Consumption Responses to an Unpopular Policy: Evidence from a Short-lived Soda Tax

Abstract

Public policies that intervene or restrict consumer choices for the benefit of the society are often controversial. For instance, the compliance rate of COVID-19 pandemic social distancing rules varied dramatically across cities and states, and these policies even backfired among some consumers who strongly disagreed with them. Motivated by such controversies, we investigate whether such rebellion behavior happens in the context of a sin tax. More specifically, we hypothesize that opponents of a sin tax will decrease their consumption of taxed products by more compared to supporters of the tax, in order to avoid the tax burden. By combining detailed voting records with price and quantity data at over a thousand grocery retailers, our diff-in-diff estimation results show that in response to the short-lived Washington State soda tax, stores mainly patronized by tax opponents experience twice the reduction in quantity sold of taxed beverages (6%) compared to stores mainly patronized by tax supporters (3%), even though the tax pass-through is uniform across all stores (5% increase in prices). Moreover, our estimation results show an inward shift of the demand curve for tax opponents' stores, providing additional support for the theory that consumer disagreement with a policy induces tax avoidance.