KN5. Sugar-Sweetened Beverage Taxes: Rationale, Evidence and Design for Improving Health1 The purpose of this note is to provide an updated overview of 1) the rationale for implementing sugar-sweetened beverage (SSB) taxes, 2) the impact of SSB taxes on prices, the demand for SSBs and substitutes, and economic outcomes, and 3) tax design, revenue, and tax administration considerations. A summary of policy considerations is also provided to aid in decision-making. SUMMARY Sugar-sweetened beverage (SSB) taxes are an important fiscal and health policy tool since they raise tax revenue and improve health by reducing demand, as well as reduce health expenditures by alleviating the burden on the health system. SSB taxes can be designed efficiently to reduce costs of over-consumption related to both negative externalities and internalities and do not generally distort other aspects of economic activity (i.e., they do not lead to job loss). SSB taxes result in net progressive distributional outcomes since reductions in health expenditures and increased productivity can particularly benefit the poor. The design of SSB taxes requires careful attention with the type, scope and characteristics of the tax structure influencing the policy transmission mechanism, including incentives for firms to reformulate products. It is important to take into consideration the authorities’ tax administration capacity as some tax structures can be complex. Overall, SSB taxes can be considered a win-win policy that can help to improve health outcomes and at the same time generate tax revenues, while generating benefits for equity, health system efficiency, and further societal gains. A companion Q&A document delves into complementary issues and commonly asked questions about SSB and broader nutrient-based taxes. 1. RATIONALE FOR SUGAR-SWEETENED BEVERAGE TAXES Health taxes are excise taxes imposed on products that taxes can generate additional revenue (Chaloupka, Powell have a negative public health impact, and include taxes on and Warner, 2019; World Bank 2023a). tobacco, alcoholic drinks, and sugar-sweetened beverages2 (SSBs).3 In their own right, health taxes are one of the most The consumption of SSBs, and related intake of excess cost-effective policy measures for reducing the sugars, is a risk factor for noncommunicable diseases consumption of these products and associated mortality (NCDs) and, in turn, increases mortality and imposes social and morbidity. Relatedly, the economic framework for and economic costs on society. SSB consumption is directly health taxes has multiple goals and highlights their special linked to type 2 diabetes, obesity, dental caries, nature: first, health taxes aim to reduce the quantity cardiovascular and stroke risk, and some types of cancers demanded for the taxed products in order to reduce (Vartanian et al. 2007; Malik et al. 2010a, 2010b, 2013; consumption-related “externalities”, e.g., additional Bleich and Vercammen 2018; Malik and Hu 2019; Wang et publicly funded healthcare costs, productivity costs; al. 2022). Additionally, obesity itself is a significant risk second, they reduce “internalities”, e.g., inconsistent time factor for numerous NCDs including heart disease, stroke, preferences related to individual harm; and, third, health diabetes, and some cancers (Rexrode et al. 1997; Kurth et al. 2002; Renehan et al. 2008; Abdullah et al. 2010; Khan et 1 This note was prepared by Lisa M. Powell (University of Illinois Chicago) and Evan Blecher (World Bank), with inputs from Ceren Ozer and Danielle Bloom (World Bank), and Anne-Marie Thow (University of Sydney). The authors wish to thank peer reviewers Felipe Dizon, Kyoko Shibata Okamura, and Violeta Vulovic (World Bank); Patrick Petit (IMF); Chonlathan Visaruthvong and Itziar Belausteguigoitia (WHO), and Linde Kremer for support (also World Bank). This series is produced via the Global Tax Program Health Tax Project under Task Team Lead Ceren Ozer. 2 Sugar-sweetened beverages: non-alcoholic beverages sweetened with added free sugars (for example, including fructose, glucose, high-fructose corn syrup, honey and/or sucrose). 3 Throughout this knowledge note references to SSB taxes generally refer to excise taxes unless specified as another type of tax. This is similarly assumed when making comparison to other types of health taxes such as taxes on tobacco and alcohol products. al. 2018). The prevalence of obesity worldwide has nearly Figure 1 shows the disability-adjusted life years (DALYs) lost tripled since 1975; in 2016, more than 650 million adults due to diets high in SSB consumption in 2019 and Figure 2 and 124 million children and adolescents aged 5-19 were shows the average annual percentage change in the same estimated to have obesity (NCD-RisC 2017, WHO 2021a). It between 2010 and 2019, stratified by country income was estimated that 4.7 million people died prematurely group. The data show a clear income gradient with DALYs due to high body mass index in 2017, representing rising as countries get richer, however, the data also show approximately 8% of deaths (GDB 2018). The number of a clear trend with respect to growth, with DALYs rising people with diabetes worldwide rose from 108 million in faster in poorer countries than richer countries.4 While 1980 to 422 million in 2014, and, in 2019, 2 million deaths estimates vary by country, there is consensus that medical were attributable to diabetes (WHO 2023). and economic costs associated with obesity are staggering and it is estimated that these costs will reach upwards of $4.3 trillion (2.9% of GDP) worldwide by 2035 (Okunogbe et Figure 1 // Disability-adjusted life years al. 2022). (DALYs) lost due to diets high in sugar- sweetened beverage consumption, 2019 As SSBs are estimated to be one of the largest contributors to added sugars intake (Bowman 2019a, 2019b) and have little or no nutritional value (WHO 2022), and there is a link between SSB consumption and NCDs and associated costs, SSBs are considered prime contenders for health taxes from a public health perspective. In the context of a health tax, data from the World Bank Global SSB Tax Database show that SSB taxes are currently in place in more than 94 countries worldwide of which 20 apply only to SSBs with the remainder applying to other forms of non-alcoholic beverages in addition to SSBs (World Bank 2023d).5 As noted above, the economic framework for implementing such a tax is that individuals overconsume SSBs due to the fact that the market does not take into account negative Note: Groups are high-income (HIC), upper-middle-income (UMIC), lower-middle- externalities (e.g., healthcare and productivity costs) and income (LMIC), and low-income countries (LIC). there are individual internalities (e.g., inconsistent time Source: GBD (2019) preferences related to morbidity and mortality) associated with consumption (Chaloupka, Powell and Warner, 2019). Further, research has shown that SSBs have increasingly become more affordable which, in turn, through leading to Figure 2 // Average annual percentage increased consumption can contribute to a rise in the change in DALYs lost due to diets high in prevalence of obesity and NCDs (Blecher et al. 2017; sugar-sweetened beverage consumption, Ferretti and Mariani 2019). Thus, an SSB tax can be thought 2010-2019 of as a corrective tool, often referred to as a Pigouvian tax, that by way of increasing prices (known as tax pass- 5.0% through) can reduce harmful levels of demand. percentage change Average annual 4.0% To design an effective SSB tax policy, it is important to 3.0% undertake country-specific situational analyses, consider 2.0% the country’s tax environment and administration capacity, and take into consideration the transition mechanism 1.0% (Figure 3) through which taxes impact consumption and 0.0% health outcomes. As noted above, in order for health taxes HIC UMIC LMIC LIC HIC UMIC LMIC LIC to impact consumption and yield optimal health benefits, SSB prices must increase by a sufficient amount to account Per 100,000 Percentage of all DALYs for both consumption-related externalities and internalities (Allcott, Lockwood and Taubinsky, 2019). The Note: Groups are high-income (HIC), upper-middle-income (UMIC), lower-middle- amount by which prices ultimately increase will depend on income (LMIC), and low-income countries (LIC). the tax amount, pass-through and design. Additionally, substitution for other potentially harmful products and Source: GBD (2019) tax-avoidance behaviors (such as cross-border shopping) must be minimized so that they do not create leakage and offset improvements in health. Relatedly, such leakage would lower the estimated socially optimal tax amount 4 This trend is not observed in low-income countries where the 5 Non-alcoholic beverages are all packaged or commercial beverages contribution to all DALYs is rising rapidly, while per capita DALYs are not. which do not have alcohol, this includes SSBs, but also artificially This highlights the relative growth due to rapid gains in other areas of sweetened beverages, dairy drink, and water. public health, particularly infectious diseases. HEALTH TAXES • GLOBAL TAX PROGRAM • WORLD BANK • Sugar-Sweetened Beverage Taxes: Rationale, Evidence and Design for Improving Health Page 2 (Allcott, Lockwood and Taubinsky, 2019). In addition to the 82% (Andreyeva et al. 2022). It is important to note that the transition mechanism shown in Figure 3 through price, SSB extent to which SSB prices increase can also be dependent tax designs where the tax amount is based on sugar on the type of tax that is implemented. Of note, specific content may also induce supply-side product changes such excise taxes generally raise the prices of SSBs at a as reformulation to reduce sugar content in beverages consistent amount per volume metric, whereas ad valorem which, in turn, may yield health benefits. Finally, revenues taxes raise prices by a lesser amount per volume on larger generated from an SSB tax may help to fund programs and package sizes that are offered at volume discounts. It is policies that provide complementary improvements in also important to keep in mind that, because SSB taxes are population health. often levied on manufacturers or distributors, an ad valorem tax of a given percentage, even when fully passed The World Health Organization (WHO) has classified SSB through, will not raise prices faced by consumers by the taxes as a cost-effective intervention alongside other policy equivalent percentage of the retail price since it is levied interventions to reduce unhealthy diets for prevention and earlier in the distribution chain on the pre-markup price. control of major NCDs; this is similar to tobacco and alcohol taxes as being cost-effective policies to reduce B. Demand for SSBs tobacco use and the harmful use of alcohol (WHO, 2022a). Evaluations of SSB taxes have also produced a significant SSB taxes are well supported by a broad range of body of literature on the impact on the demand for these institutions with both the WHO and the International beverages. A recent meta-analysis of estimates from SSB Monetary Fund, in addition to the World Bank, tax evaluations worldwide (Figure 4) found that across all recommending the use of SSB taxes (World Bank 2020; studies and tax policies there was a 15% reduction in SSB Petit, Mansour, Wingender 2021; WHO 2022b). sales, with a corresponding estimated price elasticity of demand of -1.59 (Andreyeva et al. 2022). An earlier meta- analysis that combined worldwide studies of sales, 2. EVIDENCE ON SSB TAX IMPACTS purchases and intake to examine impacts on consumption As shown in Figure 3, the key mechanism through which found that a SSB tax of 10% was associated with a 10% health taxes impact demand is that they raise prices faced reduction in consumption, equivalent to an estimated by consumers for products targeted by the tax, known as elasticity of -1.0 (Teng et al. 2019). Meta-analyses of SSB tax tax pass-through. In turn, the increase in the relative prices evaluations that included studies of sales and of the taxed products is expected to reduce the quantity consumption for the Region of the Americas found a demanded. This is often measured by a common metric consistent estimate of SSB tax/price elasticity of demand of referred to as the price elasticity of demand, the -1.36 (PAHO 2020). Thus, a SSB tax that raises prices by 40% percentage change in quantity demanded that results from is expected to reduce demand by approximately 40-64%. a one percent change in price. These estimated elasticities of demand for SSBs (which are found to be elastic, i.e., elasticity >1) are larger than what has been found for tobacco and alcohol (which are found Figure 3 // Transmission Mechanism of Sugar- to be inelastic, i.e., elasticities, on average, for both <1); sweetened Beverage Tax Impacts meaning that taxes that raise SSB prices by a given percentage will result in relatively larger reductions in demand for SSBs compared to respective impacts on demand related to similar tax increases for tobacco and alcohol products (Powell and Chaloupka, 2023a). While these expected impacts on demand are good from a public health vantage point, they also have implications for raising revenue given that the tax base will shrink more quickly as tax rates rise. Nonetheless, this is not presently much of a concern because SSB taxes are generally new and/or low providing a significant time horizon to generate potential revenue associated with increased taxes (Powell Source: Adapted from Fig 3.1 in Powell and Chaloupka (2023a) and Chaloupka, 2023b). This latter point is discussed in more detail in the section on tax revenue below. A. Tax Pass-Through and SSB Prices While a number of different factors related to a country’s SSB market structure, demand for and supply of SSBs, along with manufacturer and retailer strategic behaviors can influence the extent of tax pass-through (Chaloupka, Warner and Powell 2019; Belloni and Sassi 2023), a growing body of literature has shown that SSB taxes have generally been passed on to consumers in the form of higher prices. A recent meta-analysis of worldwide studies that examined changes in SSB prices following the introduction of an SSB tax found that the tax pass-through rate was, on average, HEALTH TAXES • GLOBAL TAX PROGRAM • WORLD BANK • Sugar-Sweetened Beverage Taxes: Rationale, Evidence and Design for Improving Health Page 3 Figure 4 // Price elasticity of demand of SSB taxes Source: Andreyeva et al. 2022 C. Unintended Substitution to Untaxed For sub-national taxes and countries with soft borders, it is important to take into consideration that tax avoidance Products and Tax Avoidance through cross-border shopping, where consumers shift While the intended impact of an SSB tax is to reduce SSB making purchases to outside of the taxing jurisdiction, can consumption/sugar intake and induce substitution to undermine the impact of the tax. While consumption data healthier beverages such as water or low-fat milk without capture the net effect of the tax from all sources, sales data added sugars, there is concern regarding potential only reflect changes in the taxing jurisdiction. Evidence substitution to untaxed products that may dampen the from meta-analysis of U.S. studies of local-area SSB taxes intended health benefits of the tax. This includes that are more susceptible to cross-border shopping substitution for beverages that are often excluded from compared to national-level taxes shows that, on average, the tax base, such as 100% fruit juices which contain based on studies that used store scanner data, naturally occurring free sugars and flavored milks with approximately one-quarter of the estimated reduction in added sugars. Overall, evidence from meta-analyses of tax demand was offset by cross-border shopping: the evaluations shows no statistically significant substitution to reduction in volume sold of taxed beverages fell from an untaxed beverages including those with and without average of 25% to 18% and the estimated price elasticity added sugars; however, some studies do find substitution fell from -1.51 to -1.05 after adjusting for cross-border to untaxed beverages, particularly water, in a number of shopping (Powell et al. 2021). Tax avoidance in the form of jurisdictions, including, for example, Mexico, Barbados, cross-border shopping can also be a threat to national- and some localities in the United States (U.S.) (Teng et al. level taxes with soft borders; for example, with respect to 2019; Andreyeva et al. 2022). Additionally, evidence the 2014 repeal of the Danish SSB tax (Schmacker and suggests that some substitution may occur to untaxed Smed 2020); and, indeed it was raised as an important foods that may be high-sugar substitutes, but that such issue for policy learning among SSB tax policymakers in the substitution is not likely to substantially offset the overall European Union region (Thow et al 2022). impact of the tax. For example, one study examined the net impact of the U.S. Seattle SSB tax on overall grams of D. Economic and Distributional sugars sold from SSBs after accounting for changes in grams of sugars sold from substitution to untaxed Considerations beverages, standalone sugars and sweets and found that A concern frequently raised by industry when SSB taxes are at 2-years post-tax net grams of sugars sold from SSBs fell being proposed is that they will lead to job losses. by 19%, compared to 23% without accounting for However, it is important to keep in mind that when substitution (Powell, Leider and Oddo 2021). Only a few consumers reduce their purchases of SSBs they will studies have examined substitution to alcoholic beverages reallocate their spending to other goods and services, following the implementation of an SSB tax and have including untaxed products from the same beverage generally found limited to no substitution (Gibson et al. industries, and governments will spend the revenue 2021; Powell and Leider 2022). generated by the tax (Mounsey, Powell and Chaloupka HEALTH TAXES • GLOBAL TAX PROGRAM • WORLD BANK • Sugar-Sweetened Beverage Taxes: Rationale, Evidence and Design for Improving Health Page 4 2023). Studies of employment and unemployment TAX DESIGN outcomes following the introduction of SSB taxes in There are a number of important tax design considerations Mexico, Peru and two local jurisdictions in the U.S. have that need to be taken into account in order to maximize found no impact on jobs or unemployment claims, the effectiveness of SSB taxes. This includes decisions including in industries that produce and sell SSBs related to the following questions: 1) What is the scope of (Guerrero-López et al 2017; Lawman et al. 2019; Marinello SSB products that will be taxed? 2) What type of tax will be et al, 2021a, 2021b; Diaz et al. 2023). applied to the SSB products? 3) How will the tax be structured (that is, will it be uniform, or tiered)? 4) What will A further argument that has been raised against SSB taxes the tax rate be? 5) What is the expected tax revenue? is that they will adversely impact lower-income populations. Indeed, while consumption taxes can be A. Scope of the tax regressive because lower-income individuals spend a Given the public health objective of an SSB tax is centered higher share of their income on consumption, from a on reducing consumption and related intake of added health tax perspective they can be considered progressive sugars with the ultimate goal of reducing health risks such for several reasons. First, and importantly, health taxes are as type 2 diabetes and obesity, it is critically important to intended to improve population health by reducing consider the scope of the tax, i.e., the set of products to consumption. Low-income individuals tend to be more which the tax applies, with reference to all types and forms price sensitive and so are likely to be more responsive to of SSBs. That is, the scope should consider all water-based the tax and reduce their consumption to a greater extent. beverages with added sugars (carbonated drinks, energy They therefore garner a relatively higher health drinks, sports drinks, fruit or vegetable drinks), sugar- improvement and, therefore, a commensurate benefit. sweetened coffee drinks, coffee substitutes, tea and herbal Price studies (Claro et al. 2012) and tax evaluations infusions (teas/coffees), and sugar-sweetened milks and (Colchero et al. 2016, 2017; Ng et al. 2019) have shown dairy-based drink products (sugar-sweetened/flavored larger price/tax-related reductions in SSB demand among milks and yogurt drinks). Additionally, given that all forms lower- versus higher-income populations. Second, SSB of free sugars are considered a risk factor for NCDs, it is taxes have the potential to improve health equity, given recommended that 100% fruit juice (which contains that some within-country studies have shown that lower- naturally occurring free sugars though no added sugars) be income individuals are relatively heavy SSB consumers, added as part of the scope of taxable beverages (WHO and SSB consumption and obesity are increasing at a 2015; WHO 2022b). It is also important that all forms of relatively high rate in low- to middle-income countries (Han beverages be taxed; that is, not only should liquid forms be and Powell 2013; Baker et al. 2020). Finally, it is also taxed but also concentrates, powders, and syrups used to important to note that SSB tax policies could be linked to make SSBs by adding water or carbonated water. complementary programs targeting health and well-being that support low-income populations to further improve A secondary consideration of the scope of the tax is not just health equity. which beverages to include or exclude from the tax, but also whether to levy different tax rates on different As an example, World Bank research using an Extended categories of beverages either based on beverage types or Cost Benefit Analysis (ECBA) shows that SSB taxes can be sugar content.7 These points are discussed in more detail fiscally progressive in the long run when the behavioral below. In Croatia, for example, taxes on energy drinks effects of reduced consumption are accounted for (Fuchs containing taurine or methyl-xanthine (at least 15mg per and Pierola, 2022). The ECBA model highlights the common 100ml) are taxed at a higher rate than other SSBs.8 argument against health taxes that they are regressive since the burden of the tax increase falls B. Tax type disproportionately on the poor and notes that it is a narrow As introduced above, health taxes are excise taxes argument that relies on the average rather than marginal imposed on products that have a negative public health tax incidence. Since poorer income groups are relatively impact, e.g., taxes on tobacco, alcohol, and SSBs. The term more elastic than richer income groups the anticipated health taxes almost always refers to excise taxes. change behavior is larger in poorer than richer income Consumption taxes are considered indirect taxes and, in groups. Furthermore, savings in avoided health costs and addition to excise taxes, they include value-added taxes, increases in labor productivity and extended working life goods and services taxes and other general sales taxes. disproportionately favor the poor thereby making SSB However, sales taxes when they are uniform across taxes progressive in the long run. This has been products are not considered health taxes since they do not demonstrated, for example, in Kazakhstan using the ECBA change the relative prices of targeted products and reduce methodology (Fuchs et al 2020).6 consumption through increased cessation, reduced 6 In addition to the World Bank studies, there are other published studies 8 SSBs are taxed on a tiered system with rates of €1.33 per hL (sugar with similar results from South Africa (Saxena et al., 2019) and the content of 2.001g to 5g per 100ml), €3.98 per hL (sugar content of United States (White et al., 2023). 5.001g to 8g per 100ml), and €7.96 (sugar content exceeding 8g per 7 This has some overlap with sugar content-based tiers discussed in the 100ml. Tax rates on energy drinks are of €26.54 per hL (containing following sections, but the nuance is that the tax rates do not vary by taurine) or €10.62 per hL (at least 15mg per 100ml of methyl-xanthine). sugar content (even if sugar content may be broadly generalizable within categories and differ between), but rather by category definitions that are not determined by sugar content. HEALTH TAXES • GLOBAL TAX PROGRAM • WORLD BANK • Sugar-Sweetened Beverage Taxes: Rationale, Evidence and Design for Improving Health Page 5 initiation, and intensity of use. When sales taxes are varies based on the product’s characteristics (i.e., level of differentiated, they function somewhat like excises, sugars) or price. The choice of the tax base and structure although they are not viewed as good practice for several can have significant impacts on the policy transmission reasons. For example, the tax structure would be limited to mechanism. For example, the earlier in the value chain that ad valorem taxes, the may have a limited impact on price, the ad valorem tax is based, the smaller the impact on and they introduce administrative complexities into the retail prices, which is not the case for specific excise taxes. sales tax system.9 Import tariffs are also generally not Uniform taxes are generally easier to administer, however, considered health taxes since they influence where tiered taxes based on sugar levels and specific taxes based something is produced rather than where it is consumed; on sugar content can provide incentives for consumers to that is, they do not tax locally produced products and shift away from the most sugar-laden products and hence are not comprehensive taxes (World Bank 2023a). incentives for firms to reduce sugars in beverages overall. Given that SSB taxes are designed to be applied to a This is best explained by considering several country relatively narrow range of products in order to induce examples. larger price differentials between them, an excise tax is the most appropriate tax. Mexico applies a volumetric specific tax of MXN 1 per liter of beverage, whereas South Africa applies a specific tax of Excise taxes can be applied as a specific tax (e.g., levied on ZAR 0.021 per gram of sugars per 100ml. In addition to the volume or any physical characteristics of the beverage tiers, the sugar content can also be used to define tax or sugar) or as an ad valorem tax (e.g., levied as a thresholds (a level below which tax is not paid). South percentage of value). Specific taxes are generally the Africa applies a threshold of 4g per 100ml, meaning that preferred type of tax on products that generate negative only SSBs with 4g or more of sugars per 100ml are subject externalities and internalities like SSBs, because the to the tax. Mexico does not apply a threshold, but Hungary externalities and internalities correlate with the volumes of is an example of a volumetric specific tax that is applied consumption rather than the value. For example, a above a threshold. The tax is levied at a rate of HUF 15 per cheaper SSB does not generate smaller externalities and liter for SSBs containing at least 8g of sugars per 100 ml. internalities than a more expensive SSB. Specific taxes also The United Kingdom (U.K.) also applies a volumetric have a number of advantages over ad valorem taxes in specific tax (GBP 0.18 per 100ml) and imposes multiple terms of achieving goals of reducing consumption (Powell thresholds: a threshold of 5g of sugars per 100ml for the and Chaloupka 2023b). Because specific taxes are applied first tax amount and it applies a higher rate (GBP 0.24 per per unit (either volumetric units or sugar content) rather 100ml) at a second threshold for SSBs exceeding 8g of than as a function of value, quantity discounts are still sugars per 100ml. Figure 5 shows the impact of these tax taxed at the same rate; this is important because an ad structure choices on the effective tax relative to sugar valorem tax could induce consumers to substitute to larger content by converting these four examples into common sized beverage bottles and/or cases of beverages. units and currency. Additionally, specific taxes reduce the incentive for consumers to switch to less expensive brands. Specific Figure 5 also highlights the incentives of the different tax taxes are less susceptible to industry manipulation in the structures. The volumetric tax in Mexico does not generate form of under-invoicing or transfer pricing where any incentives for producers to lower sugar content since manufacturers set lower prices at the point of tax the same tax applies no matter the sugar content. application and then increase prices later in the However, it generates incentives for consumers to switch distribution chain. This makes tax administration of from taxed to untaxed beverages since the prices of taxed specific taxes generally easier than ad valorem taxes and beverages will increase relative to untaxed beverages. The improves the stability of tax revenue since they are not threshold in Hungary generates incentives for producers to subject to industry price manipulation. However, it must be lower sugar content in a dichotomous manner. If noted that specific excise taxes must be adjusted regularly producers reduce sugar content below 8g of sugars per to account for changes in real income and inflation 100ml they pay no tax, otherwise they pay the tax no otherwise their impact will be eroded over time (World matter the sugar content. Beverages already containing Bank 2023b).10 less than 8g have no incentive to reformulate or increase prices since they are not subject to the tax, while drinks C. Tax base and structure with 8g or more have an incentive to reduce to 7.9g, but no Specific taxes can be based on either the volume of the more. beverage or the volume of sugars (i.e., content), while ad valorem taxes can be based on a value early in the supply chain (e.g., CIF or ex-factory prices) or later in the supply chain (e.g., retail prices or retail prices net of taxes). Both specific and ad valorem taxes can be structured to apply as uniform taxes (i.e., at a single rate) or with a tiered rate that 9 A hallmark of modern sales taxes like VAT are that they are as uniform as policy makers an overview of relevant issues and feasible policy choices possible. Introducing exceptions with graduated rates undermines the in setting health taxes, including SSBs, in the context of rising inflation. It efficiency of these systems by increasing the administrative burden. provides practical solutions to protect the real value of taxes and tax 10 The World Bank Global Tax Program recently published a Knowledge revenues, including benchmarking of specific taxes. Note on “Health Taxes and Inflation” (World Bank 2023b) that provides HEALTH TAXES • GLOBAL TAX PROGRAM • WORLD BANK • Sugar-Sweetened Beverage Taxes: Rationale, Evidence and Design for Improving Health Page 6 Not all the impact was on the supply side, with changes in Figure 5 // SSB tax rates per gram of sugars in consumer behavior accounting for two-thirds of the Hungary, Mexico, South Africa, and the change through substitution to lower-sugar beverages and United Kingdom a reduction in total SSB consumption (Bercholz et al., 2022). The reduction in sugar consumption from SSBs is also corroborated by tax data, which shows a reduction in tax revenue of 30 percent between the 2018/19 and 2021/22 fiscal years even though the tax rate has remained unchanged (National Treasury, 2022).11 In the U.K., the threshold and tier apply two discrete incentives, rather than the linear incentive like in South Africa. Evaluation of the tax shows that manufacturers engaged in significant product reformulation to lower sugar content to reduce their tax liability. Furthermore, the U.K. provided producers with a significant lead time of nearly two years between the announcement (early 2016) Source: World Bank Global Tax Program estimates and implementation (April 2018) with the intention of giving firms time to develop and implement reformulation strategies. As shown in Figure 7, many producers began The South African tax structure generates two incentives reformulating immediately after the announcement and for producers to reduce the sugar content to reduce their most products that were to reformulate had done so tax liability, through the tax as a continuous function of before the implementation of the tax, while a large number sugar content (i.e., ZAR 0.021 per gram of sugars per also reformulated at the time of implementation 100ml) and the threshold below which they do not have (Scarborough et al. 2020). Evidence shows that two years any tax liability. Research shows that the incentives have post-tax implementation there was an 11% reduction in generated reactions from firms. Of 30 of the most popular the content of sugars of SSBs subject to the levy, and the taxed SSBs, 18 reduced sugar content to below the 4g caloric content of such SSBs fell by 6% (Public Health threshold to avoid the tax entirely, 9 reduced sugar content England 2018). While there was a reduction in sales of high- but remained above the threshold thereby partially sugar beverages which fell 40% (due to both reformulation reducing their tax liability, while only 3 did not alter their and the impact of the tax) there was an increase in the sugar content (see Figure 6; Heneck, 2022). The impact has intake of low-sugar drinks (Bandy et al 2020). Therefore, it been a significant reduction in sugar consumption, from is important for tiered structures to maintain relatively SSBs with the majority of SSBs reducing sugar content to high tax rates on lower-sugar beverages. In another lower their tax liability, partially or fully. Research evaluation, evidence shows that one year after conducted using household scanner data found a 32 implementation, although the overall volume of soft drinks percent decrease in sugar consumption from beverages, of purchased did not change, the amount of sugars from which reformulation accounted for a third of the change. Figure 6 // PRE- AND POST-TAX CHANGES IN SSB SUGAR CONTENT IN SOUTH AFRICA Source: Heneck (2022) 11 Since the tax is a specific tax based on the sugar content, the reduction in revenue coincides with the reduction in sugar consumed, but only above the threshold. HEALTH TAXES • GLOBAL TAX PROGRAM • WORLD BANK • Sugar-Sweetened Beverage Taxes: Rationale, Evidence and Design for Improving Health Page 7 drinks purchased was 10% lower per household per week excise taxes. For example, in South Africa, the tax revenue (Pell et al. 2021). generated by the SSB tax in its first year (R 3.2 billion in 2018/19) amounted the same value as cumulative incremental revenue from tobacco taxes for 6 years Figure 7 // Proportion of SSBs with sugar (National Treasury, 2023). content exceeding 5g of sugars per 100ml in the United Kingdom before and after Notably, the design influences the revenue yield. Since the implementation tax structure in South Africa generates supply side incentives for manufacturers to reduce their tax liability by reformulating products, the design limits the revenue impact. However, tax structures that do not generate these incentives, like Mexico’s uniform specific tax, will generate more significant tax revenue. In the first year after implementation, Mexico’s generated approximately 0.09 percent of GDP, compared to only 0.05 percent in South Africa.15 Tax structures that generate supply side responses may also affect how revenue evolves over time. South Africa and the U.K. are examples of tax designs that influence reformulation, but also how the revenue yield evolved differently over time (see Figure 8). Both countries implemented these SSB taxes in the 2018/19 fiscal year and have not adjusted nominal tax rates since. In South Source: Scarborough et al. (2020) Africa, nominal tax revenues declined from ZAR 3.3 to 2.1 billion between 2018/19 and 2020/21, before rebounding slightly. The decline coincided with a decline in the total D. Tax revenue volume of sugars (from SSBs with more than 4 grams of SSB taxes have the potential to generate significant sugar per 100ml) from 147 to 110 tons between 2018/19 additional revenue, particularly when a new SSB tax is and 2022/23.16 This corroborates the data that show a being introduced. In most cases, SSB taxes generate less large reduction in sugar content among popular SSB revenue than tobacco and alcohol taxes. While SSB tax brands to reduce their tax liability. revenue data are not as widely available as for other taxes as fewer countries implement them, data for 23 countries The U.K.’s tax structure has several similarities, generating show that SSB taxes (sometimes including non-alcoholic incentives for producers to reduce the sugar content to beverage taxes), average 0.07 percent of GDP, with a reduce their tax liability. The data from the U.K. do not maximum of 0.19 percent of GDP.12 This is compared to an show a decline in tax revenue. In fact, tax revenue has average of 0.6 and 0.3 percent of GDP for tobacco and increased between 2018/19 and 2019/20, but has alcohol, in 81 and 78 countries, respectively (World Bank stabilized since. However, the U.K. announced the tax with 2023c).13 The lower magnitude of revenue is due to a long lead time, nearly two years in advance of the relatively lower tax rates, greater price elasticity of implementation. As Scarborough et al. (2020) noted, much demand, often narrow scope of the tax14, and tax of the reformulation to reduce sugar content occurred well structures that generate more supply-side responses. before the implementation of the tax, explaining why tax Revenue is not the only consideration though. The revenue did not decline after implementation. In fact, the relatively elastic demand that results in a smaller revenue significant market response resulted in a reduction in the yield means that SSB sales volumes will decline more than official revenue estimate by the authorities before alcohol or tobacco for the same tax (and related price implementation (HM Treasury, 2018). Analysis of revenue increase), increasing the potential health impact of the tax. trends in countries with SSB taxes that generate reformulation incentives should be done with care to The smaller total revenue yield does not consider tax ensure that revenue trends are not misinterpreted to buoyancy. Since most countries do not implement an SSB represent policy failures when declining revenue trends tax, establishing a new tax may generate significant may occur by design. revenue, potentially more than from increasing existing 12 It should be recognized that since SSB taxes are not yet widely 14 Of the 20 countries that have taxes on SSBs only, only 7 applied taxes to implemented and only recently implemented in several countries, all six categories of SSBs that the World Bank (2023b) database covers. broader trends in revenue are not widely established. Furthermore, the On the other end of the spectrum, 2 countries only applied to two range of countries measured in global research is still small and limits categories, highlighting the wide variation in scope of tax. the generalizability of results. 15 GTP estimates using data reported by SHCP (2016) and National 13 For a more comprehensive review of tax revenue and health taxes, Treasury (2023). please see World Bank Global Tax Program’s Knowledge Note 16 Since the volume of sugar is the tax base, the volume of sugar can be “Unpacking the Empirics behind Health Tax Revenue” (World Bank, estimated by dividing the tax revenue by the tax. However, since the tax 2023c). is applied above the threshold, it only measures the sugar consumed above the threshold. HEALTH TAXES • GLOBAL TAX PROGRAM • WORLD BANK • Sugar-Sweetened Beverage Taxes: Rationale, Evidence and Design for Improving Health Page 8 can achieve dual goals of further improving nutrition Figure 8 // Nominal tax revenue collected outcomes and health equity). from SSB taxes in South Africa and the United Kingdom E. Tax administration Effective and efficient implementation of SSB taxes is necessary to ensure that the policy achieves its desired fiscal and health objectives, and appropriate tax administration is essential to ensure this. In many cases, SSB tax administration will be reliant on existing excise tax and/or indirect tax administration systems; however, there are several unique characteristics of SSBs and SSB tax policy design that generate challenges that may require tailored approaches to tax administration or require additional investments in tax administration (Petit, Mansour, Wingender 2021; WHO 2022b): • Similar to tobacco and alcohol taxes, specific taxes are generally easier to administer than ad valorem Source: National Treasury (2023); HMRC (2023) taxes. Ad valorem taxes generate incentives for undervaluation, whereas volumes are observable. • As with other excise taxes, SSB taxes that apply early in the supply chain will provide fewer opportunities for tax evasion activities, and result Even in places where SSB taxes exist, increases Source: Scarboroughin such et al. (2020) in collection from a fewer number of taxpayers. taxes are expected to provide additional streams of • Differentiated sales taxes should be avoided as revenue given that most current SSB taxes account for additional tax administration issues can arise relatively low shares of SSB prices (Roche et al 2022), when these types of taxes are applied at the point particularly when compared to existing tobacco or alcohol of purchase and retailers are not clear about taxes. WHO recommends that tobacco excise taxes which products are subject to the taxes. account for at least 70 percent of retail prices (WHO, 2021), • Countries with limited administrative capacity and evidence shows that excise taxes accounted for 45 should consider simpler and less complex tax percent of cigarette prices in 2018 (and higher in high- designs. For example, excise taxes that are income countries) (Powell and Chaloupka 2023b). While uniform across SSB products and sugar content alcohol excise taxes are relatively common, they typically are the most straightforward to apply than taxes account for a lower share of prices (17 percent) compared with rates that vary based on product to tobacco taxes. Worldwide data on SSB tax shares are not characteristics such as type and sugar content. available but a recent study of countries in Latin America • Investments may be needed in customs’ import and the Caribbean found that median excise taxes systems that use HS codes to identify taxable represented 6.5 percent of the price of carbonated SSBs products to help facilitate the application of SSB and 2.3 percent for energy drinks (Roche et al 2022). This is taxes at the point of entry for imported products. substantially lower than the estimated recommended tax • Tax administrative investments are needed to amounts that account for externalities and internalities, monitor tax evasion and ensure enforcement. The with estimates from one study, for example, suggesting use of technology can be particularly useful in this that SSB taxes may require increasing retail prices by as regard. A potential issue with SSBs taxes is also much as 40 percent (Allcott, Lockwood and Taubinsky, the administrative complexity of the tax, which 2019). may need to be collected from multiple and diverse manufacturers. With regard to potential uses for tax revenue, it should also • SSB tax administrators should consider coherence be noted that in some cases with either soft or hard across fiscal policies. For example, SSBs should earmarking, the introduction of SSB taxes has also been not be exempt as food from other taxes such as combined with or led to the adoption of policy reforms that VAT or food sales taxes. can help to garner public support for SSB taxes and be • SSB tax administrators should aim for cross- targeted to complement the health impact of the tax (e.g., sectoral alignment of SSB tax policies with other programs that focus on reducing diabetes and obesity, or SSB policies such as labeling laws and restrictions support healthy eating and physical activity). Additionally, on beverages offered with kids’ meals, etc. in targeting these complementary reforms towards lower- order for policies to appropriately complement income populations can help to offset concerns of each other and, in turn, have the most regressivity (e.g., subsidies for fruits and vegetables or comprehensive impact on health. improving healthy food access in low-income or rural areas HEALTH TAXES • GLOBAL TAX PROGRAM • WORLD BANK • Sugar-Sweetened Beverage Taxes: Rationale, Evidence and Design for Improving Health Page 9 POLICY CONSIDERATIONS The following considerations should be taken into account when designing SSB excise tax policy: • Excise taxes are an effective tool for reducing the demand for SSBs and can also be used to instigate supply side changes by generating incentives for manufacturers to reformulate products and reduce sugar content. However, SSB taxes need to be well designed to ensure that they effectively target negative externalities and internalities and achieve the desired health and fiscal impact. • SSB taxes need to increase prices by an amount that accounts for the negative externalities and internalities of SSBs. • Specific taxes can be based on either the liquid volume of the beverage or the grams of sugars per beverage volume, while ad valorem taxes can be based on a value early or later in the supply chain. Applying the tax to the amount of sugars can generate incentives for consumers to shift away from the most sugar-laden products, as well as incentives for manufacturers to reformulate products to reduce sugar content. • Both specific and ad valorem taxes can be structured to apply as uniform taxes or with a tiered rate that varies based on the product’s characteristics. Tiers based on value may not be effective in generat ing strong heath and fiscal outcomes, however tiers based on sugar content can provide incentives for consumers to shift away from the most sugar-laden products, as well as incentives for manufacturers to reformulate products to reduce sugar content. • Specific taxes are more effective than ad valorem taxes in targeting negative externalities and internalities and generate stronger heath and fiscal outcomes. • Specific taxes are generally easier to administer than ad valorem taxes, and uniform taxes are easier than tiered taxes. Taxes based on sugar levels – whether uniform or through tiers – can be more complex to implement than those based on the beverage volume. • SSB taxes also have the potential to generate meaningful additional revenue, particularly when a new SSB tax is being introduced. 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Available from: https://cdn.who.int/media/docs/default-source/ncds/mnd/2022-app3- technical-annex-v26jan2023.pdf?sfvrsn=62581aa3_5#:~:text=The%20purpose%20of%20Appendix World Health Organization (WHO) (2022b) Manual on sugar-sweetened beverage taxation policies to promote healthy diets. Geneva: World Health Organization. World Health Organization (WHO) (2023) Diabetes Key Facts. April 5, 2023: https://www.who.int/news-room/fact- sheets/detail/diabetes This Knowledge Note Series is funded by the World Bank’s Global Tax Program (GTP). More information: https://www.worldbank.org/en/programs/the-global-tax-program globaltaxprogram@worldbank.org HEALTH TAXES • GLOBAL TAX PROGRAM • WORLD BANK • Sugar-Sweetened Beverage Taxes: Rationale, Evidence and Design for Improving Health Page 14