Berkeley’s Soda Tax Loses Its Fizz But Offers Important Lessons

William F. Shughart II Research Director, Independent Institute
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Supporters of public health taxes toasted a victory last November when voters in Berkeley, Calif., approved overwhelmingly a proposal to levy a tax of one cent per ounce on local sellers of carbonated soft drinks and other sugary beverages. More than six months after the tax was implemented, however, we can say with reasonable certainty that their expectation of reduced consumption of these drinks was wishful thinking.

“Berkeley vs. Big Soda,” a lobbying group that helped garner 73 percent voter approval for the measure, naively thought the tax would be passed fully on to consumers, thereby raising the retail prices of sugary drinks, reducing their sales, and cutting significantly the consumption of “the number one source of added sugar in the American diet.”

The new tax was sold to voters as a proverbial “win-win” for Berkeley. It promised about $1.2 million in extra revenue for the city’s coffers (some of which was earmarked for “healthy living programs”), while at the same time “nudging” citizens to guzzle less calorie-dense soda, sports drinks, energy drinks, presweetened tea, and other beverages predominantly sweetened with high-fructose corn syrup, a suspected culprit in the rise in obesity and adult-onset (Type II) diabetes.

Although 34 U.S. states and the District of Columbia include soft drinks in their sales tax bases, Berkeley was the first jurisdiction in the nation to impose a differentially higher tax on sugary soda pop. With victory won at the polls, the tax’s supporters might have hoped that similar initiatives would spread like tooth decay across the country.

Advocates of the Berkeley vs. Big Soda campaign should have spent less time taking the paternalistic health-conscious high ground and more time studying the principles of public finance. A study released on August 17 from the National Bureau of Economic Research, by economists John Cawley of Cornell and David Frisvold of the University of Iowa, concludes that Berkeley’s selective soda tax, which went into effect on January 1, has fallen flat.

Only about 22 percent – not 100 percent – of the tax increase has been passed on to consumers in higher prices. The health benefits claimed for the tax thus will be much smaller than anticipated.

What should well-meaning voters learn from this episode?

Lesson 1: To determine who bears the brunt of a selective excise tax, it is irrelevant who is required to remit the receipts to the treasury (beverage distributors in this case). In general, the burden will be shared by producers and consumers: some of the tax will be shifted forward to buyers and some of the burden will fall squarely on the shoulders of sellers or be shifted backwards to suppliers and employees.

Lesson 2: The extent to which consumers pay higher after-tax prices hinges on the availability of substitutes for the taxed item. In the case of Berkeley’s soda tax, consumers had many options at hand, including buying their soft drinks in neighboring cities and shifting toward tax-exempt artificially sweetened beverages.

Lesson 3: Selective excise taxes can have unintended consequences that conflict with the underlying aim of the advocates of those taxes. For example, medical evidence is mounting that drinking artificially sweetened sodas is as bad for one’s health as drinking sugary ones. Although zero-calorie beverages do not add directly to weight gain, they are implicated in the onset of Type II diabetes because the human body reacts to artificial sweeteners much like it does to cane sugar or high-fructose corn syrup. Also, since artificial sweeteners do not produce energy “rushes”, people who consume diet drinks may satisfy their cravings for sweetness by eating sugary candy bars.

Lesson 4: Taxes on consumer goods fall most heavily on low-income households but not necessarily on the poorest. People using food stamps to buy sugary drinks are not required to pay Berkeley’s new tax.

The bottom line is that Berkeley’s tax on sugar-sweetened beverages will do very little to promote healthy lifestyles and will not raise nearly as much revenue as its supporters thought. Singling out one group of taxpayers and demonizing them for making poor dietary choices is a common strategy nowadays for pushing through new taxes or raising existing ones. That strategy may succeed at the polls, but not in the marketplace.

William F. Shughart II, Research Director at Independent Institute, is J. Fish Smith Professor in Public Choice at Utah State University’s Huntsman School of Business