Market Overview

Did Berkeley Just Start An Anti-Sugar Revolution?

Did Berkeley Just Start An Anti-Sugar Revolution?

Seventy-five percent of Berkeley, California voters November 4 said “Yes” to a one-cent-per-ounce tax on sugary beverages.

The vote represented the first time in U.S. history a municipality passed such a law, begging the question: Is this the beginning of a real war on sugar consumption and obesity?

Related Link: Sugar Branded Toxic As More Than 4 In 10 Adults In US Are Obese

Trailblazer Or Outlier?

At 75 percent, the votes in favor of taxing sugar in beverages were substantial. On the other hand, this was Berkeley, California.

Roger Salazar, spokesman for the soft-drink manufacturer sponsored opposition, told The Associated Press, "Berkeley is very eclectic. It doesn't look like Anytown, USA."

Elasticity Is Key

Benzinga reached out to professor Arjun Sondhi at Wayne State University in Detroit who said economic elasticity would be a key factor in the success or failure of the Berkeley tax.

Sondhi explained, “According to economic theory, if you tax a good, which means you raise the effective price to consumers, it will definitely lead to less consumers buying it. The more important question is ‘How much less?’”

Calories Or Sugar

Referencing a study published in the American Journal of Agricultural Economics, titled “By Ounce or by Calorie: The Differential Effects of Alternative Sugar-Sweetened Beverage Tax Strategies,” professor Sondhi noted that the way in which a tax is calculated also made a difference.

According to Sondhi, the study found that a tax on calories of $0.04/calorie would likely result in a reduction of consumption of 9.5 percent while a tax on sugar, which is the basis for the Berkeley tax, would likely only result in a consumption reduction of 8.5 percent.

Education Rules

Professor Sondhi noted that there were three main strategies for lowering or reducing consumption of a product (in this case, sugar).

In addition to a tax, such as the one just passed in Berkeley, other options included regulation (law) and consumer education.

“The most effective option to pursue,” Sondhi said, “is to impact consumer demand and not by forcing to change the price but by educating them.”

Who Bears The Cost?

According to Sondhi, “The burden of a tax [such as Berkeley’s], through the markets ends up being shared … by the producers and the consumers.”

Depending on elasticity, he said, the share of the tax born by producers (i.e., The Coca-Cola Co (NYSE: KO), Pepsico, Inc. (NYSE: PEP), etc.) would likely range between 40 and 60 percent.

Sondhi stated that would explain the $1.675 million beverage companies spent trying to defeat the Berkeley sugar tax.

Related Link: Nomura Raises Price Target On Coca-Cola

Will The Revolution Spread?

While nobody knows the long-term impact of Berkeley’s new tax, professor Sondhi pointed to several positive signs for anti-sugar/anti-obesity forces.

“We have seen cases like San Francisco and New York,” Sondhi said, “who have tried to pass it [demonstrating] … there is enough interest.”

He added, “Now that it’s been passed in one place, people are going to push and say ‘It has been done.’”

All this led Sondhi to conclude, "I would guess that this kind of tax, whether it’s based on sugar or calories, would probably go beyond Berkeley.” 

Image credit: Geisha Bot, Flickr

At the time of this writing, Jim Probasco had no position in any mentioned securities.

Posted-In: Arjun Sondhi Roger SalazarEducation General Best of Benzinga


Related Articles (KO + PEP)

View Comments and Join the Discussion!

How Snapchat's Monetization Deal With Amazon Could Boost Its IPO

Wynn Resorts Falls Amid Money-Laundering Report