The Effects of Soft Drink Taxes on Child and Adolescent Consumption and Weight Outcomes

RWJF Scholars in



Health Policy Research


Program









The Effects of Soft Drink Taxes on Child and
Adolescent Consumption and Weight
Outcomes


Jason M. Fletcher
David Frisvold
Nathan Tefft


August 2009
Working Paper Series

WP-44
Preparation and dissemination of this working
paper series was assisted by a grant from
The Robert Wood Johnson Foundation
Princeton, New Jersey

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Comments Welcome – Please address comments to David Frisvold at david.frisvold@emory.edu


The Effects of Soft Drink Taxes on Child and Adolescent Consumption and Weight Outcomes*

Jason M. Fletcher†, David Frisvold‡ and Nathan Tefft§

August 26, 2009


Abstract

Childhood and adolescent obesity is associated with serious lifetime health consequences and has
seen a recent rapid increase in prevalence. Soft drink consumption has also expanded rapidly, so
much so that soft drinks are currently the largest single contributors to energy intake. In this
paper, we investigate the potential for soft drink taxes to combat rising levels of adolescent
obesity through a reduction in consumption. Our results, based on state soft drink sales and
excise tax information between 1988 and 2006 and the National Health Examination and
Nutrition Survey, suggest that soft drink taxation, as currently practiced in the United States,
leads to a moderate reduction in soft drink consumption by children and adolescents. However,
we show that this reduction in soda consumption is completely offset by increases in
consumption of other high calorie drinks.


JEL classification codes: I18; H75

Keywords: Obesity; Soft Drink Taxation


* This study was supported, in part, by the Robert Wood Johnson Foundation and the Emory Global Health Institute.
We thank Jeremy Green, Alejandra Carrillo Roa, and John Zimmerman for excellent research assistance. We thank
Alexandra Ehrlich and Stephanie Robinson for support with the restricted NHANES data. We also thank Meena
Fernandes and participants at the International Health Economics Association World Congress for helpful
comments.
† School of Public Health, Division of Health Policy and Administration, Yale University, 60 College Street, New
Haven, CT 06510, USA, email: jason.fletcher@yale.edu.
‡ Department of Economics, Emory University, Atlanta, GA 30322-2240, USA, email: david.frisvold@emory.edu.
§ Department of Economics, Bates College, 4 Andrews Road, Lewiston, ME 04240, email: ntefft@bates.edu.

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Introduction
While soft drink taxes have been used for decades as a way to raise revenues, lately there
have been an increasing number of proposals to considerably increase these taxes in order to
combat the rapidly growing obesity epidemic in the United States. These proposals have often
framed soda taxation as a “sin tax” and made comparisons between soft drink taxation and
cigarette taxation, which has both lowered tobacco consumption and raised considerable
revenues. The price elasticity for soda is estimated to range between -0.8 and -1.0 (Andreyeva et
al. in press), which indicates that further taxation could lead to substantial consumption
reduction. Additionally, soft drink revenues in the United States are approximately $70.1 billion
per year, suggesting a relatively large tax revenue potential, even accounting for the drop in
consumption from a soda tax (Sicher 2007); in comparison tobacco revenues are approximately
$93.1 billion per year (Tobacco-NAFTA Industry Guide 2009). Thus soft drink taxation could
improve health by lowering consumption, as well as generate substantial revenues to relax
government budget constraints and could potentially be used for further obesity prevention or
reduction. However, the potential behavioral responses to increasing soda taxes have not been
fully examined. There is relatively weak information on the tax elasticity on consumption of soft
drink taxes, and, importantly, the substitution patterns between soft drinks and other (potentially
high-calorie) beverages has not been adequately explored in this context. Thus soda taxes could
have unintended consequences and may be an ineffective “obesity tax”.
There are multiple examples documenting how behavioral responses to public policies
can counteract the intent of the policies or lead to unintended consequences. One of the best
known examples in the economics literature is an evaluation of a set of automobile safety
regulations in the late 1960s, where Peltzman (1975) shows that drivers responded to increased

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safety regulations by driving faster, which completely offset any reductions in highway fatalities.
More recently, Adams and Cotti (2008) show that smoking bans in bars have lead to increases in
fatal accidents due to an increase in the distance driven to bars that allow smoking. Adda and
Cornaglia (in press) find that smoking bans increase the exposure of non-smokers to tobacco
smoke as a result of the relocation of smokers away from bars and restaurants. There is also
some evidence documenting an unintended rise in obesity and weight due to smoking bans
(Fletcher 2009) and higher cigarettes taxes, although there is mixed evidence on taxes (Chou et
al. 2004, 2006, Gruber and Frakes 2006, Baum 2009). Courtemanche (in press) seeks to
harmonize these disparate findings and has shown a counterintuitive reduction in obesity
following cigarette taxation, where the proposed behavioral mechanisms are through changes in
exercise and food consumption. Additionally, Evans and Farrelly (1998) find that smokers
respond to higher cigarette taxes by smoking cigarettes with higher tar and nicotine content.
Similarly, Adda and Cornaglia (2006) find that smokers adjust their behavior to smoke more
intensely in response to higher taxes. Finally, recent theoretical and simulation research by
Schroeter, Lusk, and Tyner (2008) shows there are plausible scenarios where taxes on certain
types of food (e.g. food away from home) could lead to increases in body weight simply due to
substitution among types of food. Likewise, soda taxes could cause substitution to other, high
calorie beverages and increase or have no effect on net caloric intake. In the extreme, these
potential substitution patterns could result in a case where individuals consume no soda but
offset soda consumption with other high calorie beverages, such as fruit juice, juice drinks, or
whole milk. The impact of these behavioral responses would be no tax revenues as well as no
weight reduction and the policy would accomplish neither of its proposed goals.

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In this paper we combine newly collected soft drink tax data between 1988 and 2006 with
the restricted-access version of the nationally representative National Health Examination and
Nutrition Survey (NHANES) in order to examine the effects of soft drink taxes on child and
adolescent soft drink consumption, substitution patterns, and weight outcomes. We use standard
empirical specifications from the cigarette taxation literature (Chaloupka and Warner, 2000),
including year and state fixed effects, and conduct a series of robustness checks to increase
confidence in the results. Overall, we find evidence of moderate reductions in soft drink
consumption from current soda tax rates. However, we also show that reductions in calories from
soda are completely offset by increases in calories from other beverages. Thus, we find that, as
currently practiced, soda taxes do not reduce weight in children and adolescents and is, therefore,
likely an ineffective “obesity tax”. These results suggest that public health policymakers should
consider behavioral responses when crafting policies to reduce obesity.

Background Literature
The rise in childhood and adolescent obesity in the US and other developed countries has
been the source of considerable debate and public policy effort. The effects of obesity on
chronic health conditions have been compared to the effects of aging twenty years in adults, and
the health costs associated with obesity are even greater than two other behaviors widely
recognized to cause significant harm: cigarette smoking and alcohol consumption (Sturm, 2002).
Since childhood and adolescent obesity may increase the risk of adult obesity (Nader et al.,
2006), prevention, rather than treatment, of adult obesity may be the more effective tool in
limiting lifetime health care costs. Finkelstein et al. (2009) estimate that the medical costs
attributable to obesity were as high as $147 billion in 2008, which is nearly 10% of all medical

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spending nationally. The additional medical costs of obesity represent an externality because the
obese do not fully pay for their higher costs within pooled health insurance and public health
insurance programs and because being insured increases obesity (Bhattacharya et al. 2009).
There have been many efforts at reducing the burden of obesity, some focus on food prices and
advertising (Chou, Rashad, and Grossman 2005) and others highlight the need to increase
exercise opportunities (Cawley, Meyerhoefer, and Newhouse 2007). Recently, there have been a
large number of proposals that focus on reducing consumption of products with little nutritional
value, such as soft drinks.
Soft drinks were the single largest contributor to energy intake during the last decade
(7%) (Block 2004) and soft drink consumption increased by almost 500% during the past 50
years (Putnam and Allshouse 1999). While soft drinks are a large and growing category of
caloric intake, it may be unclear whether focusing on a single class of consumption can lead to
weight change. In fact, there is emerging evidence that small net changes in caloric consumption
can lead to substantial changes in the prevalence of obesity over time (Cutler, Glaeser, and
Shapiro, 2003). For example, Hill et al. (2003) suggest that reducing energy intake by only 100
calories per day, which is less than one fewer can of soda per day, could prevent weight gain in
over 90% of the population. Ludwig et al. (2001) demonstrate that consuming one additional
sugary drink per day over a period of eighteen months increased the odds of being obese in
children by 60%. Harnack, Stang, and Story (1999) find that total energy intake is positively
associated with the consumption of nondiet soft drinks. Thus, it may be possible to effectively
reduce weight by targeting a single food item.

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A policy that has garnered recent attention as a possible method for reducing weight and
thus improving health is a tax on soft drinks.1 The taxation of soft drinks by states, which dates
back to at least 1920 (New York Times, 1920), has historically been used to raise revenue
(Caraher and Cowburn, 2005). Recently, however, taxes on soft drinks have been proposed at
federal, state, and local levels as an indirect tax to reduce obesity, while continuing to raise
revenue (Chouinard et al., 2007; Brownell and Frieden, 2009). For example, in May 2009 the
Center for Science in the Public Interest planned to propose a federal excise tax on sweetened
soft drinks and other beverages.2 Brownell and Frieden (2009) suggest a tax equal to a penny
per ounce, which is larger than all prior taxes on soft drinks, to our knowledge. Governor David
Paterson of New York proposed an “obesity tax” in December 2008, which consisted of an 18%
tax on sugared beverages.3 4

These tax proposals have been offered with little evidence to assess their potential
effectiveness. In fact, most of the rigorous evidence that exists appears to suggest limited
effectiveness. For example, in the context of adult outcomes, Fletcher, Frisvold, and Tefft (in
press) use repeated cross sections of the Behavioral Risk Factor Surveillance System (BRFSS)
data combined with state and year fixed effects to show that the reduced from effect of soft drink
taxes on adult weight is negligible. The reduced form approach was unable, though, to shed light
on whether there were consumption responses to taxation.5

1 See Chriqui et al (2008) for an overview of U.S. soft drink taxes in 2007.
2 http://online.wsj.com/article/SB124208505896608647.html#mod=rss_Health (last accessed May 12, 2009)
3 http://www.cnn.com/2008/HEALTH/12/18/paterson.obesity/ (last accessed May 11, 2009)
4 In addition to attempting to reduce obesity, the goals of these proposals were also to raise revenue. The tax in New
York was proposed to raise revenues to help balance the state budget and the Center for Science in the Public
Interest proposed to raise revenues to pay for national health care reform.
5Powell, Chriqui, and Chaloupka (2009) also take a reduced form approach and focus on adolescent weight. Like
Fletcher et al. (in press), they find no evidence of reduced form effects on adolescent weight. However, the
interpretation of their results is unclear because they are unable to control for unobserved state-level characteristics
that could be correlated with soft drink taxes. They also are only able to examine a small set of ages (8th, 10th, and

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While the current evidence suggests no effects from soft drink taxation on adult weight, it
is possible that there may be differential effects of soda taxation on children. For example,
Chaloupka et al. (2000) review multiple studies of cigarette price elasticity, noting that youth
have often been found to be more responsive to price than adults (although these conclusions are
complicated by the fact that youth are also subject to access restrictions). One explanation for
this possibility is that children and adolescents may spend a larger share of their budget on soft
drinks than adults or households and are therefore more responsive to changes in price. If youth
exhibit a relatively strong price response as in the case of cigarette consumption, policies that
moderately change soft drink prices could lead to substantial declines in obesity over time among
children and adolescents.

Conceptual and Empirical Framework
We conceptualize the demand for soft drinks by child i in state s as a function of
individual and family socio-demographic characteristics (X), household income (I), and the
prices of soda (Ps) and other beverages (Po):
soda = f P (? ), P , X , I ,





(1)
is
( s s o i i)
where soft drink prices are a function of soft drink taxes imposed by the state (? ). Our focus in
s
this paper is estimating the effects on soda consumption and weight from increasing soda tax
rates.6 But in order to gain a complete understanding of the effects, it is useful to recall the
decomposition of the effects:
s
? oda
s
? oda
P
?
is
is
s
=
?
,






(2)
?
P
?
?
?
s
s
s

12th graders), and can provide no evidence of whether adolescents are price sensitive in their soda consumption
decisions.
6 We assume the income effect is unimportant in these decisions.

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s
? oda
P
?
where
is is the price elasticity of demand of soda and
s is the proportion of tax pass-
P
?
?
?
s
s
through or shifting from suppliers to consumers. Because we do not have adequate price data for
the individuals in this sample and because price is endogenous in demand analysis (Gruber and
Frakes 2006), we focus on the reduced form effects of (exogenous) taxes on consumption.
Before presenting our empirical model, we outline what is known about the two components of
the reduced form estimates. This discussion also highlights the uncertainty of calculating
consumption responses when not using evidence from direct tax effects.
Estimates of the price elasticity of demand for soft drinks are available, but there does not
seem to be a consensus. While a recent survey of the literature suggest typical price elasticities
of -0.8 to -1.0 (Andreyeva et al. in press), more recent examples of compensated price elasticity
estimates range from -0.15 (Zheng and Kaiser, 2008) to -1.90 (Dharmasena and Capps, 2009).
The differences in estimates are, in part, due to the specificity of food and drink categories that
might be considered candidates for complements or substitutes. In any case, there is a relatively
large range of uncertainty for policy makers to predict demand responses to price changes given
the evidence accumulated thus far.
In addition to the uncertainty surrounding price elasticities, there is scant evidence on
how soft drink taxes might affect behavior through prices. Since policy makers often do not set
prices directly, they must rely on indirect methods such as taxation. Kotlikoff and Summers
(1987) describe the theory of tax incidence and show that tax shifting, or the proportion of a tax
that is reflected by a change in price, varies by market. In fact, Besley and Rosen (1999) show
that the change in soft drink price exceeds a tax change by 29 percent and suggest that this

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overshifting of the tax burden is the result of imperfect competition in the soft drink industry.7
Overall, however, as a result of the recent changes in states’ soft drink taxes, additional work is
needed in this area.
Even after establishing the effect of taxes on consumption behavior through prices, the
further question remains regarding how effectively reducing soft drink consumption will
improve child weight and obesity prevalence. In fact, if youths reduce their consumption of
caloric and non-caloric soft drinks in response to a tax but increase their consumption of non-
taxed high calorie beverages such as juice or whole milk, then a tax on soft drinks could actually
increase weight (Schroeter, Lusk, and Tyner, 2008). For example, while a 12 ounces can of soda
contains 140 calories, 12 ounces of whole milk contains 225 calories. The empirical uncertainty
surrounding soft drink price elasticity and tax shifting combined with the theoretical ambiguity
of the effect of soft drink taxes on obesity warrants an analysis of the direct tax effects on both
consumption and weight outcomes when considering the dual policy goals of revenue generation
and child health.
Empirical Framework
Our empirical strategy regarding soft drink taxes follows the literature on cigarette
taxation (Chaloupka and Warner, 2000) and work examining adult BMI (Fletcher, Frisvold, and
Tefft, 2009) by estimating state and year fixed effects models using the repeated cross-sections
of the NHANES datasets. Specifically, we estimate the empirical models,
Y
= ? ' X
+ ? T + µ + ? + ? + ? ,
(1)
istq
1
istq
2 stq
s
t
q
istq
where Y
is the consumption or weight outcome of individual i in state s in year t in quarter q,
istq
which is determined by individual and environmental characteristics ( X
), the soft drink tax in
istq

7 Kenkel (2005) also finds evidence of overshifting between alcohol taxes and prices.

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Document Outline

• Comments Welcome ? Please address comments to David Frisvold at david.frisvold@emory.edu
• The Effects of Soft Drink Taxes on Child and Adolescent Consumption and Weight Outcomes0F
• Jason M. Fletcher1F , David Frisvold2F and Nathan Tefft3F
• Abstract
• JEL classification codes: I18; H75
• Keywords: Obesity; Soft Drink Taxation
• Introduction
• Background Literature
• Conceptual and Empirical Framework
• Empirical Framework
• Data
• Soft Drink Taxes
• NHANES
• Results
• Robustness Checks
• Conclusion
• References
• Appendix: Definitions of Soda, Juice, and Juice Drinks

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