Responsible researcher: Bruno Benevit
Original title: How Well Targeted Are Soda Taxes?
Authors: Pierre Dubois, Rachel Griffith and Martin O'Connell
Intervention Location: United Kingdom
Sample Size: 2,449 individuals
Sector: Tax Economy
Variable of Main Interest: Demand for soft drinks
Type of Intervention: Taxation
Methodology: OLS, Logit
Summary
Excessive sugar consumption is associated with the development of several serious diseases, posing health challenges for governments. To change the population's consumption habits, several countries apply higher taxes on the consumption of foods with high levels of sugar. In this sense, this study conducted a series of analyzes to verify the impact of taxes applied to soft drinks on their demand, considering different consumer profiles. The evidence found demonstrated that soft drink taxes are relatively effective in reducing sugar intake among young people, but less effective in reducing intake among those with high total dietary sugar intake. The results suggest that the incidence of these taxes is unlikely to be regressive, especially for consumers who benefit from the avoided internalities.
Sugar consumption represents one of the biggest health challenges in developed countries. Its excessive consumption is linked to the development of several serious diseases, such as diabetes, cancer and heart disease (DUBOIS; GRIFFITH; O'CONNELL, 2020). The incidence of these diseases configures the economic phenomenon defined as internalities, where the consumption of a certain good or service implies consequences for the consumer in the long term.
According to the CDC ( Centers for Disease Control and Prevention , 2016), non-alcoholic beverages are the biggest contributors to the high rates of sugar consumption in the diet today, particularly the soft drinks category. The groups most susceptible to excessive consumption of soft drinks include individuals with diets rich in sugar and the young population, especially those with low income.
Faced with this problem, the governments of several countries have adopted the application of taxes on the consumption of soft drinks in order to induce a reduction in their consumption. In December 2019, targeted taxation on soft drinks was carried out by 43 countries. Among these countries, the United Kingdom implemented the Soft Drinks Industry Levy in 2018, imposing a levy of £0.24 per liter on Coca-Cola and Pepsi variants from April 1 of the same year (DUBOIS; GRIFFITH; O' CONNELL, 2020). In this sense, measuring the consequences of applying this type of tax for the well-being of the population involves understanding how the demand for these products reacts to groups of consumers with different consumption patterns and price sensitivities.
The study observed the non-alcoholic drinks market, considering consumers' choice between alternative drinks and replacement with snacks. Non-alcoholic drinks include soft drinks (with and without sugar), energy drinks, fruit juices, sweetened milk-based drinks, and other sweetened non-alcoholic drinks, as well as bottled water. "Soda taxes" are typically applied to soft drinks that contain sugar, including diet drinks. On the other hand, drinks such as pure fruit juices without added sugar and drinks predominantly made from milk are exempt from this type of tax.
The immediate consumption of these drinks is important to understanding their demand. Immediate consumption represents an important part of the market and a significant source of sugar, especially for younger people. Approximately half of the sugar intake from sweetened soft drink products comes from purchases for immediate consumption. Furthermore, the identification of immediate consumption behavior makes it possible to distinguish the consumption preferences of households from the consumption of individuals within different age groups.
Soft drinks available for immediate consumption in the UK non-alcoholic drinks market comprise products from brands owned by Coca-Cola Enterprises, PepsiCo, GlaxoSmithKline (GSK) and Barrs, as well as a large number of small brands (the group of brands representing 16% of the market). Additionally, the study also considered fruit juices, flavored milks and flavored waters, which together represent just under 10% of the market, and bottled water, which represents a further 11%.
Kantar Worldpanel immediate food consumption survey carried out by the market research company Kantar. Immediate food data tracks food and beverage purchases made by individuals for immediate consumption outside the home and for consumption at home. Individuals in the immediate consumption survey are randomly selected from households registered in the database. Thus, it was possible to identify information about the products purchased, the transaction price, the store where the purchase was made, household attributes and consumer characteristics.
From these transaction-level prices, and for each product, it was possible to calculate the average monthly price in each type of store, allowing us to estimate the demand for the products. The average monthly price was calculated in two ways. For national chains in the UK, with nationally set prices, and for vending machines, their respective national prices were considered. For independent stores, prices that were calculated regionally.
The data comprise a panel of 2,449 individuals between the period from June 2009 to December 2014. The study observations took place at the “occasion of choice” level, defined as a day on which individuals make a purchase of a drink not alcohol or a snack/snack. The final sample consisted of 616,544 choice occasions, where 95% and 60% of consumers submitted observations on more than 25 and 100 choice occasions, respectively.
The study considers a demand model considering various characteristics of products, transactions, consumers and periods. Regarding the characteristics of the products, their type (drink or snack), the brand, whether or not sugar was added, and the price of the products were considered. To control the characteristics of the transaction, the reseller firm, location and type of advertising were observed, considering different types of target groups. Regarding consumer characteristics, the fixed effects of each individual were considered and groups of individuals were distinguished in terms of gender and age group.
The authors estimated to what extent the tax on soft drinks is passed on to market prices. To this end, the event study method was adopted for the prices (per liter) of the two main brands, Coca-Cola and Pepsi. The period analyzed comprised the year before and after the rate implementation date, considering the characteristics of the products, transactions and consumers.
Drinking preferences for beverages were identified in order to capture the heterogeneity of individuals' tastes. Thus, a multinomial Logit method was used, allowing us to estimate the probability of individuals purchasing a certain product on each occasion of choice. This approach made it possible to evaluate the impact of the tax on consumer profiles with different age groups and sugar preferences.
Through the estimated demand model, the impacts of the tax on soft drinks on the amount of sugar ingested on occasions of immediate consumption of drinks were verified. Additionally, the effectiveness of focusing taxation on priority groups was verified: young people, individuals from low-income families and individuals with high annual sugar intake. Finally, the study analyzes the impact of the policy on consumer well-being and whether the tax is regressive in nature.
Estimates revealed that prices of beverages affected by the soda tax increased by $0.28, but varied heterogeneously according to the size of the beverage package. Soft drinks with smaller packaging saw an increase of £0.241 per liter, while larger packaging saw an increase of £0.294 per liter. Considering that the Soft Drinks Industry Levy implemented a tax of £0.24 per liter for sugary variants of Coca-Cola and Pepsi, these results indicate a strong pass-through of taxes to the price paid by consumers.
Preferences for price and drinks varied little between different age groups, with the exception of older people's predilection for drinks over snacks. However, sugar preferences vary considerably with age. Individuals under 30 are more likely to prefer sugary varieties of products, while older people are less likely to do so. For those with moderate sugar preferences, younger people have a significantly higher average sugar preference than 22- to 30-year-olds, who in turn prefer more sugar than those over 30.
Estimates related to consumer profiles indicated that consumers who purchase soft drinks reduced, on average, the amount of sugar consumed immediately by around 245g per year, a reduction of 21%. Part of this reduction is offset by the replacement with non-sugar taxed drinks and alternative snacks. Even considering behavioral responses, compensatory variation remains high for these groups. Taking a can of Coca-Cola as a benchmark, an internality of at least £0.62 per can would be required for these consumers to experience an increase in well-being, assuming no benefit from tax revenue.
Young individuals and those from poor families obtain more sugar from sodas consumed immediately, making them more affected by the soda tax. Estimates showed that consumers aged 13 to 21 reduce, on average, 280g of sugar and have a compensating change of £4.94. Young people and individuals in low-income households are most impacted by the tax and experience greater reductions in sugar consumption. Individuals with high dietary sugar intake showed lower responses, both in absolute and percentage terms.
UK Soft Drinks Industry Levy on sugary drinks To this end, an analysis was conducted using data on individuals' immediate daily consumption patterns, considering consumers' reactions to price changes caused by the tax.
The evidence from this study highlighted that consumers are moderately sensitive to the price increase due to the tax. The implementation of the tax resulted in a significant reduction in sugar consumption, especially among young people and low-income individuals, highlighting the effectiveness of the tax in reaching these specific groups. Furthermore, the study highlighted the importance of consumption preferences and substitution for untaxed beverages in determining consumer response. The design of this policy reveals how the price structure can induce healthy consumption changes, contributing to reducing sugar intake and improving public health in the long term.
References
DUBOIS, P.; GRIFFITH, R.; O'CONNELL, M. How Well Targeted Are Soda Taxes? American Economic Review , vol. 110, no. 11, p. 3661–3704, 1 Nov. 2020.
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