Sugar-Sweetened Beverage Taxes: Increasing Prices to Reduce Beverage Consumption

The study in this issue of AJPH by Falbe et al. (p. 1017) examined the impact of the 1.00-cent-per-ounce sugar-sweetened beverage (SSB) tax on SSB prices in 2 California cities—Oakland and San Francisco—in comparison with nontaxed California jurisdictions. The authors used store audits (80 in the taxed cities, 75 in the untaxed cities) to assess pre- and posttax differences in SSB and non-SSB prices, using store-level fixed effects, and weighting the data by regional beverage sales. Regardless of beverage size, the authors found that the average price of SSBs increased in San Francisco and Oakland by 0.92 cents per ounce and 1.00 cent per ounce, respectively, as compared with the untaxed jurisdictions. This was equivalent to 92% and 100% of the taxes, respectively, being passed through to consumers, but the extent of pass-through varied by store type.

ASSESSING BEVERAGE TAX PASS-THROUGH

The study by Falbe et al. focused on an important precursor to the impact of SSB taxes on consumption—namely, the extent to which the tax is passed through to consumers in the form of higher prices. In economics, this tax pass-through is known as tax incidence—that is, the extent to which consumers versus producers bear the burden of the tax. The extent of tax pass-through depends on the price responsiveness (i.e., price elasticity) of demand and supply. When consumers are price-insensitive, they tend to bear the full burden of the tax, but as consumers’ price sensitivity increases, pass-through becomes lower. When a large number of nontaxed substitutes are available or consumers are able to easily avoid the tax (i.e., through cross-border shopping), consumers will tend to be more price-sensitive and pass-through may be lower. At the same time, in some settings with less than perfectly competitive markets, taxes may be over-shifted onto consumers.

The finding of essentially full tax pass-through for Oakland and San Francisco differs from earlier evaluations from neighboring Berkeley, California, where tax pass-through of its 1.00-cent-per-ounce SSB tax, especially in the early months after the tax, was found to be much lower.^1–3 And, a recent study that used scanner data to evaluate Seattle, Washington’s, SSB tax highlighted that tax pass-through estimates are likely to differ somewhat when store audit versus scanner data are used.⁴ That study noted that in the case of Seattle pass-through, estimates may be overestimated slightly when they use store audit data because of several data limitations.⁴ First, store audit data draw on a limited mix of products and usually the most popular brands (indeed, in Falbe et al., prices were collected for more than 30 nationally top-selling brands), which in sensitivity analyses in the Seattle study were shown to have higher pass-through. In addition, store audits use both a given number of product categories and product sizes that do not reflect actual volume sold. The study by Falbe et al. employed weights from scanner data to address these potential limitations. Finally, store audits draw on a certain number of store types and, thus, may oversample some store types relative to beverage volume sold in those stores—Falbe et al. were not able to address this limitation. Importantly, to avoid problems of missing data, Falbe et al. were able to confirm prices of beverages that were not marked on shelves through direct inquiry at stores or on-site purchases.

TAX PASS-THROUGH AND EVALUATION LESSONS

As new taxes are implemented and evaluated, we get a better understanding of the extent to which such taxes can be expected to raise the prices faced by consumers as well as about variations in pass-through and potential unintended consequences in terms of changes in untaxed product prices. The Falbe et al. study builds upon previous work from several other jurisdictions and, similar to other findings, suggests that the extent of pass-through differs by store type,^1–3,5 although there does not appear to be a consensus on the pattern of these differences across studies. When one examines the results by store type in Figure 2 in Falbe et al., the differences in estimates do not appear to be statistically significant, which may be a challenge associated with the limited number of stores audited. In fact, the authors note that sample size may have limited their ability to identify differences in pass-through across stores located in areas with different household income levels. Thus, it is important to have a large number of stores sampled to gain an understanding of the potential heterogeneity across stores and where they are located. This often cannot be done with scanner data where store types or locations may not be available.^4,6 Interestingly, although the Falbe et al. study found no change in the prices of untaxed non-SSBs, on average, it did find that the prices of small-size (< 33.8 fluid ounce) diet soda increased. Unfortunately, because of relatively small sample sizes of different store types, the study was unable to delve further to assess whether the pattern of increases in the prices of smaller-sized diet soda was happening across all markets or just in certain store types.

Each successive beverage tax implementation provides an opportunity to generate additional empirical evidence regarding the impact of SSB taxes on prices (tax pass-through) along with tax impacts on individual outcomes (i.e., purchasing, consumption, and health) and their potential unintended consequences (e.g., marketing and promotions, cross-border shopping, and job loss). For studies of tax pass-through, store audits and scanner data compiled of universal product codes of beverage products are the primary data sources. On-site store audits such as those used in Falbe et al. are also often used to assess whether the tax is correctly applied, the tax impact on beverage prices and its related pass-through rate, and industry marketing and promotion strategies. Unlike store audits, scanner data also can be used to measure the volume of beverages sold throughout a geographic region or its border area (to assess cross-border shopping) such as a municipality subject to an SSB tax.

The Falbe et al. study provides new empirical evidence for policymakers on the extent of tax pass-through for Oakland and San Francisco—suggesting that, based on store audits, the tax was fully (or nearly fully in San Francisco) passed through to consumers at one year after tax implementation. Importantly, the results also point to the fact that future work is needed to investigate differences in tax pass-through across store types and location and to understand whether retailers may increase prices of both taxed and untaxed beverages (e.g., single-serve diet beverages, which may be less price-sensitive because of convenience factors). Future studies based on scanner data will build on this evidence both in terms of providing further evidence on tax pass-through and on impacts on volume sold. Similarly, future work using individual-level data will also inform on consumption impacts that are expected to follow from these increases in SSB prices. As evaluations of sugary drink taxes increasingly contribute to the evidence base, it is important to understand that multiple studies based on different sources of data are valuable as each will contribute to a broader understanding of the impacts of such taxes.