Key Takeaway:
- When policymakers enact consumption taxes to raise revenue for the government, consumers who oppose the tax may decrease their consumption more, leading to a reduction in tax revenue.
BALTIMORE, MD, November 18, 2024 - One of the most common assumptions tax policymakers make is that by raising taxes, they will raise revenue for the government. However, a new study that centers on a soda tax in Washington state has reinforced alternative presumptions about tax impacts on consumer behaviors.
Researchers found that when Washington state enacted a tax on soda, it not only generated backlash in the consumer marketplace and political arena, but the related movement to repeal the tax also led to a significant decrease in soda consumption. In effect, Washington realized less tax revenue than it anticipated after instituting the tax.
The peer-reviewed research study published in the INFORMS journal Marketing Science is called "Consumption Responses to an Unpopular Policy: Evidence from a Short-Lived Soda Tax," authored by Andrew Ching of Johns Hopkins University and Daniel Goetz of the University of Toronto Mississauga.
"We decided to investigate whether consumers' level of agreement with a policy affects how they respond to that policy in the marketplace," says Goetz. "So, when Washington state enacted a consumption tax on soda, that provided a natural experiment to see whether consumers who disagreed with the tax reduced their consumption, and if that had any implications for tax revenues."
In 2010, Washington state enacted a soda tax that was primarily publicized as a means to raise tax revenue. Meaning, it was not billed as a means to change unhealthy consumer choices. As a result of the tax, a grassroots movement formed to place the soda tax on the ballot for a voter referendum, in which, ultimately, the voters voted to repeal the tax.
"We were able to use voter data along with data that measured monthly demand for soda while the tax was in place. We merged the highly localized precinct-level data for voting with consumer shopping patterns and shoppers' home locations to create a novel measure of grocery store-level tax opposition. We then combined this with price and quantity data from grocery stores statewide," says Goetz.
The study authors found that those stores frequented by opponents of the tax saw a 53% greater reduction in sales of the affected beverage brands. This reduction in sales compares to the consumption trends for stores frequented by those who actually supported the soda tax.
"At the end of the day, the takeaway is that the effectiveness of consumption taxes in raising revenue for the government really depends on how much support there is for that tax. When opposition is strong, you may very well find that a consumption tax will raise much less tax than what you expected," says Ching.
About INFORMS and Marketing Science
Marketing Science is a premier peer-reviewed scholarly marketing journal focused on research using quantitative approaches to study all aspects of the interface between consumers and firms. It is published by INFORMS, the leading international association for the data and decision sciences. More information is available at www.informs.org or @informs .
