Governments worldwide use indirect taxes as a tool to influence consumer behavior, generate revenue, and address public health concerns. In the United Kingdom, the Soft Drinks Industry Levy (SDIL), commonly known as the “sugar tax,” was introduced in 2018 as a response to rising obesity and health issues linked to excessive sugar consumption. This tax aimed to reduce the demand for high-sugar beverages by increasing their prices, thereby encouraging consumers to make healthier choices while incentivizing manufacturers to reformulate their products.

By 2024, the U.K. sugar tax had raised over £1.2 billion in government revenue, with a 44% reduction in sugar content per 100ml in soft drinks since its introduction. Despite the tax’s success in reducing sugar consumption, its economic impact has been mixed, affecting consumers, manufacturers, and retailers differently. While demand for low-sugar and sugar-free alternatives has increased, traditional sugary beverages still maintain a strong market presence, particularly among certain demographics and income groups.

This case study explores the economic effects of indirect taxation on soft drinks in the U.K., analyzing price elasticity, shifts in consumer demand, producer responses, and the broader implications of taxation as a policy tool.

Price Elasticity and Consumer Response to the Sugar Tax

One of the primary economic concerns surrounding the sugar tax is its effect on price elasticity of demand (PED). Price elasticity measures how sensitive consumers are to price changes, with products categorized as elastic if demand significantly changes with price fluctuations and inelastic if demand remains stable despite price increases.

Soft drinks, particularly high-sugar variants like regular Coca-Cola and Pepsi, exhibit moderate price elasticity, meaning that while higher prices lead to some reduction in demand, a significant portion of consumers continue to purchase these products. A study conducted in 2022 found that for every 10% price increase due to the sugar tax, demand for sugary drinks decreased by 6%, indicating a PED of approximately -0.6. This suggests that while the tax has reduced consumption, some consumers remain relatively unresponsive to price hikes due to brand loyalty, habit formation, and limited availability of substitutes for certain taste preferences.

By 2024, sales of sugary soft drinks in the U.K. had declined by 15% compared to 2017 levels, while sales of zero-sugar variants, such as Diet Coke and Coca-Cola Zero Sugar, increased by 35%. The introduction of the sugar tax has effectively shifted consumer preferences toward lower-sugar alternatives, but not eliminated demand for high-sugar beverages altogether.

Income disparities also play a role in how different socioeconomic groups respond to indirect taxes. Studies show that lower-income households are less responsive to the sugar tax, as they tend to allocate a higher proportion of their food and beverage spending to processed and sugary items. While middle- and high-income consumers have shifted more quickly to sugar-free alternatives, lower-income groups have continued purchasing taxed beverages at a higher rate, raising concerns about the regressive nature of the tax—meaning that it disproportionately impacts lower-income individuals who spend a larger share of their income on taxable goods.

Producer Response: Reformulation and Market Adjustments

The sugar tax not only affected consumer behavior but also forced major soft drink manufacturers to adapt their strategies to maintain profitability. In anticipation of the tax, brands such as Coca-Cola, PepsiCo, and Britvic altered product formulations to avoid higher tax brackets and maintain competitiveness. The U.K.’s sugar tax applies a tiered structure, where drinks with sugar content above 8g per 100ml are taxed at 24p per liter, while those with 5g to 7.9g per 100ml face a lower tax of 18p per liter.

By 2023, over 50% of soft drink brands in the U.K. had reformulated their products to contain less than 5g of sugar per 100ml, thereby avoiding taxation entirely. This reformulation strategy helped preserve consumer demand, as price-sensitive customers were more likely to switch to untaxed versions rather than exit the market altogether. Notably, Fanta and Sprite reduced their sugar content to fall below the taxable threshold, while Pepsi chose to keep its full-sugar formula unchanged, accepting the tax as a cost passed onto consumers.

Retailers also adjusted pricing strategies to minimize consumer resistance. Many supermarkets absorbed part of the tax cost, particularly in large multi-buy promotions, keeping retail prices relatively stable. However, convenience stores and smaller retailers passed the tax fully onto consumers, leading to higher prices for single-purchase beverages. By 2024, the average price of a 500ml bottle of full-sugar soda had increased by 20% compared to pre-tax levels, while prices for zero-sugar alternatives remained stable.

Economic and Health Trade-Offs of Indirect Taxation

The effectiveness of indirect taxation depends on balancing economic efficiency with public health benefits. The U.K. government has justified the sugar tax as a necessary intervention to combat rising obesity rates, which cost the National Health Service (NHS) an estimated £6 billion annually. Since the tax’s implementation, public health data indicates that childhood obesity rates have declined slightly, with a 5% reduction in sugar intake among children aged 11-18.

However, indirect taxes also create economic trade-offs. While public health benefits are evident, some critics argue that the tax has negatively impacted small businesses and low-income consumers. Many independent retailers, particularly small convenience stores, have reported lower profit margins due to declining sugary drink sales. Additionally, some argue that taxation alone is not a sufficient strategy for improving public health, as it does not directly address broader dietary habits, physical activity levels, or sugar consumption from untaxed sources such as confectionery and baked goods.

Another key consideration is tax revenue allocation. The U.K. government initially pledged that sugar tax revenue would be reinvested into school sports and public health initiatives, yet reports indicate that only 60% of collected funds have been allocated toward these programs, with the remainder absorbed into general government spending. This raises questions about the long-term sustainability and effectiveness of earmarked taxation policies.

Future Outlook: Should Sugar Taxes Be Expanded?

The debate over expanding sugar taxes to other food categories has gained momentum in the U.K. and globally. Some policymakers propose extending taxation to high-calorie processed foods, fast food, and other sugar-laden products, arguing that a broader approach would create a more comprehensive impact on public health.

Conversely, critics warn that excessive taxation on food products could lead to unintended consequences, such as increased food insecurity, reduced consumer choice, and disproportionate effects on small businesses. A potential alternative could be subsidizing healthier food options, ensuring that consumers have greater access to affordable, nutritious alternatives without relying solely on punitive taxation.

While the sugar tax has demonstrated success in reducing sugar consumption and encouraging product reformulation, its economic effects remain mixed. Future policies will need to balance revenue generation, consumer fairness, and long-term health outcomes to ensure that indirect taxation remains an effective tool for shaping market behavior without unintended negative consequences.