Obesity, Soft Drink Taxation, Agribusiness, Food Consumption/Nutrition/Food Safety, Health Economics and Policy, I12, H20, H71,

Fletcher, Jason

English

Research Papers in Economics

 
3rd Quarter 2011 | 26(3) 
SODA TAXES AND SUBSTITUTION EFFECTS: WILL OBESITY BE AFFECTED? 
Jason Fletcher  
JEL Classifications: I12, H20, H71 
Keywords: Obesity, Soft Drink Taxation 
This article is part of a series of Policy Issues articles on Soda Tax. You can also find articles on Should Soft Drinks 
be Taxed More Heavily?, Can Taxing Sugary Soda Influence Consumption and Avoid Unanticipated Consequences?, 
Sugar-Sweetened Beverage Taxation as Public Health Policy-Lesson from Tobacco, Better Milk than Cola: Soft Drink 
Taxes and Substitution Effects, Evaluating Excise Taxes: The Need to Consider Brand Advertising, and Caloric 
Sweetened Beverage Taxes: The Good/Food/Bad Food Trap as part of this theme. 
Although the United States has a relatively long history of taxing soft drinks, it has only been in the past decade that 
public health experts have focused on this policy as a way of potentially curbing the growing prevalence of obesity for 
both adults and children (Jackson and Brownell 2000; Brownell and Frieden 2009; and Andreyeva, Long, and 
Brownell, 2010). This recent focus has occurred for many reasons, including the large amounts and increases in soft 
drink consumption; increases in obesity, against the backdrop of ineffective policy responses; and the considerable 
success of tobacco taxes in reducing tobacco use in the previous decades. These factors point to a need to craft 
policy interventions to combat obesity and a compelling example to guide a policy of taxation related to specific types 
of consumption. 
Soft drinks and the larger group of sugar-sweetened beverages (SSBs) appear to be reasonable targets because 
they are often considered to be “empty calories”—a category of consumption with very little nutritional value—and 
because they are a surprisingly large category of caloric intake for both adults and children. Putnam and Allshouse 
(1999) report that soft drink consumption has increased by almost 500% in the past 50 years, and recent data 
suggest it represents 7% of overall energy intake in adults and often larger proportions in children (Block, 2004). For 
example, Wang, Bleich, and Gortmaker (2008) estimate a 16% share of calories in youth ages 12-19 and 11% in 
children ages 2-11. However, some evidence points to recent reductions in soda consumption among some groups 
(Welsh, et al., 2011). 
Indeed, soft drink taxation has been an increasing focus of state legislatures across the United States. Soft drink tax 
legislation was filed in 17 states between January 2009 and May 2010 (Yale Rudd Center for Food Policy and 
Obesity, 2010). While many of these bills failed, there is growing support from the public and health experts for such 
a tax. Additionally, as of the first quarter of 2011, over a dozen states were considering new excise taxes on SSBs in 
the legislative session. The benefits are touted to be widespread, including increased tax revenues, reductions in 
unhealthy beverage consumption, a reduction in obesity and associated illnesses such as diabetes, and potential 
downstream effects on the labor market and medical utilization and expenses. With this list of potential benefits, it is 
important to highlight obesity’s role in the policy debate—while it is the clear focus of public health officials, other 
benefits of a potential soda tax should not be ignored, including those commonly discussed as well as more distal 
effects, such as improved dental health through reductions in sugar consumption. The focus on obesity is an 
important issue in this debate because much of the available evidence suggests that soda taxation may have 
negligible effects on obesity. If obesity was the main reason to consider taxation, then this evidence may imply that 
soda taxes may be unwarranted. However, a broader perspective on the potential health and economic gains from 
such a tax should be considered in evaluating this policy option. 
Uncertainty about Effectiveness of Soft Drink Taxation to Reduce Obesity On one hand, the potential benefits of soda taxation on obesity seem quite straightforward. We know that soda 
consumption is an important share of total consumption, and ample evidence suggests that maintained reductions in 
consumption of approximately 100 calories per day—less than a can of soda—could halt weight gain for 90% of the 
population (Hill, et al., 2003). Thus, basic economic theory suggests that raising the price of soda would reduce 
consumption and reduce population weight. This intuition is buttressed by the history of tobacco taxation, where price 
increases in cigarettes and other tobacco products have appeared to substantially reduce consumption. On the other 
hand, there is now ample research that examines the association between the level of state soft drink taxes—or soft 
drink prices—and obesity rates and found no effect (Fletcher, Frisvold, and Tefft, 2010 a, b, c). 
The answer to this apparent discrepancy between intuition and empirical evidence may be quite simple—substitution 
effects. This becomes more apparent when we consider the important differences between the consumption of 
tobacco and soda. In a sense, the different results between tobacco and soda taxation are a matter of the definition of 
policy goals and in considering precisely what desire is being satisfied for individuals who consume tobacco or soda. 
For tobacco, we might think that the demand the product satisfies is somewhat narrow, mainly nicotine, and the policy 
of tobacco taxation was aimed at reducing consumption. For soda, the demand for the product seems broader, 
including its sweetness/sugar and its calories. This basic difference suggests a smaller ability for soda taxation to 
reduce the quantity of sugar/calories because of the many opportunities for substitution to other products. In contrast, 
it is more straightforward to tax the larger class of products containing nicotine and potentially reduce its consumption. 
In emerging results, this substitution effect seems to answer the question of why taxes seem to lead to soda 
consumption reduction but not lower obesity rates. Fletcher, Frisvold, and Tefft (2010c) use the National Health and 
Nutrition Examination Survey (NHANES) dietary data to show evidence that, while individuals in states with higher 
soda taxes have lower soda consumption, these individuals completely offset the reductions in calories from soda by 
consuming other high-calorie beverages, such as milk and juice. This evidence is consistent with the view that 
individuals demand calories each day, and if the price increases on one mechanism of attaining calories (soda) then 
individuals shift their consumption relatively easily to satisfy their demand. These results are not without controversy, 
though, as research that uses simulation methods, and assumes lower levels of substitution to high-calorie drinks, 
suggests that soda taxes could reduce obesity (Smith, Lin, and Lee, 2010). 
The clear and intuitive substitution effect found in Fletcher, Frisvold, and Tefft (2010c) has implications for the type of 
policies that we might then suggest to reduce obesity in the population. Broader taxes on higher calorie products 
would appear to allow less substitution than narrow taxes. However, an issue with this approach is the number of 
healthy high-calorie products—for example, milk and juice—that would be difficult to motivate including in the tax 
category. A more general excise tax on added sugar may serve to shift consumption to alternative products. 
Related to the issue of substitution, a second potential limitation with the discussion of soda taxation in policy circles 
is the insistence on comparing the debate surrounding soda taxes to the debate and eventual success of tobacco 
taxes. While there are clear similarities with how public perception has changed over taxation, as well as how the 
relevant industry has lobbied against the imposition of taxes, there are also some key differences. Unlike soda 
consumption, there is no completely safe level of tobacco consumption. While there are likely to be health 
consequences for any level of tobacco use, it is only excess calories from soda that increase weight. In this way, the 
issue of soda taxation may be more similar to that of alcohol taxation than to tobacco taxation. In both cases, the 
health consequences seem to be specific to heavy or excessive consumption, but moderate consumption may pose 
no health risk. This is an important distinction because an evaluation of the success of the policy of taxation would 
need to center on reductions in problem users rather than reductions in moderate users. Indeed, in the case of 
alcohol taxes, Manning, Blumberg, and Moulton., (1995) found that only moderate drinkers—and not problem 
drinkers—reduce consumption when alcohol taxes increase. This undercuts the public health goals of the policy 
because it penalizes responsible users and has no effect on the problem users and the associated externalities, such 
as drunk driving. Similarly, we may be concerned whether any reductions in soda use are coming from individuals 
who are consuming excess calories, or those with otherwise healthy diets and weights. There is currently very little 
evidence related to this research question. 
New Tax Policy Proposals and the Potential for Obesity Reductions 
A primary limitation in the current research examining the effects of soda taxation on obesity is the limited policy 
variation that is available. While most states tax soda either through excise taxes or through sales taxes—the rates 
are currently quite low and they are not often clear to the public. Because many states use the sales tax instead of an 
excise tax, consumers do not see the tax in the posted shelf price—it is added at the register. Thus, some consumers 
may not know they are being taxed differentially for soda. In addition, the low rates of soda taxation may be below 
some critical (and unknown) threshold where consumers react. Fletcher, Frisvold, and Tefft (2010c) show reductions in soft drink consumption associated with soda taxes in NHANES data of about 6 calories per day for each 1-cent 
increase in tax. So, there is evidence of some reaction, but it is counteracted through substitution to other high-calorie 
drinks. These small (and “hidden”) tax rates on soda have led many proponents to suggest that only large taxes will 
reduce obesity rates. The claim is that when consumers know they are being taxed—and taxed heavily—they will 
react by lowering soda consumption and will, thus, over time, lose weight. The key assumption with this claim is the 
existence of a threshold of taxation where substitution patterns abruptly shift. Indeed, many proponents of increased 
soda taxation assume that over one-third of soda consumption is shifted to water, which has zero calories, if there is 
an 18% to 20% increase in soda taxes. Of course, this could be true—there could be a threshold effect in consumers’ 
substitution patterns. However, there seems to be no evidence for the existence of a threshold, and this implicit 
assumption in many proponents’ analyses is often not discussed. 
Ongoing Policy Considerations 
The simplicity of the reason that soda taxation appears to be ineffective in reducing obesity is both vexing for current 
policy efforts but also potentially useful for future policy efforts. While currently proposed soda taxes likely will not 
overcome the issue of substitution, it might be constructive for future policies to focus attention on this particular 
component of the pathway between commodity prices and eventual weight. Specifically, efforts to constrain the 
availability of substitutes, particularly for children, may serve as a useful complement to ongoing policies aimed at 
reducing obesity. As an example, Fletcher, Frisvold, and Tefft., (2010a) show that children in schools subjected to 
vending machine restrictions drink the same number of soft drinks as those in schools with no restrictions, again 
suggesting the issue of substitution effects. That is, most students have multiple avenues to purchase soft drinks in 
schools in addition to vending machines, such as school stores, cafeterias, and the like. But a more comprehensive 
policy that removed soda from all school facilities and substituted water may serve to reduce soda consumption in 
school. An open question is whether after-school soda consumption might compensate for in-school reductions. 
However, the potential goal for policies would be to limit the availability of substitution between soda and other high-
calorie drinks—perhaps policies can interactively work together to both shift students away from soda through the 
price mechanism and also limit availability of other substitutes. Although on its own, the prospects of soda taxation 
contributing to substantial reductions in obesity seem limited, more comprehensive policies may serve to affect the 
change in obesity rates that proponents desire. For example, Massachusetts recently passed new school standards 
that ban foods with artificial sweeteners, trans-fats, and caffeine from schools’ a la carte lines, vending machines, 
stores, events, and fundraisers. The standards also require schools to offer unsweetened fruits and vegetables, and 
provide water for free at all times (Kaiser 2011). 
Finally, although new soda taxation may fail to meet its primary stated purpose of reducing obesity, it may yet 
enhance population health. Because soda consumption is typically “empty calories” with little nutritional value and it 
also reduces dental health, policies such as soda taxation, which have been shown to reduce soda consumption, 
may still be an effective health policy without actually contributing to its main goal of obesity reduction. 
For More Information 
Andreyeva, T., Long, M., and Brownell, K. (2010). The impact of food prices on consumption:A systematic review of 
research on price elasticity of demand for food. American Journalof Public Health, 100, 216–222. 
Block, G. (2004). Foods contributing to energy intake in the US: Data from NHANES III and NHANES 1999–2000. 
Journal of Food Composition and Analysis, 17, 439–447. 
Brownell, K. D., and Frieden, T. R. (2009). Ounces of prevention—The public policy case for taxes on sugared 
beverages. New England Journal of Medicine, 360, 1805–1808. 
Fletcher, J. M., Frisvold, D., and Tefft, N. (2010a). Taxing soft drinks and restricting access to vending machines to 
curb child obesity. Health Affairs, 29, 1059–1066. 
Fletcher, J. M., Frisvold, D., and Tefft, N. (2010b). Can soft drink taxes reduce population weight? Contemporary 
Economic Policy, 28, 23–35. 
Fletcher, J.M., Frisvold, D., and Tefft, N. (2010c). The effects of soft drink taxation on soft drink consumption and 
weight for children and adolescents. Journal of Public Economics, 94, 967–997. Fletcher, J.M., Frisvold, D., and Tefft, N. (2011). Are Soft Drink Taxes an Effective Mechanism for Reducing Obesity? 
Journal of Policy Analysis and Management, 30 (3) 
Hill, J.O., H.R. Wyatt, G.W. Reed, and J.C. Peters. (2003). Obesity and the Environment: Where do we go from here? 
Science, 299 (5608): 853-855 
Jacobson, M., and Brownell, K. (2000). Small taxes on soft drinks and snack foods to promote health. American 
Journal of Public Health, 90, 854–857. 
Kaiser, J. (2011). New Mass. School Food Rules Ban Sweet Snacks. Associated Press. Available online: 
http://www.boston.com/news/local/massachusetts/articles/2011/07/13/health_officials_to_consider_school_snack_rul
es/ 
Manning, W., Blumberg, L., and Moulton, L. (1995). The demand for alcohol: The differential response to price. 
Journal of Health Economics, 14, 123–148. 
Putnam, J.J., Allshouse, J.E. (1999). Food consumption, prices, and expenditures, 1970–97. Washington, DC: Food 
and Consumers Economics Division, Economic Research Service, U.S. Department of Agriculture. 
Smith, T.A., Lin, B.H. and Lee, J.Y. (2010) Taxing Caloric Sweetened Beverages: Potential Effects on Beverage 
Consumption, Calorie Intake, and Obesity. Economic Research 
Wang, Y. C., Bleich, S. N., and Gortmaker, S. L. (2008). Increasing caloric contribution from sugar-sweetened 
beverages and 100% fruit juices among U.S. children and adolescents, 1988–2004. Pediatrics, 121, e1604–e1614. 
Welsh, J.A., Sharma, A.J., Grellinger, L., and Vos, M.B. (2011). Consumption of Added Sugars is Decreasing in the 
United States. American Journal of Clinical Nutrition, 94(2):  Yale Rudd Center for Food Policy and Obesity. (2010). 
Soft drink tax legislation filed 2009–2010. Retrieved December August 1, 2011. Available online: 
http://yaleruddcenter.org/resources/upload/docs/what/policy/SSBtaxes/SSBTaxMap_2009-2010.pdf 
Jason Fletcher (jason.fletcher@yale.edu) is an Associate Professor in Yale University's School of Public Health, 
Division of Health Policy and Administration, New Haven, Connecticut., as well as a Health and Society Scholar for 
the Robert Wood Johnson Foundation at Columbia University, New York, N.Y. 
The views expressed are those of the authors and do not necessarily reflect the positions of the Federal Reserve 
Bank of Kansas City, the Federal Reserve System, or Purdue University. 
© 1999-2011 Choices. All rights reserved. Articles may be reproduced or electronically distributed as long as 
attribution to Choices and the Agricultural & Applied Economics Association is maintained. 
 

Soda Taxes and Substitution Effects: Will Obesity be Affected?

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