Smart health taxes: A win for public health and the economy

Imagine a world where strategic investments in health not only save lives but also drive economic growth and resilience. This vision was at the heart of the 7^th Annual Health Financing Forum, where hundreds of participants and experts recently gathered to explore health financing in the post COVID-19 era.

As we face the slowest five-year growth in 30 years, with financial stress, inflation, and heightened debt levels, innovative fiscal policies are critical. The economic slowdown, amplified by COVID-19’s lingering effects, underscores the need for public investments in health and other social priorities like education to support human capital.

The benefits of health taxes

Recognizing these challenges, the World Bank’s Global Tax Program Health Taxes Project brought to the forum a special session focused on the strategic role of health taxes. These excise taxes on tobacco, alcohol, and sugar-sweetened beverages are multipronged policy tools with beneficial health, growth, and fiscal impacts. Designed to reduce the consumption of unhealthy goods, health taxes help curb the burden of non-communicable diseases such as cancers, diabetes, cardiovascular, and respiratory illnesses, which drive public health spending up and drag labor market outcomes down. At the same time, health excise taxes are a fiscal tool capable of generating meaningful revenue.

When thoughtfully designed and implemented, excise taxes on tobacco can generate an estimated 0.6% of GDP in tax revenues, and alcohol taxes about 0.3%. 

To ensure the success of these health excise taxes, specific design features are crucial. These features make health taxes both effective and sustainable:

• Regular rate increases: Ensure that taxes remain impactful over time, continually discouraging use of harmful products.
• Structures targeting consumption: Support more precise tax design, including tax structures that account for product use, such as the number of tobacco sticks sold or the volume of sugar or alcohol content in beverages.
• Indexing for inflation: Prevents the real value of these taxes from eroding, ensuring they remain a robust source of revenue and a strong deterrent against unhealthy consumption.

Earmarking and revenue use: What are they and why do they matter?

The session also delved into the concept of earmarking, a practice gaining traction due to sectoral financing needs. But what exactly is earmarking, and why is it important? Earmarking involves setting aside revenue for specific expenditures, ensuring that funds are dedicated to particular policy objectives including health programs such as smoking cessation. This practice can make allocations more targeted, but also can reduce flexibility in the budget. However, well-designed health taxes improve population health and reduce costs with or without earmarking.

The discussion also introduced the concept of revenue use, a term that includes approaches that allow funds to be directed toward priority expenditures within the budget without formal earmarking. This method adheres to good fiscal practices, while maximizing health and revenue gains.

To achieve these goals, Ministries of Health play a critical role on the revenue side by supporting dialogue around health taxes at the country level to ensure their proper design. Their involvement is essential to make sure that the benefits of well-structured health taxes are fully realized, with or without an explicit expenditure purpose being defined.

Global and local perspectives on health tax reforms

Other dynamic discussions by practitioners and experts brought diverse and insightful perspectives on critical issues around health taxes:

• The urgent need to prioritize health tax reforms, particularly for tobacco and alcohol, due to their profound health and revenue impacts, where experts highlighted the importance of using fiscal tools judiciously in emerging policy areas, ensuring that health taxes are applied correctly. They stressed that excise taxes should target specific harmful products, while broad-based taxes like VAT should not be misused as health taxes, as this undermines their effectiveness.
• Supporting health tax reforms at the country level, in which World Bank health experts highlighted the power of a coordinated "One Bank" approach, leveraging the Bank’s comprehensive expertise across fiscal, health, poverty, and governance sectors. The panel also addressed the political and economic challenges of implementing health taxes, including in federal systems, and the importance of seizing strategic opportunities to advance health tax objectives.

Beyond the forum: Advancing health tax impact

The Annual Health Financing Forum showcased the importance of the pivotal role of health taxes in building a healthier, more resilient future. In this effort, the World Bank’s Global Tax Program and Health Taxes Project provide essential support by driving research that informs key policy decisions. Our analysis of health taxes on economies, trade, and labor markets, including the use of sex-disaggregated data, promotes fairer tax systems.

In June, the World Bank and the World Health Organization hosted the International Dialogue on Sustainable Financing for Non-communicable Diseases and Mental Health to push this agenda at a global level in collaboration with our partners and ensure lasting benefits for both health and the economy. Learn more about the event here.

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