is failing to hit consumers as much as public health advocates had hoped, with stores only passing on 22 percent of the tax to customers.

Berkeley, Calif. was the first city in the nation to vote for a soda tax, with supporters arguing the higher price would cut consumption of sugary drinks and help tackle obesity. The law took effect in March and forced distributors to pay a 1 cent tax per ounce of soda. However, Berkeley’s store owners have refused to play ball and have only passed on a fraction of the price increase to consumers.

Economists John Cawley of Cornell and David Frisvold of the University of Iowa gathered price data from all Berkeley’s groceries, supermarkets, pharmacies, convenience stores and gas stations. Prices in these stores were then compared to a sample of shops in San Francisco. Published in the National Bureau of Economic Research, the paper found that just 21.7 percent of the tax was passed to customers.

“These results imply that the Berkeley soda tax, because it is passed through to consumers to a lesser extent than anticipated, will result in less of a reduction in consumption, and thus less health improvement, than anticipated,” the study said.

The study fails to provide a concrete answer for why the tax failed to materialize. Cawley and Frisvold speculate stores in Berkeley may have been worried about shoppers driving to nearby districts to buy cheaper soda.

“In the U.S., the mean distance traveled to shop for groceries is 5.2 miles; even for households with income below $30,000 the average distance traveled to grocery shop is 4.8 miles. In light of this, retailers may not try to shift the tax to consumers, fearing loss of sales,” said Cawley.

Sin taxes have come under fire from economists for being regressive and hitting the poorest consumers hardest. A recent study by the Mercatus Center concluded that “sin taxes — taxes that are intended to change the behavior of consumers—are one prominent category of taxes with a disproportionate effect on the poor.”

To demonstrate the regressive nature of sin taxes Mercatus cited a study in the U.K. showing the poorest 20 percent of households spend roughly $2,000 per year on sin taxes, amounting to around 11.4 percent of their disposable income. (RELATED: Sin Taxes, Zoning Laws And Occupational Licensing Are Holding Back The Poor)

Poor British households spend almost 40 percent of their disposable income on sin taxes, compared to households in the top 20 percent who spend just 15 percent.

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