Sugar-Sweetened Beverages (SSB)[i] are a well-recognized adversary in the fight against obesity and the quest for better public health. Interest in discouraging consumption through higher taxes is growing as more jurisdictions impose them and as we learn more from their experiences. [Pop-up box 2} Sugar-sweetened beverage taxes are one of three taxes for health highlighted in a recently published report by the Task Force on Fiscal Policy for Health.
Many are asking: are taxes on sugar-sweetened beverages are really a sweet deal? Does such a tax enable policy makers to improve health outcomes by reducing unhealthy consumption? And does it help generate additional tax revenue for more spending on human capital?
These taxes have sceptics. Some oppose the sugar-sweetened beverage taxes in principal, saying that the government is playing nanny state. Other critics question these taxes’ effectiveness as a policy tool, arguing that people are likely to substitute other sugary foods, such as ice cream, for the sugary beverages. People may also just shop for their sugary fix in lower-tax jurisdictions across borders, canceling out most health and revenue effects. Finally, some are convinced that such taxes are unfairly regressive, meaning they tax the poor more than rich.
These and other questions were recently discussed at a World Bank event in Washington, D.C., hosted by the Governance Global Practice and the global tax team. Here are seven lessons that I drew from the discussion:
Sugar-sweetened beverage taxes can enhance welfare across society as a whole by incentivizing individuals to reduce unhealthy consumption and lower public health costs to society. In the case of sugar-sweetened beverages, harm to society is related to public budgets and the public health costs of treating obesity, diabetes and cardiovascular disease. Economists call these negative externalities. The field of behavioral economics offers another welfare-enhancing opportunity for individuals, which is linked to the concept of internalities. People may not be correctly internalizing the costs, due to imperfect nutrition knowledge, lack of self-control or we may simply incorrectly discount the effects on our future health.
National Bureau of Economic Research working paper, internalities are largest for lower-income individuals who “have systematically less nutrition knowledge and likely to self-report they consume more sugary beverages than they think they should... Low-income households reduce consumption much more than high-income households when prices rise.” They conclude these benefits would be progressive. World Bank Research shows that tobacco taxes are progressive when second-order effects (reduced medical expenditures, and additional years of productive life) are considered.A common concern voiced in opposition to increasing sugary-beverages taxes is that they will fall heaviest on the poor. If poor people are consuming these products more, it is certain that they would pay more of the taxes if their consumption level stays the same. But to evaluate the overall distributional impact of the taxes, one must also consider the benefits from reduced consumption resulting from the price increase. According to a recent
Mexico, for instance, the sugar-sweetened beverage tax revenue averaged around 0.1 percent of GDP annually since they were instituted in 2014.Sugary beverages are thought to be unlike tobacco and alcohol, for which people tend to sustain consumption even as prices rise. Economists call this characteristic price-inelastic--meaning that consumption falls but less than the amount of the price increase. Demand for sugary beverages is more elastic, meaning people are more likely to reduce consumption as prices rise. In theory, this makes sugar taxes less effective at raising revenue over time. Still, sugar-sweetened beverage taxes are relatively new, and evidence of their revenue-enhancing benefits is still emerging. Early implementers show some consistent revenue gains following the implementation of these taxes. In
Philippines’ experience is a good example where soft earmarked revenue is linked to the country’s universal health coverage. In other jurisdictions links have been made to programs benefiting the community and children. Hard earmarks are not recommended: public expenditure management experts discourage earmarking for specific purposes because it can limit the ability to prioritize spending based on current needs. Reviewing empirical evidence, Cashin, Sparkes, Bloom (2017) conclude that “in most cases earmarking is unlikely to bring a significant and sustained increase in the priority placed on health in overall government spending.” They find that “earmarking has been more effective when practices come closer to standard budget processes – that is, softer earmarks with broader expenditure purposes and more flexible revenue–expenditure links.”The
Authorities need to consider which tax type and tax rate structure work best for the policy purpose. Excise taxes are the most commonly used form for sugar-sweetened beverage taxation. Specific taxes can reduce price gaps between different brands, decreasing the probability that consumers will switch to cheaper brands when taxes increase. However, specific taxes need to be increased regularly to keep up with inflation and income growth. From a public-health perspective taxing sugar content (rather than per-ounce tax) is most effective. When focusing on sugar content, however, the tax administration’s capacity to implement and the resources of the country to assess sugar content in these beverages are factors. Countries considering sugar-sweetened beverage taxes should also complement the tax policy with necessary legislation on consumer protection and product labeling.
Soft Drinks Industry Levy (SDIL) in April 2018 to tackle childhood obesity by encouraging manufacturers to reduce the sugar content in the soft drinks. The levy is a tiered system that impose a higher volumetric tax for drinks with higher sugar content. The soft drinks manufacturers were given two years and encouraged to reformulate products and bring their sugar content below the taxable thresholds. About 50 percent did. The tax authority had to revise early revenue forecasts by half.The UK Government introduced a
It may sound obvious, but it is crucial for reformers to study the political economy landscape, to prepare for public debates and to set the pace of reforms accordingly. For instance, I learned that these taxes hardly faced any resistance in Samoa and Tonga, because soft drinks were mostly imported. In Thailand on the other hand, the legislative process was much fraught and slow as the beverage industry mobilized a strong opposing block jointly with the local sugar cane farmers.
Are you interested in learning more about any of these seven points? Let us start a conversation here and we will use the next blogs to deepen each topic with your help. I look forward to your comments.
For other related content, make sure to check out these blogs:
- The seven salvos of sin (taxes)
- Sugar-Sweetened Beverages and Snack Taxes: All Eyes on Mexico (and Hungary)
[i] A sugar-sweetened beverage is any drink with caloric sweeteners, including carbonated soft drinks, sports drinks, energy drinks, fruit drinks, chocolate (or otherwise sweetened) milk, and sweetened coffee and tea, but not including 100 percent fruit juice or “diet” drink alternatives with non-caloric sweeteners. The beverage categories included in sugary drink taxes depend both on political calculations and judgment calls by public health experts. (As defined in Allcott, Lockwood, Taubinsky, (2019)) For a definition of caloric and non-caloric sweeteners read this handout.
[Sources for Chart/Table]
Should We Tax Sugar-Sweetened Beverages? An Overview of Theory and Evidence. Allcott, Lockwood, Taubinsky (2009)
Building momentum: lessons on implementing a robust sugar sweetened beverage tax. World Cancer Research Fund International (2018)
I think that sugar-sweetened beverage taxation is a good way to prevent non-communicable diseases. But it shoud take into account the consequences on industries like beverage and the other sectors affiliated.
A great piece!
I am having a hard time understanding the point made by Cashin, Sparkes, Bloom (2017). Kindly expand on this with a case-study.
I would think that in developing countries, these monies should be reinvested directly -- hard-earmarking -- than, such as in South Africa, have the money go into the general government's ficsus.
Diabetes S.A. agrees with the institution of Sugar tax as an Awareness Tool in educating the public of the high amounts of sugar in the sugar sweetened beverages. The issue for us is, where is the tax going to go to. Will it go into the same pot as
all the other government taxes, or will it be used to provide nutritional information and education for patients at risk for diabetes and patients already diagnosed? This is where the funding is needed as we do not receive funding for this type of education, with a result that many people die from complications of diabetes, and many more people develop diabetes, when they may have delayed or prevented developing it with the information and education which the tax could provide.
Thanks for an excellent summary that can be understood by non-specialists like me. In addition to sugary drinks, would more products need to be brought under tax coverage in developing countries where other sources of sugar consumption are major culprits e.g. sugar added to multiple cups of tea consumed in S Asia, local sweets sold from thousands of shops in countries like India and Turkey etc.? Otherwise reduction in consumption may not be enough just through reducing consumption of SSBs. It still feels right to tax these as a preventative move.
Great write up!!!
I strongly believe taxing sugar sweetened beverages is a good step in the right direction. Firstly, it aligns with the overall objective of value added taxes, which are taxes targeted at controlling or discouraging consumption of certain items by the government.
Again, virtually every government is concerned with the health and well being of its citizens; hence if a government views sugar-sweetened beverages tax as one of several methods to help in addressing health issues arising from unhealthy consumption of sugar-sweetened beverages and also increasing the life expectancy of its citizens, then such taxes should be adopted.
This could as well bring forth two major benefits; the first is to help maintain a healthy population through regulation of sugar intakes, while secondly serve as a means of generating extra tax revenue. I think its pros outweighs its cons, so the development is a welcomed one.
In case you didn't know, those evil sugary sodas are sweetened with corn syrup...
And yet, I've noticed that the 4.6 BILLION tax dollars subsidizing the corn industry EVERY YEAR in the US is always suspiciously omitted from the conversation.
If World Bank's (and this author's) genuine interest was improving public health by reducing consumption via cost increase, they could accomplish the same effect with a significant reduction of those subsidies. Corn farmers would increase their prices accordingly and, VOILA!
But that would only be a solution if their real goal was improved public health, wouldn't it..?
With global elite leftists it's always the same: Always more tax, never less spending.