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Recently there's been a lot of policy interest in so-called soda taxes, and
in the US several cities have started implementing such taxes.
And quite a few other cities are thinking whether to pass such taxes, and
if they pass them, how to exactly implement them.
How to set the tax rate?
Over which geographic area to levy the tax?
And which products should exactly fall under the tax?
And so we were interested in using data from one of the cities that already
implemented such a tax,
in order to understand exactly how that tax affected consumers.
Whether it improve nutritional intake, whether it was able to raise tax revenue.
And to use those findings to then guide or
thinking about how to design soda taxes going forward.
In our study, we are using data from Philadelphia which is the first largest
city that implemented such a soda taxa.
And it provides us with a very detailed information across many products and
a large set of stores starting from convenience stores to supermarket,
to wholesale clubs.
And we observe both the prices and the quantities that were purchased of sugar
sweetened beverages, before and after the texts went into effect.
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Philadelphia in our mind was particularly useful testbed to look at
the effects of soda taxes,
and think about what effect sort of taxes might have in other localities?
So far, researchers have mainly use data from Berkeley where the first sort of of
tax was introduced in order to study the effects of such a tax.
But Berkeley is a relatively small place, relatively homogeneous, and
so it's a bit of a question to what extent those findings would extrapolate
to other settings.
Philadelphia instead, it's much closer to the US average in terms of its demographic
profile, in terms of its obesity rate.
And it's also quite heterogeneous and diverse city so
it allows us to study how consumers in different neighborhoods with different
income profiles and different obesity rates might react to the tax.
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This tax was 1.56 cents per ounce, so on the typical two liter bottle of Coke,
the price would increase from about a $1.50 to about $2.50, so
that's a very substantial increase in prices.
Now the tax was levied not on retailers directly but on distributors.
So the first thing to study is whether the price increase was actually passed through
to consumers.
And we find that the answer to that question is yes,
it is essentially a 100% passthrough rate.
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We find that quantity purchased in stores in Philadelphia dropped quite dramatically
by about 46% on average, with sometimes even larger decreases in supermarkets, and
some somewhat smaller decreases in convenience stores to tend to sell
smaller pack size of good.
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We study in particular two adjustment margins,
we looked at do people switch to untaxed beverages?
And there's really two classes of beverages here, people could switch to
bottled water, or they could switch to natural juices which aren't taxed,
because they have no artificial sweetener added to them.
Interestingly, we find there's almost no change in demand for bottled water, so
that doesn't seem to be any substitution towards those products.
And there's some modest amount of substitution to its natural juices,
which are presumably healthier along other dimensions, but
they're actually still quite high in sugar and calories, so
it doesn't improve things along that dimension.
And then finally, and this is maybe the most interesting and
striking finding that we didn't necessarily anticipate,
is that we see a large amount of what we call cross-shopping.
A lot of consumers drive outside of the city in order to buy the same beverages
at stores that aren't in the taxed area.
Now, it's important to bear in mind that Philadelphia is still a relatively
small area.
So you're never more than four miles away from the city border, so
it's maybe just quite easy to engage in that type of cross shopping.
And so about half of the decrease that we see in stores in Philadelphia,
is compensated by a corresponding increase in stores up
to six miles outside of the city border.
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Interestingly, what we find is that stores that are located in lower income areas,
there's actually less of a response to the price increase.
And this was something that initially was very surprising to us, because you would
think that Lower income households tend to be more price sensitive.
Now, one possible explanation for that is that low income households have less
access to transport, so it's harder for them to cross shop at stores outside of
the city, and hence they can't react on that particular adjustment margin.
And so what happens is that they simply continue buying the product at the higher
price, whereas richer households drive outside of the city to buy their
soda at those stores where the taxes not apply.
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The fact that so many consumers decided to drive outside of the city to buy sugar
sweetened beverages, is a discouraging fact along a few different dimensions.
So what this large amount of cross shopping means is that we don't get
an improvement in nutritional intake because consumers continue to buy the same
product.
It leads to lower tax revenue because purchases outside of the city aren't
taxed, and to inconveniences consumers in the process.
So regardless of whether you're aiming at improving consumers nutritional intake or
you're trying to raise tax revenue that you can use for other purposes in
the city, the cross shopping makes it harder to achieve both of those goals.
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Depending on the policy goal you have,
whether you want to improve nutritional intake or simply raise tax revenue,
you might address policy leavers a little bit differently.
If you wanted to raise tax revenue, you want to make it very difficult for
consumers to avoid the tax.
So what you want to do is to tax a broad geographic area, and
to have a broad product coverage, so it's difficult for consumers to substitute to
any other product in either geographic or product space.
If instead you are trying to improve nutritional intake,
you want to make it hard for consumers to avoid the tax geographically, but
you actually do want them specifically to substitute towards different products in
particular, healthier ones.
And so if you are trying to improve nutritional intake, my suggestion would be
to tax a broader geographic area, but tax a more narrow range of products that
actually allows consumers to substitute towards relatively healthier products.
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