Spatial retail competition reduces the effects of soda taxes on price and quantity: Evidence from the Philadelphia Beverage Tax

Abstract

We model and measure the economic response to taxes on sugar-sweetened beverages (SSB). We hypothesize that when the tax does not cover the geographic extent of the market, cross-border shopping by consumers reduces the pass-through rate of the tax and the effect of the tax on consumption. We further hypothesize that the multi-product nature of retail groceries compounds this competitive effect. We use retail scanner data and a difference-in-difference estimator to quantify effects of the Philadelphia Beverage Tax (PBT) implemented in 2017. We estimate a pass-through rate of 80 percent and a 32-percent reduction in SSB sales caused by the PBT. We find the tax increased sales and revenue of SSBs and of non-taxed products in stores close to Philadelphia but not subject to the tax. In addition, we find lower pass-through rates in stores offering a wider assortment of products. We take this as evidence that multiproduct competition reduces the effect of Philadelphia’s SSB tax. An important implication is that a tax implemented at the state or national level would be more effective at reducing SSB consumption.