Would A Soda Tax Be A Big Deal?

By Jacob Goldstein

The recession has left some state and local governments desperate for new sources of money. That's giving a boost to an idea public-health types have been pushing for a while now: taxing sodas and other drinks with added sugar.

New York's governor has called for a penny-per-ounce tax on sugar-sweetened beverages, and Philly's mayor wants one that's twice that high.

Some public-health experts argue that taxes like these could slow the rise in obesity rates. The beverage industry has called it "a money grab, pure and simple," and says it's a "myth" that taxing one type of product will affect obesity rates.

For both sides, there's a fundamental economic question here: How much would a tax drive down consumption?

Economists call this issue "price elasticity of demand" -- how much demand goes down as price increases. Price elasticity of demand is different for different products.

A study published this week in the Archives of Internal Medicine used data from a 20-year study to estimate that a 10% increase in the price of soda would lead to a 7% decrease in the amount of soda calories people consume.

A recent paper in the American Journal of Public Health pooled results from 14 previous studies and concluded that for the broad category of "soft drinks," a 10% increase in prices would lead to an 8% decrease in consumption.

Sodas, sports drinks and the like only cost a few cents per ounce. So a penny-per-ounce tax could lead to a price hike of about 20%.

Price elasticity isn't totally linear -- a price hike of 20% wouldn't reduce demand by exactly twice as much as a hike of 10%. Still, those recent studies suggest that a penny-per-ounce tax could drive down consumption of sugary beverages by well over 10%.