Habit Formation and Demand for Sugar‐Sweetened Beverages

Using scanner data, we estimated demand for nine nonalcoholic beverages under habit formation. We found strong evidence for habit formation. Although demand for sugar‐sweetened beverages by low‐income households is less elastic to own‐price changes compared with high‐income households, there is evidence that high‐income households consider beverages to be more substitutable than low‐income households do. A half‐cent per ounce tax on store‐purchased sugar‐sweetened beverages will result in a moderate reduction in consumption of sugar‐sweetened beverages for both income strata. Because of habit formation, long‐run national tax revenue from a sugar‐sweetened beverage tax is about 15 to 20% lower than short‐run revenue.