Should the US impose a soda tax? Economists say yes, for financial and health benefits

20 May 2019 --- Soda taxes generate net benefits to society, and if the US were to implement a nation-wide tax, it would yield US$7 billion per year. This is according to an economic assessment based on an analysis of health benefits and consumer behavior. The work highlights that a tax would bring advantages similar to those of long-standing cigarette taxes. Moving forward, the US should consider a nation-wide – as opposed to state-by-state – tax to boost health outcomes and save in medical costs, the assessment concludes.

The analysis, by researchers at New York University, the Wharton School at the University of Pennsylvania and the University of California, Berkeley, was released as a National Bureau of Economic Research (NBER) working paper.

Although a handful of countries have already instated so-called “sin” taxes on sugary beverages, the US does not have such policies nationwide. Berkley was the first US state to implement a sugar-tax in November 2014 and it saw a 52 percent drop in the consumption of sodas, as well as a 29 percent increase in water consumption. Yet Arizona, California, Michigan and Washington have each passed either legislation or held referenda banning their cities from adopting new soda taxes. This new paper’s findings suggest that these bans are not economically justified.

“The research is clear that sugary drinks are bad for our health,” note NYU’s Hunt Allcott, Wharton’s Benjamin Lockwood and UC Berkeley’s Dmitry Taubinsky, the paper’s authors. “Our study takes the next step to evaluate the overall economic rationale as to whether we should impose a tax. Using an economic framework, we show that taxing soda generates net benefits to society – taking into account the health effects, the enjoyment that people get from drinking the drinks they enjoy, the value of the tax revenues and other factors.”

Sugary drinks have been linked to diabetes, obesity and heart disease, resulting in high medical bills ultimately paid by taxpayers through Medicare and Medicaid, or by private insurers. The researchers estimate that, on average, drinking a 12-ounce can of Coke will impose about 10 cents of health care costs on others.

The assessment further notes that 53 percent of Americans who consume sugary drinks say they do so “more often than [they] should,” according to a previous survey, which suggests that soda taxes could help people reduce consumption toward the level they want for themselves.

In addition, the study found that people with high nutrition knowledge drink fewer sugary drinks, and that soda taxes help people reduce consumption toward the level they would choose for themselves if they were fully informed about the health impacts.

The researchers estimate that the benefits would reverberate through all societal and income levels. “While low-income people drink more sugary drinks and thus pay more in soda taxes, their health also benefits more from drinking less.”

They describe that previous studies have shown that low-income people more often bear the brunt of diabetes, obesity and heart disease – afflictions linked to consumption of sugary drinks – so they would likely benefit the most from drinking fewer of these beverages. Furthermore, low-income people have lower nutrition knowledge and are more likely to report drinking soda “more often than [they] should.”

Researchers propose state-level taxes
State-level taxes would be even more effective than city-level taxes, say the researchers, such as those implemented in San Francisco, Philadelphia and other US cities.

“Soda taxes would yield more benefit at the state level than they would at the city level, both because they cover more people and because buying tax-free soda just outside the city, which some people do, dilutes the benefits of a tax,” the authors observe.

The existing tax in Philadelphia includes diet drinks, even though the health harms from diet drinks are not clearly established, posing a financial burden while not offering a robust health benefit. “Soda taxes should be limited to sugary drinks, where the health evidence is more clear,” the economists argue.

The analysis shows that the standard 1-cent-per-ounce tax rate might be too low for a state-level tax to yield health and economic benefits and might be too high for a city-level tax in places with substantial cross-border shopping. “Because these estimates involve a number of assumptions, we need more research on this issue,” they say.

The studies, supported by the Alfred P. Sloan Foundation, will appear later this year in the peer-reviewed Quarterly Journal of Economics and the Journal of Economic Perspectives.

Across the pond: The UK sugar tax
The UK sugar tax followed the government’s food and beverage sugar-reduction plan, drawn up in 2016, and is part of the nation’s bid to reduce the negative effects of increased sugar consumption. With a third of British children leaving primary school overweight or obese, Public Health England (PHE) continues to call for increased action from all sectors of the food industry to achieve the 20 percent sugar reduction ambition by 2020.

Industry was also challenged to achieve a 5 percent reduction in the first year of the program which was not successful. 

Earlier this month, the possibility of more sugar taxes for the UK came to the fore. In a bid to get a handle on continually rising UK childhood obesity rates, newly-appointed Public Health Minister Seema Kennedy vowed to crack down on obesity and diet from the earliest ages. Hailing the UK sugar tax on soft drinks as an example of fighting obesity, the Health Minister said that the UK government has had some early success through “sensible and proportionate action.” Moving forward, the Minister wants to shift the focus of the obesity fight toward addressing sugar consumption among the UK’s youngest population. This raises questions that further sugar levies could be introduced across other food categories in the UK which would prompt further reformulation.