Montreal Mayor Denis Coderre recently announced he would like to tax sugary drinks. Taxing consumers — there’s a new and original idea!
In recent years, the most discussed “solution” to obesity and so-called unhealthy habits is the introduction of sales taxes on sodas and sugary drinks. The theory is that, by raising the price of these items, a tax will discourage their consumption, which means that we will ingest fewer calories and consume less sugar. In the long run, health problems related to obesity might become less common.
Taxes can reduce the consumption of the goods they affect — that’s pretty straightforward economics. However, the effect of a tax can be quite small and, in the end, have a negligible impact on consumption. The question, then, is how much a tax will matter. If the tax is low, then the effect will be negligible at best.
But even if the tax is high, people might simply be encouraged to substitute untaxed sugary drinks for heavily taxed sugary drinks. This is because the matter of which products to tax is not clear-cut. For instance, should cranberry juice be taxed? Tim Horton’s coffee? Chocolate milk? Or do you just go after the “bad guys” like Pepsi and Coca-Cola? After all, it’s quite easy to put the blame on them for the choices consumers make.
A recent study about a sugary drink tax in the city of Berkeley in California offers the starkest illustration of this point. To investigate the effect of the special sales tax of one penny per fluid ounce, a group of economists studied the sales of sugary drinks in a local university before the political campaign for the adoption of the tax, during the campaign, and after the enactment of the tax.
The reason for this approach is that during the campaign, voters were exposed to information regarding the adverse health effects of consuming too much sugar. This influx of new information changed their preferences and led them to consume fewer sugary drinks, regardless of the price. By reducing consumption, it generated the same effect as a tax, but we must be careful to separate the effect of the tax with that of the extra information.
This is why that study is important. It shows that a substantial share of the decline in sugary drink consumption occurred before the change in prices caused by the tax. In fact, consumption fell by 30 per cent before the implementation of the tax. In contrast, there was very little effect after the tax was implemented.
This is not the only study to find such a result. Studying the effect of a California referendum on an animal welfare issue related to egg production, economist Jayson Lusk found that the publicity surrounding the referendum changed the preference of consumers significantly. In the lead-up to the vote, sales of cage-free and organic eggs increased by 160 per cent and 20 per cent, respectively. While the proposition ended up passing, barring the use of cages in egg production in the state, a major change in consumption habits resulted from the information voters were exposed to before voting took place.
Persuasion and information are potent tools for changing behaviour. They change the preferences of consumers who can make more enlightened decisions about what they choose to consume. As such, these appear to be quite effective alternatives to the heavy-handedness of taxes when it comes to shaking off those extra pounds.
Jasmin Guénette is Vice President of Operations at the Montreal Economic Institute. The views reflected in this op-ed are his own.