Voters in Berkeley and San Francisco had the opportunity on November 4 to decide whether to approve taxes on “sugary soda.” The Berkeley measure passed 75%-25%; the San Francisco one failed 55%-45% (A 2/3rds supermajority applies because revenues would have been earmarked for specific purposes).
As Pigouvian “sin” taxes, each initiative suffered from certain design limitations. Their effect on this particular sin would be extremely difficult to observe even if every scientific claim made about the adverse health effect of sugar-sweetened beverages was true. Consumer are free to purchase taxed beverages outside of Berkeley, or substitute other forms of sugar for sugar-added beverages. And not all beverages containing sugar are covered by the tax.
The two proposals were written differently. Berkeley’ initiative will impose a tax of $0.01 per ounce of sugar-sweetened beverage on beverage distributors. San Francisco’s would have imposed a tax of $0.02 per ounce on beverage sales. The choice of tax rate is based on appeals to external authorities with multiple interests. According to proponents of the Berkeley ordinance, for example, “Leading public health researchers and policy experts support a penny-per-ounce tax on the distributors of sugary drinks.” This is a good place to look for both politicized science and scientized policy.
There are many other differences as well. Berkeley’s initiative is simple; San Francisco’s runs several pages. Both include a findings section purporting to set forth a health-based rationale. Both initiatives stated broad social welfare purposes but made only ambiguous claims concerning what they are expected to achieve:
[T]he purpose of this Ordinance is to diminish the human and economic costs of diseases associated with the consumption of sugary drinks by discouraging their distribution and consumption in Berkeley through a tax.
Assessing a tax on [sugar-sweetened beverages] is intended to help address the high levels of obesity, type 2 diabetes, 11 and other diseases by reducing consumption and providing a revenue stream (or City-directed and 12 grant-funded physical activity and nutrition programs in schools, parks, community centers, and through community-based organizations.
Both ordinances would have exempted numerous beverages containing sugar in one form or another. Both ordinances proposed to exempt baby formula, beverages primary comprised of milk, beverages solid or used for weight loss, and alcoholic beverages. Finally, because beverages containing only natural sugar were exempt, both ordinances would be more accurately described as imposing taxes on added sugar, not on sugar per se. Neither initiative dealt with the tax’s inherently regressive nature.
The economic purpose of Pigouvian taxes is to eliminate an externality and thereby restore efficient market prices. How great is the externality? It’s hard to say. An externality typically arises when an activity imposes costs on third parties, and no such external cost arises here. Only those who consume sugar-added beverages bear the costs of sugar consumption — or gain the benefits. (One might assert that children are incapable of making informed decisions, but their decisions are subject to the authority and control of their parents, who presumably have no generalized decision-making incapacity.)
Today’s futures price of #11 world sugar for delivery in March 2015 is 15.48 cents per pound. Today’s futures price for #16 US sugar is 24.50 cents per pound — 58% above the world price. This gap is the result of federal programs that restrict imports and subsidize domestic producers. These programs act as taxes on American sugar consumption. However, at an individual level they are small compared to the Berkeley tax.
The Berkeley tax is equivalent to about $.004 per gram. (A 12-ounce Coca Cola contains a reported 39 grams of sugars per 12 ounces, or about 4 grams per ounce. Efforts to corroborate this figure on the Coca Cola website failed; its page on nutrition labels does not include any nutrition information, and its page on transparency is not transparent.)
Dividing the Berkeley tax by four yields $.0025 per gram. There are 454 grams in one pound, making the Berkeley tax about $1.14 per pound of sugar (or sugar equivalent). That’s about eight times greater than the tax already imposed indirectly through federal import restrictions and subsidies.
A key feature about Pigouvian taxes is theory is that their purpose is to change behavior, not to raise revenue. Berkeley residents can monitor how much the city gains in revenue and judge the tax accordingly. The more revenue is collected, the less behavioral change was induced and the more ephemeral would be the health benefits.