In 2012, sugary drink (SD) excise taxes were under consideration in eight U.S. states and one city. Not one piece of legislation passed though California currently has pending legislation. Excise taxes are included in the price of an item at the point of selection, NOT simply added on at the cash register as with a sales tax. Sales tax is applied to SDs in 34 U.S. States.
Proposals to tax SDs have met with strong opposition, despite support for the public health benefits of a tax. The arguments tend to be about adverse economic impacts on business, not public health outcomes. One frequently raised argument is that small retailers will lose sales critical to their profitability consumers will cross municipal, state and country borders to purchase untaxed drinks. Opponents assert SD excise taxes will amount to lost jobs and the dislocation of existing businesses.
But, there is no currently published data showing these outcomes. There is only hedged language, including “could result in job loss,” “could cost jobs”, and “we have no solid data,” according to Capital Hill Research Center and the National Automatic Merchandising Association.
We know that changes in the price impact demand. The SD price elasticity has been estimated to be between -0.8 and -1.2; a 10 percent increase in price leads to an 8 to 12 percent decrease in demand. There are reasons to believe that people may be more reactive to excise taxes compared to sales tax. Sales taxes are applied to a variety of goods and are added at the cash register and buyers may not associate the higher price due to the general sales tax to one specific item or even realize the item is taxed. People receiving Supplemental Nutrition Assistance (SNAP) or shopping in military commissaries are exempt from paying sales tax.
On the other hand, excise taxes are included in the price at the point of product selection, clearly indicating a higher price of a SD. We obtained funding from the Robert Wood Johnson Foundation to conduct a study specific to the economic arguments against an SD excise tax in Vermont and to investigate people’s purchasing reactions.
In Vermont, a SD tax was proposed during each of the past two legislative sessions. The bill never made it out of committee. Just this week the American Beverage Association Lobby reported spending $550,000 on anti-tax print and radio ads; a major proponent of the tax, the American Heart Association spent 99 percent less. A major argument against the tax was cross border shopping would lead negative economic impacts on smaller retailers including convenience stores and gas stations.
A telephone survey about the tax was conducted in February, 2011. SDs were defined as non-diet soda, sweetened tea and sports or energy drinks. The analysis included the respondents who reported purchasing an SD in the previous month (181 of 508); a subsample that provided 95 percent confidence (+/- 6.18 percent). These respondents were provided a scenario in which they were asked about their SSB purchase behavior if the price of a 16 ounce SSB beverage increased from $1.50 (the reference price) to $1.66 (one cent per ounce excise tax), purchased in a convenience store or gas station. Because there are NO excise taxes (yet), and thus no market data, the study asked respondents what they intended to do.
Analysis revealed that the excise tax would have the intended result—the penny per ounce tax, 10.66 percent increase in price on a 16 oz. SD, led to a 21.3 percent decrease in sales for a retailer, a price elasticity of -2. Furthermore, the analysis found NO increased negative impact on small retailers and people would NOT cross the VT/NH border to avoid the tax.
In fact, many consumers would still make a purchase. Fifty-six percent who do not purchase a SD after the tax, would choose no calories (nothing) or a no- or lower-calorie beverage (water, diet beverage). Fifty-two percent of consumers said their behavior would not change. We know of no other study specific to a SD excise tax that estimated border and retailer size impacts. This study provides evidence suggesting that the economic/cross border arguments opposing SD excise taxes as a policy instrument to help decrease the obesity problem in the U.S. may not have a strong empirical basis.
Retailers adapt when faced with price increases and sales decreases on particular items, compensating by stocking their shelves with alternatives. The marketplace is already seeing the beverage industry respond to public health concerns by reducing SD package sizes and reformulating toward lower calorie products . Consumers and businesses are constantly faced with fluctuating prices and a changing product mix. Consumers, producers, and sellers adjust accordingly. SD excise taxes seem to be policy tool that nudges a majority of consumers away from SDs without causing undue economic harm to small retailers.
The sugar sweetened beverage research team includes: Jane Kolodinsky, Richard Watts, Ph.D., Rachel K. Johnson, Ph.D., Sarah Heiss, Ph.D. and Michael Moser, M.S.