BFI NewsNov 24, 2015

Taxing Sugar, a Nudge Toward Better Health

Taxes on sugary drinks prove to be a viable piece of the larger puzzle of widespread obesity
A diet hinged on sweeping, systemic changes to the way you eat are often the least sustainable, resulting in gaining back the weight as soon as willpower wears thin. Sustainable weight loss is achieved through small, sustainable tweaks in behavior over the long term. That might be the case not only for those of us trying to lose weight after the holidays, but for the overweight populations of entire countries.
For nations seeking to address epidemic obesity and the looming health problems and costs it brings, taxes on sugary drinks may provide a nudge changing behavior. Increasingly such taxes come up as a possible solution in the US, where  69 percent of Americans are overweight. Jeffrey Grogger wanted to know exactly how much of the problem such taxes could realistically address.
To find out, Grogger, the Irving Harris Professor in Urban Policy at the Harris School of Public Policy, analyzed price and purchase data to trace the impact of such a tax as implemented in Mexico. He discussed some compelling early findings with MBA students at a Becker Brown Bag talk on Nov. 9.
His calculations show that soda taxes raise prices enough to cut consumption by a small but potentially significant margin.
Mexico has a similar weight problem compared to the US; 73 percent of the adult population is overweight, and 33 percent is considered obese. Making matters worse, fewer citizens suffering from diabetes control their condition with preventative care and blood sugar monitoring, making their overall medical expenses higher.
The Mexican government launched the National Strategy to Prevent and Control Overweight, Obesity and Diabetes in 2014. This itincludes a whole suite of national programs targeting various trouble spots for overeaters, including taxes on various junk foods, limits on ads for sugary foods aimed at children, and, as mentioned, a national tax on soda. Sugary drinks seemed a natural target, given that they represent 20 percent of adult energy intake in Mexico; as implemented, the 9 percent tax represented a roughly 1 peso increase per liter of soda.
The policy thinking is pretty simple: raise the price to constrict the demand for it. But Grogger wanted to quantify exactly how much such a tax could lower the demand. How much of that price increase would actually pass through to consumers, as opposed to being absorbed by producers? Would Mexican consumers facing higher soda prices substitute other beverages and limit the overall impact the tax could have on weight loss?
Getting price data was easy—the Mexican Consumer Price Index survey contained all the highly-detailed market data Grogger needed. A chart comparing the price jump before and after the tax went into effect really drew his interest. “When I saw this graph was when I got excited about this project. The number of times I’ve seen [a graph that dramatic] I can count on one hand.”
Figure 1: National price index for sodas, Mexico
The problem was the lack of a control product. Since the tax went into effect nationwide all at once, he didn’t have data on what soda prices would look like without the tax over the same time period. To compensate, he used a “synthetic cohort approach” wherein a fictional product price index is generated using aggregated marketwide price data from before and after the tax went into effect. Essentially, he contructed a forecast of what soda prices would look like without being taxed, so that he could compare it to what actually what happened.
He compared those results to an ARIMA model aimed at achieving a similar (but painstakingly crafted) forecast. “I don’t know how many of you have fit data to an ARIMA model by hand, but there’s art to this as well as science,” said Grogger.
The synthetic approach pointed to a 14 percent increase in prices under the 9 percent tax; the ARIMA model pointed at a 12 percent increase. There were also no noticeable increases in other beverage prices, meaning the tax didn’t simply raise prices across the board. The demand response to that price increase? On average, each consumer decreased their soda consumption enough to lose between roughly 2 to 4 pounds, depending on which model is used.
That doesn’t sound significant, but other research shows that a Body Mass Index of just 5 percent can make a significant difference in health outcomes. It translates to 21 percent fewer new cases of Type II diabetes, 8 percent fewer new cases of hypertension, and 8 percent fewer new cases of coronary heart disease and stroke. If Mexico were to target a 5 percent reduction in BMI , the results of the tax represent between roughly 25 to 40% of that goal.
Soda taxes are not as a singular cure for obesity, but framed as part of a larger incremental health program, these results are promising, said Grogger. It’s not the whole solution, but soda taxes certainly seem to be part of a solution to obesity as a global health issue.