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

Abstract

Public policies that intervene or restrict consumer choices 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 these controversies, we investigate whether such rebellion behavior happens in the context of a soda tax. More specifically, we hypothesize that tax opponents will decrease their soda consumption by more than tax supporters, in order to avoid the tax burden. We combine detailed voting records with price and quantity data from over a thousand grocery stores, and show that in response to the short-lived Washington State soda tax, stores frequented by tax opponents experience a 60% greater reduction in quantity sold of taxed beverages compared to stores frequented by tax supporters, even though the tax pass-through is uniform across all stores. Our estimation results show that demand for soda at tax opponents' stores shifts inwards and becomes less elastic, supporting the behavioral hypothesis that consumer disagreement with this policy induces tax avoidance.

Keywords: Behavioral Economics, Policy Evaluation, Soda Tax, Fairness, Political Process

JEL Classification: D63, D72, D91, H26, I14, I18, L81