Monday 11 January 2016

I'm addicted to Mexican soda

Ok, maybe not.* But I've been having to read through some of the studies on the effects of Mexico's soda tax.

Chris Snowdon points to a new one in the BMJ. They run a panel fixed effect analysis using Nielson household consumption data looking to see whether consumption of taxed and untaxed beverages changed after the imposition of a peso-per-litre tax on non-dairy and non-alcoholic beverages with added sugar. They cite other work showing the tax was largely passed on to consumers.

What's interesting is that the behavioural response was largely due to reduced consumption among the poorest quarter of Mexican households. The poorest quartile reduced consumption by 35 mL per day, or 17.4%, by the end of the period - relative to the counterfactual established in the pre-tax period. Middle SES households reduced consumption by about 5%. Both groups increased purchases of untaxed beverages; we do not know whether or how much of any of this was substitution to sugar-added dairy drinks (if the tax were restricted to non-dairy sweetened drinks as described in the BMJ), fruit juice with lots of natural untaxed sugar, or home-made sweetened lemonade and the like.

Let's assume that they've got everything right in their panel metrics. I'm not familiar with a couple of their techniques, including Duan smearing factors, so will just take it at face value.

Why would it matter that the biggest response was among the poorest? A peso per litre doesn't sound like much (and isn't much in New Zealand money), but the minimum salary reported in the sample is 59.30.** So a peso is about 1.7% of the daily minimum wage. The New Zealand minimum wage of $14.75 gives a minimum daily salary of $118 for an 8-hour day. A comparable soda tax in New Zealand would then be set at $2 per litre - if the object were to make it roughly as expensive for lower income cohorts.

Yes, the excise tax, on average, was about 10% of the purchase price of a litre of soda. But it's an excise tax, not an ad valorem tax. A peso added to a 10 peso bottle would be different from a peso added to a 5 peso bottle. I would love to know what the ex ante price of the discount brand sodas in Mexico was.

Here in New Zealand, Coke on special is about $1.70 per litre. The discount off-brand product is about $0.80 per litre - less than half the price. Any per-unit excise has a much larger effect on the price of the cheapest good than on the average price.

If you put a 10% tax on soda in New Zealand, I wouldn't expect it to do much. You'd have reasonable substitution to off-brands among lower income or value conscious cohorts, but total effects wouldn't be huge. If you put in a $0.20 per-litre excise, I'd expect larger effects as it disproportionately hits the price of the cheapest product. If you put a $2 per litre excise, so that the effect on affordability for the poorest cohorts were properly copied over to New Zealand from Mexico, I would expect very large effects on soda consumption, and especially among the poorest cohorts. Demand curves do slope down.

I don't think any of the soda tax advocates here have mooted a $2 per litre excise tax. But I'd be surprised if we didn't start hearing calls to increase any soda tax, if one were implemented. It took a while for tobacco excise to hit $0.60 per cigarette in New Zealand. In 1994, it was $0.15, or $0.23 in today's money.

Other fun questions I've not elsewhere seen asked:

  • The Mexican tax seems to be per litre of sweetened beverage, regardless of sugar content. If I lived in that environment, in places where customers have access to clean water, I'd sell a concentrated syrup for dilution at home rather than a ready-to-drink product. I wonder whether anybody there is doing that. Alternatively, I'd sell a bottled sugar-free product with a sugar sachet attached to it with a rubber band. Mix your own!
  • Even if things aren't turning into syrups, you should expect an increase in the sugar concentration in sugary beverages: taxed for a teaspoon, taxed for a cup.
  • I don't know whether the tax applies to just a bag of sugar at the supermarket. There is an 8% ad valorem tax on "a defined list of non-essential highly energy dense foods". A bag of sugar is pretty cheap. Even if the 8% tax applies to it, an 8% tax on a kilo bag of sugar has got to be cheaper than a peso-per-litre of sugar-sweetened beverage. 
    • Enterprising children should surely be setting up lemonade stands and dodging the tax man. Here's a recipe for Mexican lemonade: about a quarter cup of sugar per litre. A kilo of sugar is 5 cups, so 20 litres per kilo. That would draw 20 pesos in excise tax alone, were it taxed as a beverage. I suspect that the kilo of sugar itself would retail for less than that, with or without an 8% ad valorem tax.*** Sweet sweet tax-dodging lemonade stands.
    • One also wonders about whether any of the purchased bottled water to which folks are substituting is being used in untaxed home production of lemonade. The folks who have the Nielson household sales data should be able to tell whether purchases of sugar have changed. Why wouldn't you check that and report on it?

* Just their radio.

** Mexico has a minimum daily salary, not a minimum hourly wage. They're here using an inflation-adjusted minimum salary.

*** One dated source has the reference price for sugar at 6579 pesos per metric tonne. If that's a wholesale price, it's 6.6 pesos per kilo. Retail might then be 15-20? An 8% tax would be less than 2 pesos on the kilo where the beverage equivalent tax would be 20 pesos. Sugar in NZ retails at around NZD$3/kilo, which would be about 35 pesos, but I'd be surprised if Mexican retail prices were close to NZ retail prices.

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