Can Soft Drink Taxes Reduce Population Weight?

By Jason M. Fletcher, David Frisvold, and Nathan Tefft. Published in Contemp Econ Policy. 2010 Jan; 28(1): 23–35. Excerpts:

Abstract

"Soft drink consumption has been hypothesized as one of the major factors in the growing rates of obesity in the US. Nearly two-thirds of all states currently tax soft drinks using excise taxes, sales taxes, or special exemptions to food exemptions from sales taxes to reduce consumption of this product, raise revenue, and improve public health. In this paper, we evaluate the impact of changes in state soft drink taxes on body mass index (BMI), obesity, and overweight. Our results suggest that soft drink taxes influence BMI, but that the impact is small in magnitude."

Conclusion

"In this study, we estimate the effects of current soft drinks taxes on weight outcomes for the US population. As the “obesity epidemic” has garnered considerable attention in the US in the last decade, we examine the usefulness of attempts to control population weight gain through taxation of undesirable consumption. In doing so, we make several important contributions to estimating the effects of taxation on weight changes in the US population. We use state, year, and quarter-of-year fixed effects, along with state-specific time trends in our baseline specification and find that a one percentage point increase in soft drink taxes decreases adult BMI by 0.003. While soft drink consumption is the single largest contributor of energy intake in the US in the past decade (Block 2004), it represents only 7 percent of total energy intake. Therefore, we should expect only modest changes in population weight through soft drink consumption responses to small tax increases. We verify the robustness of our results by including a variety of time-varying state characteristics in our estimation specifications. We also perform falsification tests on variables that should not be affected directly by soft drink taxes (e.g. mental health status). Overall, our results are robust.

While our results suggest modest changes in weight as a result of soft drink taxation, we should note that soft drinks are currently taxed at a low rate and many states are proposing sizeable changes to the soft drink tax rate. Over the period of our data (1990-2006), we calculate the average incremental tax rate on soft drinks to be approximately 3 percent. Maine has recently increased its soft drink tax rate by approximately 20 percentage points. Our results suggest that a 20 percentage point change will lead to a decrease in BMI of 0.06 and that the impact could be larger for some demographic groups.

The tax rate of soft drinks is especially low compared to other consumption items like cigarettes. In New York City, smokers pay $0.39 per pack of cigarettes to the federal government, $1.50 to the state government, and $1.50 to the city (Kuchler et al., 2005), so that the price per pack is over $5.75 (Boonn, 2007). The average federal and state taxes on cigarettes across the US are $1.66 of the average retail price of $4.54 (Boonn, 2007)—these taxes are comparable to an ad valorem tax of nearly 58 percent. While a tax rate of 58 percent is nearly out of the support of our data, we perform a back-of-the-envelope calculation to estimate the effects of imposing a soft drink tax of a similar magnitude to current cigarette taxes in the US. Our results suggest that raising the soft drink tax to 58 percent would decrease the mean BMI in the US by 0.16 points.²⁴ In comparison, the average gain in BMI between 1990 and 2006 was more than 2.3 points. A similar calculation suggests that increasing the tax rate by 55 percentage points would decrease the proportion of the population who are obese or overweight by nearly 0.7 percentage points While increasing the tax rate on soft drinks to be comparable with cigarettes will not halt the obesity epidemic, the impact on population weight would likely be non-negligible.

Although the impact of soft drink taxes on population weight is small in magnitude, a more complete evaluation of the effectiveness of this policy would compare a wider array of outcomes to the costs of these taxes. Reducing soft drink consumption may lead to improvement in other areas of health, including dental health (WHO, 2003). Additionally, an increase in the soft drink tax of this size would likely raise considerable revenue for the federal and state governments. The downside of the policy of increasing taxes of soft drinks is the likelihood that the tax is regressive."