No smoking sign in Nepal. Photo: Aisha Faquir/World Bank.
The Global Tax Program’s Health Tax Workstream is a multipronged initiative that brings together knowledge and expertise from across several World Bank Group’s global practices and units — covering Macroeconomics, Trade and Investment; Health, Nutrition and Population; Poverty and Equity; and Governance.
As the world had barely started its recovery from the health and economic shocks of the COVID-19 crisis, a set of new pressures emerged: the war in Ukraine, global inflation, and economic downturn across the worlds’ largest economies. An overall projected global slowdown in 2023 means that domestic budgets will continue to strain as we move into the New Year, with challenges across sectors.
Health taxes have been gaining attention due to their dual focus on health as well as revenue impacts. As a special type of policy tool, they can also generate second-order effects: reduce strain on the health system, lead to more productive populations, and translate human capital gains into economic growth.
Health Taxes are Cost-Effective
Health taxes are excise taxes that are applied to products such as tobacco, alcohol, and sugar-sweetened beverages that can cause health-related harm. They differ from other indirect taxes like goods and services tax (GST) and value added tax (VAT) because they are discriminatory, and can be used to target products that damage health and generate harm to society and oneself.
The primary purpose of health taxes is to reduce consumption of harmful products. However, when well designed — with a focus on the right rates, structures, base and supported by complementary administrative measures — they constitute one of the most cost-effective ways to curb the use of unhealthy products and save lives while raising much-needed revenue.
Experience from the Philippines
Instituting and enhancing health taxes requires partnership. Implementation experience shows that the most successful reforms come from collaborative efforts across both a country’s Health and Finance ministries. For example, in the Philippines, the successful passage of the Sin Tax Law of 2012 was in large part due to linking the reform to benefits for the health sector. The reform was championed across political aisles, and supported by broad consultations with stakeholders and buy-in from leadership at the highest levels.
The reform also provided wins for revenue. Health tax collections were 0.5% of GDP before the reform and grew to 1.4% of GDP by 2019. Further, “sin taxes” continue to provide a reliable source of revenue for important priorities like universal health coverage (UHC), a practice aligned to the country’s fiscal system.
In 2022, the Department of Health budget and premium subsidies to PhilHealth — the health insurance scheme for the Philippines — were five times higher than they were in 2013. An extensive program of analytical and advisory assistance provided by various partners, including the World Bank, underpinned this reform.
World Bank’s Holistic Support
Moving the health tax agenda forward also takes diverse technical expertise. Drawing on years of collective efforts, the World Bank has supported governments to tackle the health tax agenda from multiple interrelated dimensions.
The Bank assesses poverty and distributional impacts of health taxes on the poorest populations, including how tobacco excise taxes can have progressive and pro-poor long-term effects when considering behavioral responses, lower future medical expenses and add years of productive life as a result of lower consumption. We have also examined and piloted how introduction and increases in sugar-sweetened beverage (SSB) taxes could be progressive over the long run.
The World Bank has examined the health and economic effects of consuming tobacco and SSBs, including the impacts of health tax reform on non-communicable diseases and related risk factors, such as obesity.
We also recognize the importance of good governance when it comes to tax administration. We work on challenging issues such as compliance that support effective tax policy and revenue collection at the country level, helping improve governance and financial management.
In addition, World Bank experts have helped countries understand how health excise taxes contribute to their fiscal policy environment and macroeconomic picture, working with counterparts in ministries of finance to leverage health taxes as a part of their broader tax reform programs and as an instrument to strengthen growth.
Collaboration for a Multi-Dimensional Approach
A newly established World Bank workstream on health taxes under the Global Tax Program builds on these efforts to support health tax reforms around the world.
This effort recognizes that health taxes should not be viewed solely through the lenses of health or finance: they demand multi-dimensionality.
Implementing health taxes requires understanding the dynamics of tobacco farming and their relationship to excise taxes on products such as fuels and vehicles that can also reduce a range of negative externalities. It also requires an understanding of the complex political economy behind health taxes including tax evasion and illicit trade, powerful industry and related stakeholder groups, and government dynamics that determine how each challenge must be managed.
These complexities make collaboration a true necessity, and the World Bank is uniquely positioned to magnify its diverse expertise in support of health tax reforms.
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