Abstract
We analyze the impact of a tax on sweetened beverages using a unique dataset of prices, quantities sold, and nutritional information across several thousand taxed and untaxed beverages for a large set of stores in Philadelphia and its surrounding area. We find the tax is passed through at an average rate of 97%, leading to a 34% price increase. Demand in the taxed area decreases by 46% in response to the tax. A large amount of cross-shopping to stores outside of Philadelphia offsets more than half of the reduction in sales in the city and decreases the net reduction in sales of taxed beverages to only 22%. We find no significant substitution to bottled water and modest substitution to untaxed natural juices. We show that tax avoidance through cross-shopping severely constrains revenue generation and nutritional improvement, thus making geographic coverage an important policy decision.
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