It seems straightforward: Taxing sugary beverages makes them more expensive, reducing consumption and leading would-be soda-guzzlers to lead healthier lives. Obesity declines, as do the myriad health conditions associated with a sugar-rich diet. Success!
That’s the argument being made in jurisdictions around the world — including here in the U.S. — in favor of taxes that target sweetened beverages. But a closer look at these taxes reveals a host of unrealistic assumptions and unintended consequences.
A common mistake sugar tax advocates make is to underestimate substitution effects, the tendency for consumers to switch to other high-calorie products that aren’t subject to the tax. For example, Philadelphia’s tax on sugary drinks seems to be linked to an increase in alcohol consumption.
After reviewing the relevant literature, the New Zealand Ministry of Health declared in 2017 that “studies using sound methods report reductions in [sugar] intake that are likely too small to generate health benefits and could easily be canceled out by substitution of other sources of sugar or calories,” adding: “No study based on actual experience with sugar taxes has identified an impact on health outcomes.”
Indeed, an analysis in Mexico, which adopted a sugar tax in 2014, revealed that the tax reduced consumption of sugary drinks by less than seven calories per day — essentially a rounding error in most people’s diets. Experts in Australia are warning that sugar taxes won’t deliver the reductions in obesity that some politicians are claiming.
Research also indicates that soda taxes are highly regressive, causing low-income households to pay nearly twice as much as the wealthy. According to official government data, 62% of the revenue collected from Mexico’s sugar tax comes from the country’s lowest income households. For this segment of the population, spending on soft drinks represents 19% of their income (before government transfers) — 39 times more than what the richest Mexicans spend. A two-cents-per-ounce tax on soft drinks in the U.S. would cost the typical consumer more than $100 over the course of a year, a hefty expense for poor families.
Denmark’s tax on saturated fat didn’t last long when it became clear that poor households were bearing the brunt of the cost and some Danes were even shopping in bordering countries to evade the surcharge. Cross-border shopping is a common response to sugar taxes. One study found that Philadelphia’s sugar tax caused residents to travel to neighboring jurisdictions to load up on sweetened drinks and did not reduce overall calorie intake at all.
While the benefits of sugar taxes are often overblown, the costs to local economies are too often ignored. Higher prices and reduced sales leave businesses struggling. In the first year, Philadelphia’s soda tax had already cost the city 1,192 jobs, reduced economic output by nearly $80 million, and deprived workers of $55 million in labor income. Mexico’s sugar tax has driven 30,000 small grocers out of business and eliminated 50,000 retail jobs.
By simplistically focusing on sweetened drinks, politicians ignore other crucial factors in obesity. This is demonstrated by the fact that the obesity rate in the Netherlands is less than half the rate in Greece, even though the Dutch consume more than four times as many soft drinks as Greeks.
Curbing obesity effectively requires a holistic approach that tackles lifestyle habits, lack of exercise, unbalanced diets, and limited understanding of nutrition. Given that sugar-sweetened beverages account for only about 4 percent of the average American’s calorie intake, our obesity problem is much bigger than an over-consumption of sugary drinks.
Focusing on punitive taxes on these products penalize the poor, destroy jobs, and are unlikely to translate into meaningful public health improvements.