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

Abstract

Products like cigarettes and soda offer consumers pleasant short-term utility, but they also carry large and negative long-term effects on individual health and a huge social cost on the healthcare system. One common tool for the government to intervene is imposing extra sales tax on these products. To evaluate the effectiveness of this tool and help determine the magnitude of the tax, researchers often estimate the price elasticity of demand before implementing the tax. However, the existing literature has ignored the role of consumer psychology. If some consumers strongly disagree with the rationale behind the tax, they may feel that they are being treated unfairly, triggering their rebellion mind set. This may lead to a reduction in their demand for the temptation product being taxed, as a way to reduce their tax burden. The short-lived 2010 Washington State soda tax provide us with a unique opportunity to test this hypothesis. This tax was very unpopular and repealed after six months of implementation. To measure consumer dissatisfaction on this soda tax, we make use of the precinct-level vote share data on the referendum to overturn this particular policy. Our diff-in-diff results provide support to our hypothesis and show that soda consumption at stores frequented by those who voted to repeal the tax fell by substantially more. We argue that the differential response across stores is likely due to consumer dissatisfaction about the tax instead of heterogeneous intrinsic preferences.

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

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