Do New Beverage Taxes Reduce Sales?

Steve Holtz
June 01, 2016
CSP
Recent study reveals surprising results that could benefit retailers
BERKELEY, Calif. — Beverage-tax proponents often preach a two-way street. On one hand, putting a tax on bottled water, for example, will bring in additional money to fund a cause—obesity prevention, road repair, recycling efforts, etc. On the other hand, the tax, by making the products more expensive, will reduce consumption and thus, limit the number of plastic bottles going into landfills.
A new study of such taxes shows only one of those arguments is accurate.
The Test Case
To cut back on bottles, many cities and states have put a tax on bottled water. In Chicago, the tax is 5 cents per bottle. California puts an extra price on bottles, but offers a refund if they are recycled.
In early 2010, Washington Gov. Christine Gregoire proposed taxing bottled water, both because of a need for tax revenue and because “products that negatively impact our environment or public health should be taxed to pay the costs of their effects.”
The state subsequently repealed a law that exempted candy, soft drinks and bottled water, among other products, from being taxed like other products.
At that time, it was calculated that the law would bring revenue of about $100 million per year, and the bottled-water tax was specifically projected to provide $32.6 million in yearly revenues.
The Study
Years later, a research team from the University of California, Berkeley chose to examine just how much the Washington tax affected consumption, and its authors were underwhelmed by the results.
“We estimate a 2.8% to 5.9% drop in bottled-water consumption in response to a tax of between 6.5% and 9.5%,” the team wrote in ” Measuring Consumer Responses to a Bottled-Water Tax Policy,” which was published in May 2016. “This implies that demand for bottled water is inelastic. Therefore, significant revenue can be raised from taxing bottled-water without causing large deadweight losses. However, the low-price elasticity means that a very high levy would be necessary to change the behavior of buying bottled water.
“The number of plastic water bottles saved per year by the tax in [one major] grocery chain [in Washington state] is about 143,000, while the total number of bottles sold by the chain per year is over 2.43 million. This suggests that taxing water bottles is not likely to have measureable environmental effects.”
The bright side for retailers is knowing that a new or increase sales tax does not mean the end of product sales. Still multiple efforts to tax beverages, particularly sugar-sweetened drinks, continue today with at least a partial goal of reducing consumption.