Now, if you want to change consumers’ behavior with a tax, the tax should be “salient.” That’s tax-speak for “able to be seen and felt.” You can see exactly why in this neat study on tax salience and tax rates by Amy Finkelstein.
Here’s where things get complicated: What does it mean to be salient? A 2009 paper by Raj Chetty, Adam Looney, and Korey Kroft found that a shelf price with a built-in excise tax is more likely to reduce demand than a tacked-on sales tax. Tatiana Homonoff and Jacob Goldin (a former TPC intern) decided to look more closely at the consumers. They found that low-income consumers responded to both tax-inclusive shelf prices and the tax added at the register. High-income customers were the ones likely to ignore the sales tax.
Back to Vermont: Imagine it enacts its sin tax. A mom strolls down a grocery aisle and sees a 12-pack of that orange-flavored drink, the one that isn’t soda but is subject to the tax, the one that she believes is healthy. It’s about $3 more expensive than it used to be. Will she keep strolling and find something else, or will she shrug and put it in her cart?