The following is a guest post from John Cawley (corresponding author), Cornell University; David Frisvold, University of Iowa; Elva Jane Bonsall, University of California at Berkeley; and Nicole Yeghiazarian, University of California at Berkeley.
Ballot Initiatives to Tax Sugar-Sweetened Beverages (SSBs)
On November 4, 2014, the residents of Berkeley, California passed, by a 76% to 24% margin, “Measure D”, which imposed a one-cent-per-ounce tax on sugar-sweetened beverages (SSBs). Berkeley thus became the first city in the U.S. to enact a tax on SSBs for the purposes of public health (many states and counties had previously imposed sales taxes on SSBs, among other foods, for the purposes of revenue generation).
Now, two years later, four other cities have SSB taxes on their November ballot. Three of the cities are in California: San Francisco, Oakland, and Albany. The fourth is Boulder, Colorado. The amount of the proposed tax is one cent per ounce in San Francisco, Oakland, and Albany, and two cents per ounce in Boulder. In all four, SSBs would be subject to the tax while diet versions would be exempt.
Effects of the Berkeley Soda Tax
The best evidence regarding the likely effects of these proposed taxes is what has happened in Berkeley. (A beverage tax was also recently passed by the Philadelphia City Council, but it does not take effect until July 1, 2017, taxes diet drinks as well as caloric ones, and is intended for revenue generation as opposed to public health.) Recent studies by Falbe et al. and Cawley and Frisvold both find that the Berkeley tax was partially passed through to consumers in the form of higher retail prices. A subsequent study by Falbe et al., based on street intercept interviews, estimates that the tax lowered consumption of SSBs and raised consumption of water.
The purpose of this note is to provide important new evidence on how the Berkeley tax is implemented. In particular, we find evidence that, in 11.5% of Berkeley stores, it is being misapplied to diet as well as caloric drinks.
Design of the Berkeley Soda Tax
First, it is necessary to provide some background on the design of the tax. By law, the tax is levied on distributors. However, if a store does not purchase their SSBs from a distributor, but instead buys them from another store outside of Berkeley, then the store in Berkeley is a “self-distributor” and must remit the taxes themselves. If the store collects the tax themselves, they may do so at the register and it will not be reflected in the shelf price or list price that the consumer sees when they are choosing their beverage. This is important because consumers change their behavior less when taxes are less salient (in this case, added at the register instead of reflected in the shelf price).
Our Study of the Implementation of the Berkeley Tax on SSBs
Interested in the extent to which stores in Berkeley are charging the SSB tax at the register instead of including it in the shelf price, we sent research assistants (EJB and NY) to every supermarket, grocery store, pharmacy, and convenience store in Berkeley to: 1) record the shelf or list price of a 20-ounce bottle of regular, caloric Coke and a 20-ounce bottle of Diet Coke, and 2) purchase one of each. These store visits took place in September, 2016, which is 19 months after the Berkeley tax took effect in March, 2015; thus, implementation of the tax was considered complete. For each store, receipts were examined and compared to the shelf price to determine whether the tax was added at the register.
Some Berkeley Stores are Incorrectly Taxing Diet Drinks
We found that five of the 26 stores we visited in Berkeley (19.2%) were adding the tax at the register. However, there was another surprising finding – three of those five stores (60%) were taxing the Diet Coke as well as the Coke. The receipt for what we’ll call Store A specified “SSB Tax” of 17 cents per 20-ounce bottle (interestingly, less than the 20 cent tax that is due). The receipt for Store B listed “Berkeley Sugar Tax” of 20 cents for each 20-ounce bottle. The receipt for Store C stated “BERK STX 20 OZ” of 20 cents per bottle. Each of these three stores taxed the Diet version (which is exempt by law) as well as the regular version that is subject to the tax.
To confirm this practice, the researchers revisited each of these three stores the next month (October, 2016) to make the identical purchases of one 20-ounce Coke and one 20-ounce bottle of Diet Coke. On the second visit, Store A was taxing 20 cents per bottle (up from 17 cents the month before) and was again applying it to the diet drink as well as the regular drink. Store B had permanently closed. Store C again charged 20 cents tax on the diet as well as the regular drink, again indicating this on the receipt with “BERK STX 20 OZ”.
We found that, in September 2016, which is 19 months after the tax was implemented, 11.5% (3 of the 26) of the stores in Berkeley were inappropriately charging the SSB tax on diet drinks. This is problematic for several reasons. First, of course, it is in violation of the law, which states that diet drinks are exempt from the tax. Second, this practice removes an incentive for consumers to switch from regular to diet drinks; it prevents the caloric drinks from becoming more expensive than their diet versions. There is debate about the merits and demerits of diet beverages, but they have the advantage of lacking calories and thus not promoting obesity. Third, it is overcharging consumers who are buying diet drinks, some of whom are low-income.
Much of the research on the Berkeley soda tax has, fairly enough, focused on its effects. However, these findings suggest that it can also be informative to study the implementation of taxes and other public policies. It also suggests a greater role for city oversight of implementation; even 19 months after the tax’s implementation, it was being inappropriately applied in 11.5% of city stores. The type of misapplication of the tax that we observe reduces the incentives for consumers to switch from caloric to non-caloric beverages, one of the objectives of the policy. This information from Berkeley is useful for the four cities considering SSB taxes on their ballot this November, and for the additional cities that will undoubtedly consider them in the future.