Taxing Food and Beverages: Theory, Evidence, and Policy

Abstract

We developed a theoretical framework that allows examination of the effect of a change in sales or excise tax on food and beverage demand after taking into consideration that consumers may have imperfect tax knowledge, are sometimes inattentive to sales tax, may not be informed of a sales tax change, and pay no sales tax on eligible food or beverages if using food stamps. We conducted a store survey in New York State and found that, on average, fully one-third of all consumers do not know the correct sales tax status of food and beverages, and past purchase of the same item does not improve consumers’ tax knowledge. Using the parameters mainly obtained from the store survey, we conducted simulations to provide insight into how much the sales tax elasticity of demand should be adjusted downward from the price elasticity of demand and quantified the advantage of using an excise tax as an anti-obesity policy.

Keywords: demand, excise tax, food and beverages, imperfect tax knowledge, misperception, sales tax

JEL Classification: H25, H71, D12