Chicago’s Soda Tax Fizzled Out

Two months after introducing a “soda tax”, a one-cent-per-ounce of sugar or sweeteners levied on beverages, Chicago (more precisely the Cook County) decided to abandon the scheme again. The controversial tax approved by the slimmest majority of 9-8 county commissioners faced strong consumer backlash, legal challenges and fierce lobbying effort by soda companies.

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The repeal is a major defeat to national soda tax proponents. While several other cities have introduced or consider introducing a similar tax (for example San Francisco or Berkeley) Chicago was by far the large municipality that has done it so far.

According to its advocates, the tax is meant to fight obesity and related health problems, alleviate health care costs, and raise revenues for municipalities. The scheme is also promoted by the World Health Organization as a ‘Pigovian tax’ – tax that discourages and offsets activity with negative externalities. Just as we pay extra taxes on fuel, tobacco and alcohol, tax advocates claim, we should also pay for sugar due to its harmful effects on individuals and the society.

Tax critics point out that while tobacco consumption is proved to be harmful even in minimal amount, moderate consumption of sweet drinks does not seem to cause health problems. Moreover, focusing on beverages only may unfairly and ineffectively promote equally bad substitutes such as sweet snacks. If obesity is the problem then other measures targeting it directly instead of one of its many possible causes might be more adequate. Some also believe that the soda tax is simply excessively paternalistic and goes beyond the nudge-style interventions envisioned by Richard Thaler.

Importantly, Cook County’s primary motivation for introducing the tax was much less theoretical. Cook County’s commissioners have admitted that they mainly wanted to fill gap in the 2017 budget by raising additional funds. Presumably, soda tax might be an effective source of revenue for the public sector. Distortions caused by taxation are in direct proportion to demand elasticity. Assuming that people are addicted to sugar as much as smoker to tobacco, sugar tax can raise funds without significantly distorting customer behavior.

Unfortunately, Chicago’s proximity to Indiana with no soda tax made the levy far less effective and more distortive. Many customers made the extra effort and started driving to the neighboring state to buy cheaper beverages. According to the Chicago Tribune, Costco’s nine Chicago stores witnessed a 34 percent decline in soft drink sales while nine closest stores outside Chicago experienced a 38 percent increase. As Costco’s representative says: “You’re displacing shopping from one area, you’re creating congestion in another and it’s just counterproductive.”

It is clear though that the epidemic of obesity is a growing problem throughout the world. Unless we find more effective measures, the soda tax debate will continue. But perhaps we are tackling the issue from a wrong end. Research has identified a very clear link between wealth and obesity – poorer people tend to be more obese and income inequality correlates with the share of obese people in population. Shouldn’t we just work on reducing income inequality then? But that’s a whole other debate...