You might want to think twice before downing that 12-ounce can of Coke. Since sugary drinks can cause a host of health problems, drinking one sugar-filled soda ends up imposing about 10 cents of health costs on others because the resulting medical bills are paid through Medicare, Medicaid or private insurers.
We came to this conclusion while studying what economics says about the benefits of soda taxes, which have been embraced by seven cities across the country.
After Berkeley became the first city in the U.S. to tax sugar-sweetened beverages, in 2014, consumption of such drinks dropped by more than 20%. San Francisco instituted a tax two years later. Nearly 40 countries also have soda taxes.
However, a Chicago-area soda tax was repealed after a series of demonstrations and legal challenges, and several states, including California, have banned cities from imposing new soda taxes. (Editor’s note: Santa Fe voters rejected a soda tax in a 2017 special election.)
We work in a subfield of economics called “behavioral optimal taxation,” which combines data, economic theory and insights from behavioral economics to help answer questions about the benefits of taxes and other public policies. In late May, we released new analysis that found soda taxes are beneficial for society.
Soda taxes counteract “externalities,” or costs that our decisions impose on others. One classic externality example is that driving our cars emits pollution that harms others. Similarly, sugary drinks impose externalities when others pay the resulting health care costs.
The standard solution to any externality problem is to impose a tax, so the price people pay reflects the full cost to society.
Soda taxes also counteract what behavioral economists call “internalities,” mistakes we make because we succumb to temptation or don’t have all the information we need before making a decision. Two facts help quantify internalities. First, more than half of Americans who consume sugary drinks say they do so more often than they should. This suggests soda taxes could help people reduce their consumption to a level they are more comfortable with.
Second, those who are more educated about nutrition consume a lot fewer sugary drinks. This suggests that soda taxes could help people reduce consumption toward the level they would choose if they were fully informed.
Some people are concerned that soda taxes would unfairly impose a higher tax burden on lower-income people, because they tend to buy more soda. But it’s not that simple. When soda prices rise, people purchase much less soda – and end up spending less on soda overall, according to our estimates. People with lower incomes also benefit the most health-wise from drinking less soda because they are more commonly affected by the diabetes, obesity and heart disease caused by sugary drinks. Those with lower incomes tend to be less knowledgeable about nutrition and more likely to report drinking soda more than they should.
We calculate that soda taxes improve well-being for people at all income levels, and they may benefit low-income consumers most.
Sugary drinks have long been shown to be bad for our health, and many doctors and public health scholars have advocated for soda taxes because of that. Our results also support soda taxes, but for a conceptually broader reason. We find that soda taxes increase what economists call “social welfare,” a comprehensive measure including health costs, the enjoyment from drinking beverages we like, tax revenues and the extent to which benefits accrue to lower-income people.
When we monetize the social welfare impacts of a soda tax, our estimates imply that a well-designed nationwide soda tax would improve social welfare by $2.4 billion to $7 billion per year.
Basic economics suggests several possible improvements to existing soda taxes.
The sugar, not the water, is what’s harmful to our health. However, many U.S. cities tax sugary drinks at one cent per ounce of liquid. If the drinks were instead taxed at a rate of 0.4 cents per gram of sugar, the social welfare gains would be much larger because a sugar-based tax more directly reduces harmful sugar consumption.
In addition, support for soda taxes would ideally emerge at the state or national level instead of the current smattering of city-level taxes. Some shoppers avoid paying the city tax by buying sugary drinks at stores just outside of town. This cross-border shopping dilutes a tax’s benefits.
But even if more cities decide to institute soda taxes at the one-cent-per-ounce level, it would be far better than nothing. Over the past 60 years, cigarette taxes have helped to dramatically reduce smoking in the U.S., saving millions of lives. Soda taxes could do the same.
Hunt Allcott is an associate professor of economics at New York University. Benjamin B. Lockwood is an assistant professor of business economics and public policy at the University of Pennsylvania. Dmitry Taubinsky is an assistant professor of economics at UC Berkeley.