Do Prices and Purchases Respond Similarly to Soft Drink Tax Increases and Cuts?

Abstract

While in January 2012, Denmark increased the long-standing tax on sugary soft drinks, the tax was cut byhalf in July 2013 and then completely repealed in January 2014. In this study, we examine whetherincreases and cuts of the soft drink tax lead to similar over- or under-shifting to prices and to similardemand responses. We use longitudinal scanner data of 1,282 Danish households to estimate within-product changes in prices and within-household changes in purchase quantity. The tax hike wasovershifted by a factor of 1.6–1.8, while the tax repeal was fully passed through with a factor of 0.9–1.2. Onaverage, consumption was 13.4 percent lower the year after the tax increase compared to the year before.The repeal of the tax was associated with an increase in purchase quantity of 31.0 percent. This isequivalent to price elasticities of
1.3 for both tax hikes and cuts. The results suggest that consumersreact similarly to tax cuts compared to tax increases. Furthermore, the increase in purchases following atax cut has no limiting effect on purchases of other beverages suggesting an increase in the intake ofcalories. This might have implications for health in countries that consider repealing current taxes on softdrinks.