Taxing soft drinks – stealthy or healthy?

Food choices are complex, and interfering with personal freedom is contentious. Can a well-designed tax on dietary dangers help save us from poor health?

When Britain announced in March this year that it would introduce a tax on soft drinks in 2018, celebrity chef Jamie Oliver cheered and challenged other countries to follow suit. “Pull your finger out, Australia,” he urged.

Countries around the world, from Finland to France to Fiji, have adopted this interventionist approach as obesity continues to defeat individual willpower and corporate responsibility.

Soft drink companies continue to promote soft drinks. Many people struggle with restraint, especially the young. A 2015 study by the Australian Bureau of Statistics found that almost half of Australian children aged between two and 18 consume sugar-sweetened beverages (SSBs) on an average day.

Health researchers at the Organisation for Economic Co-operation and Development (OECD) say the evidence suggests that under the right conditions, taxes seem to be able to encourage consumers to switch away from SSBs to more healthy drinks.

Making a drinks tax work

Australia’s major political parties have so far not supported such taxes (although the Australian Greens do support a 20 per cent tax). The major New Zealand parties have not supported the tax approach either.

However, the proposal is being examined seriously in Malaysia, which according to a study in The Lancet has had Asia’s highest obesity rate.

Meanwhile, US cities continue to move toward taxes on sugary drinks: Berkeley, California introduced a tax in 2014; Philadelphia, has announced a tax proposal; and Boulder, in Colorado, is heading toward a referendum on the issue.

Related: Is the Australian government drunk on alcohol taxes?

Ensuring these taxes work may not be so simple. Food and beverage industry critics say that such imposts will cost jobs while having little effect on obesity. Australian Beverages Council CEO Geoff Parker tells INTHEBLACK that a sugary drinks tax would cost “a significant proportion of the 30,000 Australian jobs directly involved in manufacturing soft drinks”.

Outside the industry, sugar tax critic Chris Snowden, from the UK’s Institute of Economic Affairs, has a different criticism: so far, he says, taxes have been so low that they are ineffective as health measures and instead work merely as “stealth taxes”.

So what does it take for food taxes to not only raise revenue, but also deliver measurable health benefits – reduced consumption, followed by reduced rates of obesity, diabetes and tooth decay?

Experts point to the following conditions as essential for success, assuming a food tax is just one element of a comprehensive public health strategy:

1. Consumers need to be sufficiently price-sensitive.

“Price elasticity” is a concept that measures how much people will change their behaviour when prices change.

Studies conducted by senior research fellow Dr Anurag Sharma at Monash University’s Centre for Health Economics suggest the average price elasticity of demand for sweetened drinks is around -0.63. This means that for every 10 per cent increase in price, consumption will drop by 6.3 per cent.  

This makes soft drink consumption a little more responsive to price change than alcohol, which has a price elasticity of -0.5, and tobacco, which has a price elasticity of -0.4.

However, Sharma points out that heavy consumers of SSBs are less responsive to a price hike, with an elasticity of just -0.2. It makes sense that those hooked on their sweet hit will find it more difficult to kick the habit – and the evidence is building that sugar is addictive.

“Although heavy consumers of SSBs – who also tend to be from low-income households – have the least elastic demand, they will experience greater health gains,” says Sharma, referring to his research findings published last year.

2. The taxes must be high enough.

Based on predictive modelling and real-life observation, a 20 per cent tax or equivalent is just enough to start impacting health.

A modelling study published in The BMJ (formerly British Medical Journal) predicted that a 20 per cent tax on sugar-sweetened drinks would lead to a reduction in the prevalence of obesity in the UK of 1.3 per cent.

The only real-world data comes from Mexico, which imposed a 10 per cent tax on soft drinks in September 2013. On average, a 6 per cent drop in sugary drink purchases was achieved in 2014. In the poorest households, sales decreased by 17 per cent.

“Obesity experts are arguing for a higher rate, but taxes need to be introduced slowly to make them acceptable,” says Sharma.

“They can be increased over time according to the evidence, which is what happened with cigarettes.”

3. We should tax food volumes, not prices.

When Sharma compared the tax burden and potential health gains of a sales (or valoric) tax of 20 per cent of the retail price versus a volumetric tax of A20 cents per litre, he found that the tax burden would be lower and weight reduction higher under a volumetric tax.

This was especially true for heavy purchasers in low-income households, who would lose an average 3.2 kilograms of weight and pay A$13 in taxes per year with the volumetric tax, compared with an average 2.6 kilograms of weight and A$17 tax with the sales tax.

4. Consumers should pay the tax.

“You need a clear price signal to the consumer if you want to reduce consumption,” says Jane Martin, executive manager of the Obesity Policy Coalition.

The Greens’ proposal and the UK Government’s plan is to tax manufacturers rather than retailers of SSBs. Food and beverage manufacturers and retailers, however, normally pass on the full price increase, according to a 2015 World Health Organization report, Using Price Policies to Promote Healthier Diets (PDF).

5. Revenue raised should be dedicated to promoting health.

The Australian Treasury has long opposed the idea of dedicating revenue from a particular tax for a particular purpose. Martin argues that governments need to accept this “hypothecation” in certain situations so that changes to laws can actually be passed and health can be improved.

The Mexican Government, for example, promised to ensure free drinking water in schools where previously only soft drink was available.

6. Provide cheap, healthy alternatives.

This helps to reduce substitution where, for instance, people react to a tax on sugary soft drinks by seeking out alternative cheaper sweet drinks, such as flavoured milk.

7. Beware unintended consequences.

One of the reasons Denmark abolished its tax on saturated fat after only one year was that the Danish Chamber of Commerce claimed the tax was harming business. Consumers started buying their fatty foods internationally, encouraged by German retailers who sent brochures to Danish households encouraging them to spend up outside the country.

Boosting national health

In a best-case scenario, health gains from a tax on SSBs could be substantial.

Research conducted in 2016 by Dr Lennert Veerman, from the University of Queensland School of Public Health, estimates that in Australia a 20 per cent tax on SSBs could:

•    reduce new cases of diabetes by 800 per year
•    after 25 years, result in 1600 fewer deaths, 4400 fewer people with heart disease and 1100 fewer people living with the consequences of stroke
•    raise an estimated A$400 million a year and reduce annual health expenditure by up to A$29 million
•    cost the government A$27.6 million to implement  

A matter of conscience?

“When we look back on how we managed the obesity crisis in Australia, the thing we will most rue and regret is the appeasement of the food industry.”
– Professor Rob Moodie, Melbourne School of Population and Global Health. Moodie chaired the National Preventative Health Taskforce in Australia that first recommended taxing soft drinks.

“I am not prepared to look back at my time here in this Parliament, doing this job and say to my children’s generation ... ‘I’m sorry. We knew there was a problem with sugary drinks. We knew it caused disease. But we ducked the difficult decisions and we did nothing’.”

– Former UK treasurer George Osborne, announcing the UK’s tax on soft drinks.

The economic rationale

The underlying rationale of taxing products (such as alcohol, tobacco and certain food products) for public health reasons is that consumption of some products is associated with “negative externalities” that can result in costs to society that neither the producer nor consumer covers.

In such cases, a government may want to correct for the tendency of the market to encourage the consumption of products with a documented negative impact on health.

Source: Using Price Policies to Promote Healthier Diets, World Health Organization, Europe Office, 2015

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