Do Soda Taxes Really Tackle Obesity?

In the United States, Mexican Coke has become a cult-classic import, attracting fanatics for the pure cane sugar that sweetens it. But in Mexico, the soda is just another sugary drink that costs more than it did before a nationwide tax was imposed on such beverages. Sugary drinks, the subject of many public-health investigations in recent decades, have been linked to obesity, as well as diabetes, heart disease, and gout.

Soda taxes, a popular but controversial means of addressing obesity, do more than reduce a community’s overall calorie intake, according to a study of the Mexican soda tax.

Jeffrey Grogger, the Irving Harris Professor in Urban Policy at Chicago Harris, analyzed prices of a variety of products in 46 Mexican cities before and after the soda tax took effect. He finds that a soda tax of 9 percent led to prices of regular sodas being raised by 12 percent. Prices of other taxed drinks—the tax included all drinks with sugar added—increased as well, although not as much. Moreover, prices of diet sodas (which were not subject to the soda tax) also increased, presumably due to higher demand for these products.

Grogger finds little change in the price of untaxed drinks with similar calorie-counts, such as milk and juice, suggesting that the population chose lower-calorie substitutes. The results suggest that the tax may ultimately succeed in tackling obesity, he writes in the working paper, available at the National Bureau of Economic Research.

Grogger isolates the effect of the soda tax on drink prices by analyzing price changes of unrelated goods, such as rice and beans. None of these exhibited sharp, sustained price increases when the soda tax was implemented.

Grogger’s research helps illustrate how a simple tax on one product can affect prices throughout an economy. A tax, in theory, should increase the price of a good in a competitive market by no more than the level of the tax, but it can increase it more or less than that amount in monopoly markets. The prices of other goods are affected as consumers find subsitutes for taxed goods that are now more expensive.

—Dee Gill, originally posted on Chicago Booth Capital Ideas blog