Do Soda Taxes Work? We're Still Not Sure

Convershaken Staff
May 3, 2016

Governments in India, South Africa, the Philippines and elsewhere are considering taxes on sugary drinks to reduce consumption and drive down rates of obesity and diabetes. But new figures from the two largest Coca-Cola bottlers in Mexico - which rolled out a tax of 10% on sugary drinks in January 2014 - have cast doubts on the effectiveness of a 'soda tax'. We highlight the dire situation in Mexico and look at both sides of the debate.

A country in crisis

Mexicans drink more Coca-Cola per capita than any other population in the world. Moreover, 405 of every million Mexicans die from chronic diseases caused by consumption of sugary drinks - nearly triple the rate of second-place South Africa. Obesity rates among Mexicans are over 33% for people aged 2 to 18 and 70% for adults. And national consumption of beans, fruit and vegetables has fallen sharply in the past 14 years, partly due to the signing of the North American Free Trade Agreement (NAFTA) in 1994, which has made processed foods and sugar-sweetened beverages more widely available.

Sugar rush and crash

Mexico's soda tax led to a 6% fall in consumption in 2014 compared with the average level in 2012 and 2013, even as consumption rose in other Latin American countries, according to a joint study by the University of North Carolina and Mexican health authorities. Moreover, the decline accelerated to 12% in December compared with the two preceding Decembers. That led Quartz to publish a story titled, "The evidence is in: A soda tax works" last summer.

It may have jumped the gun. Mexico's two largest Coca-Cola bottlers recently revealed their soda volumes rose 5.5% and 11% respectively in the first quarter of 2016, according to The Wall Street Journal. Moreover, national soda industry volumes crept up 0.5% in 2015 after dipping 1.9% in 2014. The Mexican government has also raised over $2bn (£1.37bn) from the tax, a third more than expected. That highlights the resilience - or 'inelasticity' in economics speak - of demand for soda.

It appears that the soda tax, similar to the products it targeted, provided a burst of energy that quickly faded. However, defenders of the measure have blamed unusually warm weather, while Mexican health authorities estimate per capita consumption - adjusted for population growth and economic activity - was 8% lower in 2015 than its average level between 2007 and 2013.

The economics of a soda tax

In theory, taxes on products reduce consumption by raising prices and generate revenues that governments can use to raise awareness of their ill effects and cover the medical costs of using them. Indeed, economists have lauded taxes as the most influential measure in the reduction of smoking in the US: per capita usage is a quarter of what it was in the mid-1960s. Here are some of the pros and cons of sugar taxes, according to experts interviewed by The Wall Street Journal.

A soda tax could disproportionately affect the poor, who tend to consume more sugary drinks and spend a larger portion of their income on them. But obesity and diabetes are 'regressive' diseases that impact the poor more than the rich, so a soda tax could reduce their prevalence among those with limited access to healthcare. Moreover, the money raised could be used to make healthcare more affordable and accessible and subsidise healthier foods and beverages.

However, there are plenty of arguments against a soda tax. Higher prices could foster the creation of a black market for soda, meaning consumption wouldn't fall but tax revenues would. It could also encourage consumers to travel elsewhere to purchase cheaper sodas.

Taxes often push consumers to buy substitutes, but that isn't always desirable or economical. Diet sodas, which are typically exempt from sugar taxes, have been linked to higher calorie consumption. And bottled water can be more costly than soda, costing about 8 pesos (£0.31) in Mexico City compared with 6.5 pesos for a local soda brand, according to The Wall Street Journal.

 

The costs of a soda tax can also be greater than they appear. Soda retailers and producers are likely to spend money to lobby against the tax, while raising awareness and implementation can be costly. 

Coca-Cola and its peers also wield significant power over consumption habits. The influence of their brands and shrewdness of their marketing in spurring consumption shouldn't be underestimated. For instance, they have trumpeted the importance of exercise rather than diet and emphasised that a balanced lifestyle is key. Coca-Cola has sponsored thousands of athletic events in Mexico, promoting its product and polishing its image in the process.

Perhaps the most compelling argument against soda taxes is that they may fail to discourage consumption. The latest findings out of Mexico certainly raise question marks over whether they have long-term impacts.