Paving the Way towards Healthier Consumption Habits to Tackle Obesity: The Mexican Soda Tax Case

Obesity represents one of the most pressing issues in public health debates, increasing rapidly in recent years. A main concern that comes with this rise in prevalence is that obesity is a risk factor in the development of many serious conditions, such as diabetes, hypertension, and chronic heart disease. As a result of negative health conditions like these, more people are killed every year by obesity than by being underweight.

Mexico is now in the top three most obese countries. Taking its first steps to fight obesity, the Mexican government imposed a tax on drinks with high amounts of added sugars, such as sodas and juices, in January 2014. High sugar intake is connected with a greater likelihood of developing obesity. By raising the price of sugary drinks, policymakers aim to reduce sugar consumption, prompt substitution towards healthier alternatives, and combat obesity prevalence in the population.

In a new study, Jeffrey Grogger analyzes the intermediate effects of imposing this tax in Mexico by determining the effect of the tax on the prices of these beverages and the substitution effect towards other alternatives. By analyzing city-level price data on taxable products collected as part of Mexico’s Consumer Price Index program, Grogger discovers that Mexico’s soda tax had a powerful effect: the prices of sodas increased by 12 percent as a consequence of the imposed tax of approximately nine percent. This finding suggests that it is reasonable to expect that the desired effect of reducing sugar consumption is achievable through the tax.

Theory predicts that, as the price of a good rises, consumption of substitute goods will increase. For example, if soda becomes more expensive, people might switch to a cheaper substitute—milk or untaxed fruit juices—instead. In turn, the prices of these substitute goods should increase as a result of higher demand. By comparing prices and consumption of taxed and untaxed drinks, Grogger finds that the prices of untaxed substitutes did not rise, suggesting that consumers did not shift their consumption from taxed to untaxed drinks. This is good news—it would not be a very effective tax if people were consuming just as many calories by drinking these substitutes.

However, the final consumption shift as a result of the tax remains unclear. The study reveals that prices of untaxed diet sodas rose by 0.61 pesos ($0.13) in 2014 as compared to 2013, and remained roughly the same in 2015. This might be interpreted as a slight substitution from regular to diet sodas. Although this shift could be effective in reducing daily caloric intake, it is not yet clear if diet sodas are more effective for preventing obesity and related health problems in the long term.

On the other hand, real prices of water were largely unchanged between 2013 and 2015, suggesting that the substitution towards water has still not been revealed, or is nonexistent. Further study of shifts in water consumption as an effect of the soda tax is needed. Increasing water prices in subsequent years could signal that the tax is hitting the correct target—implying that consumers are switching from sodas to the healthiest beverage option.

Taking into account these preliminary results, Grogger’s study is a major contribution to understanding the effectiveness of this Mexican health policy. Policymakers now have reliable data showing that the tax is successful in raising prices on sodas, and that undesired shifts towards other caloric beverages have been avoided. Since it is difficult to measure health outcomes in the short run, by focusing on the intermediate effects of the tax, the study also offers the arguments needed to support this policy intervention. This could provide adequate time to further evaluate the tax’s effects, not only on consumption but also on health outcomes.

Article Source: Grogger, Jeffrey. “Soda Taxes and the Prices of Sodas and Other Drinks: Evidence from Mexico.” National Bureau of Economic Research, 2015.

Featured Photo: cc/(Gilly Youner)