Some economists think that prices, when “gotten right,” will fix almost anything. This includes social dilemmas such as obesity and the other maladies that come from sugar-sweetened beverages (SSBs).¹ The theory is that if the price of soda can be pushed high enough through taxes or other charges, consumption will fall in a well-behaved response known as the “price elasticity of demand.” The more “elastic” the demand for SSBs the more increases in SSB prices will depress this demand. Conversely, the more “inelastic” the demand, the less price increases will affect consumption. Demand for SSBs seems to be such that a 1 percent increase in price results in about a 1 percent decrease in consumption. This is the economic basis for a tax on SSBs as a response to over-consumption.

Complicating matters, consumer behavior can often differ from the theory in unexpected ways, affecting the price and quantity demanded. For one, the vast sums spent by beverage company giants like Coke and Pepsi on advertising or the marketing of portion sizes can affect the demanded price and quantity: think “biggie size” fast food. For some beverages such as wine, a combination of consumer bewilderment over price and quality, snob effects, and gift-giving motives can begin to reverse the expected price-quantity relationship, leading consumers to demand a bottle that costs more instead of less, all things equal.

Quite aside from behavioral exceptions to economic theory, the partial success of advocates who took on Big Tobacco in past decades has given impetus to calls for a taxation strategy vis-à-vis SSBs: aggressively tax SSBs in the name of human health. In the past five years these advocates have persuaded governments such as Mexico (with one of the highest per capita levels of sugar consumption in the world—much of it SSBs) to adopt such taxes. At the municipal level, where SSB lobbyists are less cloying and city council representatives somewhat less craven, similar measures have been undertaken—notably in Berkeley, California in 2015 and most recently in Philadelphia, Pennsylvania in 2016.² The City of Brotherly Love, in particular, has commanded the attention of combatants in the Soda Wars because its rationale for soda taxes was built not around obesity or tooth decay or the evils of Big Soda but the beguilingly simple notion that it would raise money for public uses. The main selling point in Philadelphia was that soda tax revenues would target the health and wellness of its citizens, particularly those with low incomes, through early childhood education, recreation, and libraries, even if the tax itself would fall disproportionately on poorer residents.

Philadelphia Mayor Jim Kenney’s proposal started as a 3 cent-per-ounce tax that would have doubled the price of soda. Later reduced to 1.5 cents (a 50 percent price increase), the tax also applies to diet soda and fruit drinks with less than 50 percent juice. Taxing diet soda and fruit drinks, which are more often consumed by those with higher incomes, makes the tax somewhat less regressive. Kelly Brownell, one of the generals in the war on Big Soda (and Dean of the Sanford School of Public Policy at Duke University) noted in the New York Times that the Philadelphia initiative “has now created an entirely new level of momentum,” with other cities like Boulder, Oakland, and San Francisco eyeing similar strategies.³

Brownell has been at the forefront of these efforts, working both professionally as a psychologist on the causes and consequences of obesity and as a policy advocate for SSB taxes. In an article appearing in the New England Journal of Medicine, Brownell and Thomas Frieden, now Director of the U.S. Centers for Disease Control and Prevention, cited Adam Smith’s 1776 Wealth of Nations in support of taxing SSBs, which like “sugar, rum, and tobacco are commodities which are nowhere necessities of life” and “objects of almost universal consumption.”⁴ Noting that SSBs “may be the single largest driver of the obesity epidemic,” Brownell and Frieden observed that if one-quarter of the calories consumed from SSBs were replaced with other food, total calorie consumption would fall by 8000 per person per year—enough to cause an average two-pound weight loss. A three-pound reduction, if it could be achieved, would shift the mean weight of Americans 10 percent toward 1960s levels without accounting for increases in height since then.⁵

As a damage estimate, Brownell and Frieden put the annual public costs from Medicare and Medicaid spending on excessive weight at nearly $40 billion in 2009 (much of it for diabetes-related health care costs). More recently published research shows that if taxes caused the substitution of water for even one eight-ounce serving of soda per day, the result would be a significant reduction in caloric intake of 11-17 percent and “unequivocal” reductions in body weight.⁶ These results come from the National Health and Nutrition Examination Survey (NHNES) of nearly 20,000 adults from 2007–12. Jennifer Falbe and other public health researchers at University of California, Berkeley and University of California, San Francisco have studied the effects of the Berkeley, California tax, implemented in March 2015. They showed a 21 percent decrease in Berkeley’s SSB consumption and a 63 percent increase in water consumption, compared to an average 4 percent increase in SSB and 19 percent increase in water consumption in comparison cities.⁷ If predictions are right, cities that have been proactive in taxing SSBs will soon reap health and financial benefits, raising the appeal of these taxes for states.

In Mexico, a 10 percent tax on SSBs has met with mixed results, although leading medical journals and the Mexican government’s own data suggest it is having an impact. The British Medical Journal (BMJ) in 2016 reported declines in Mexico’s consumption of an average of 6 percent and of up to 17 percent among low-income consumers since the imposition of the tax in January 2014.⁸ The Mexican government’s National Institute of Public Health estimates per capita consumption of SSBs was 8 percent lower in 2015 than in the period from 2007–2013 after adjusting for population and economic growth. However, the Wall Street Journal reported in May 2016 that, despite the tax, Mexico’s sales of SSBs are again inching up—leading Coca Cola’s chief executive to claim at the company’s annual meeting that “We know these taxes don’t work.”⁹ According to critics, the gross revenue gains are evidence that the tax has not reduced individual consumers’ demand, but this critique ignores coincident factors adjusted for by Mexico’s National Institute of Public Health.¹⁰ In any event, the tax is generating plenty of revenue, with government receipts rising to more than one billion dollars as of November 2015. A Mexican worker quoted in the WSJ article offered a possible explanation: “Coke is like cigarettes—it turns you into an addict.”

The Mexican tax is interesting not only in economic but cultural terms because sweetened sodas are deeply engrained in Mexican attitudes about food and taste. Coke started bottling and selling its product there in 1926 and has been aggressively marketing it ever since; vending machines were installed in the capital city in 1940 and former President Vicente Fox, before taking office in 2000, was head of Coca-Cola Mexico. The Bulletin of the World Health Organization (WHO), quoting Mexican university teacher Monica Garcia in 2016, observed, “People think that a taco without soda is not a real taco.”¹¹ In short, taxes on soda confront the role that soda plays in society and are thus linked to broader cultural norms.

One of the questions raised by these tax measures and their critics is how soda price increases are affected by social messages sent about their purpose—in the language of marketing and behavioral economics, how such taxes are “framed.” As it turns out, “framing” can be as important as price itself in affecting consumption.¹² Those countering Big Soda have considered whether to frame soda taxes as primarily aimed at diet quality, tooth decay, protecting children, or, as in Philadelphia, as revenues for general funding for public social services. In Berkeley, for example, the campaign focused on the evils of the soda industry (with the official campaign called “Berkeley vs. Big Soda”), in contrast to 2012 statewide California efforts framed in terms of obesity and Type 2 diabetes.

In order to better understand these issues, a group of researchers at the University of Minnesota, led by Associate Professor Sarah Gollust and including Carlisle Ford Runge, conducted a survey of about 500 students. We asked a series of questions about study participants’ own weekly beverage consumption and their favorite sugar-sweetened beverages and then we randomly assigned them to view one of eight different vignettes describing a 12-cent price increase on their favorite SSB. The price increase was set as constant, but the vignettes were embedded with different justifications, or frames, describing why the price of the drink increased—as an unspecified tax, an unspecified user fee, or as a tax justified as a way to reduce obesity, offset health care costs, protect children, address budget deficits, and so on. After viewing the vignette, participants answered survey questions about their intentions to purchase the beverage as well as their attitudes about SSBs, their impressions of SSB companies and whether they would support a penny-per-ounce tax adding about 12 cents to a can of soda. In general, the survey found that respondents were relatively neutral about the healthiness and appeal of SSBs (an average of 3.2 on a 7-point scale) and fairly negative about SSB companies (2.6 on a 5-point favorability scale). Support for a 12-cent tax was middling (3.0 on a 5-point scale).

As the demand relationship discussed earlier would predict, the hypothetical imposition of a tax or fee reduced the willingness to purchase SSBs. The reduction, or demand elasticity, was greater when the price increase was described as a user fee or as a tax that would reduce obesity, offset chronic health care costs, or protect children. Another interesting result for framers of SSB measures was that when the price increase was described as the result of a fee as opposed to a simple price increase of 12 cents, the fee colored the impression of SSB companies negatively. When the tax was framed as a measure to reduce obesity, a similar increase in the negative perception of SSB companies resulted. These effects were stronger in those with lower levels of SSB consumption to start with, but not as strong with heavier users, suggesting that heavier SSB drinkers may be more impervious to or “inoculated” to such messaging.¹³ In short, taxes and fees can be marketed in their own right. Where there is a will to tax SSBs, there are various ways to sell it, and the choice of which way matters in shaping opinions and preferences.

Apart from these framing issues, economists and policymakers should also think carefully about how to get the most out of soda taxes while burdening consumers as little as possible. Those taxes that induce the greatest reduction in demand if the demand is highly price-sensitive (“elastic”) also lead to larger welfare losses. Here insight can be drawn from work first developed almost a century ago by the brilliant and sadly short-lived British economist, Frank P. Ramsey. Ramsey’s ideal tax, known as “Ramsey pricing,” would set the soda tax equal to the inverse of its elasticity, which is, as it happens, a little above where Philadelphia put it.¹⁴ The results of the Minnesota study also point to a deeper issue for economists: that the elasticity is itself not a given, but a function of the message in which it is framed.

The movement to confront excessive consumption of sugary drinks with taxes is in its infancy. Regardless of the economic theory, opponents will continue to argue that taxes are a burden imposed on habits that reflect legitimate consumer choices. And like sellers of booze and tobacco, soda sellers will continue to do a profitable worldwide business. The Soda Wars will likely end with higher taxes rather than outright prohibitions, as did the temperance movement in the early 20^th century and the anti-smoking efforts of the past fifty years. Unlike smoking or drinking, the consumption of SSBs will probably never be considered a literal sin. But given the alarming global public health costs posed by high levels of sugar consumption, SSB taxes and fees, framed accordingly, may help to defray these costs while supporting spending for badly needed education and health infrastructure.¹⁵