Health Taxes

The following sections are included:

• Forewords
• Contents
• Acknowledgements

The following sections are included:

• Background
• Scope of the book
• Questions addressed by this book
• A brief history of health taxes
• The rationale for health taxes
• Tax reform for health: Reconciling expenditure and income adjustments

Health taxes on tobacco and alcohol have a long history and on average raise significant amounts of revenues across countries. Moreover, interest in – and adoption of – taxes on sugar-sweetened beverages has increased in recent years as evidence of the negative health effects of unhealthy diets has become more prevalent. Overall, there is a trend towards a wider use of health taxes as part of countries’ health protection and promotion policies. On average, Health tax revenues account for 0.8% of GDP in high and middle-income countries and 0.4% of GDP in low-income countries. Scope exists to enhance the role of health taxes, but health tax reform needs to be embedded within the design and functioning of the broader tax system. Together with environmental taxes that aim at reducing practices which cause damage to the environment and people’s health, health taxes could play a role helping restore public finances once economies are on a more solid path to recovery from the COVID-19 crisis. In addition to increasing health tax rates, there might be substantial revenue potential from extending health taxes to other products that generate negative externalities linked to health. We begin by describing how health taxes are generally levied and we then consider their revenue-raising capacity. We consider general tax policy design principles and discuss how health taxes may interact with these principles.

We provide evidence of the extent to which health taxes on tobacco, alcoholic beverages, sugar-sweetened beverages (SSBs) and other food and nutrients reduce demand for these products. We open with a conceptual framework that outlines the mechanisms through which health taxes impact consumption and health outcomes, and how substitution and tax avoidance behaviours may affect the net impact of the taxes. We then review empirical evidence on the tax responsiveness of demand based on estimates from both demand models and tax evaluations, showing that higher prices/taxes on products are associated with lower quantity demanded for taxed products. We also evaluate the differential impacts of the health taxes by demographic and socio-economic status (SES), finding that demand for tobacco and sugary beverages is more price sensitive among lower SES populations. Next, we examine the extent to which health taxes may induce substitution to other products and the extent that consumers may undertake explicit tax avoidance behaviours such as cross-border shopping, as these affect the net impact of a given tax. Finally, we review the evidence on the impact of health taxes on health outcomes – i.e., if the taxes translate into improvements in health and reductions in other consumption-related risks. We find that while higher tobacco and alcohol prices/taxes are associated with advantageously reduced health and social outcomes (i.e., lowered levels of tobacco-related cancer and respiratory disease and lowered levels of alcohol-related liver cirrhosis, accidents and violent acts), there is less evidence on the effectiveness of taxes on SSBs and other foods on health outcomes. Overall, the evidence shows that health taxes are effective fiscal measures for reducing the harmful consumption of products such as tobacco, alcohol and SSBs and are an important tool that policymakers can implement to achieve goals of reducing the burden of non-communicable diseases and other consumption-related adverse outcomes.

Health taxes are typically levied on manufacturers. The impact of health taxes on consumption, and ultimately on health, depends on the extent of which taxes are transferred from manufacturers onto the prices faced by consumers, referred to as tax pass-through. We discuss the theoretical economic arguments and the empirical evidence on key factors influencing tax pass-through for tobacco, alcohol, and sugar-sweetened beverage (SSB) products, and provide general conclusions and recommendations for government policy. Key drivers of tax pass-through include strategic behaviours of manufacturers and retailers (production and marketing strategies, particularly for multi-product firms), market structure (especially the degree of concentration of a market), and supply and demand price elasticities. Based on empirical observations, taxes on tobacco, alcohol and SSBs are usually passed on to consumers through increases in market prices, sometimes exceeding the amount of the tax. The extent of tax pass-through can vary widely, depending on type of product, package size, brand characteristics, store type, etc. Furthermore, strategic firm behaviours may be triggered by features of tax design. For instance, ad valorem, or mixed specific and ad valorem tax structures may incentivise manufacturers to differentiate their brands and price levels, while specific excise taxes tend to reduce relative price differences between products, stifling potential substitutions. Moreover, specific taxes based on ingredients (e.g. grams of alcohol, or sugar), may incentivise manufacturers to reformulate their products, or to increase the promotion of products with a lower concentration of the taxed ingredient. The evidence presented underscores the importance for policymakers to carefully adjust the design, and closely monitor the impacts, of health taxes, to ensure that health benefits are not hindered by firms’ strategic responses.

The following sections are included:

• Background, design and implementation of the SDIL
• Planning an evaluation
• Impacts on sugar content, price and package sizes of soft drinks
• Impacts on the soft drinks industry
• Conclusions and implications

Health taxes are used worldwide to reduce unhealthy consumption of specified products. However, policymakers can be hesitant to introduce or increase health taxes due to claims from industry of negative labour impacts and economic downturn, particularly in lower-income contexts. We provide an in-depth synthesis of the global literature to evaluate these claims across the labour market spectrum. We ground the evidence around a comprehensive conceptual framework and describe the foundation from which labour market characteristics drive direct and indirect industry employment and how health taxes interact with these features. We draw on empirical and modelled evidence to critically illustrate the labour impact outcomes of these interactions across the affected sectors. We first focus on employment impacts of health taxes, describing limitations inherent in these study methodologies. Next, we explore productivity impacts of health taxes including the losses and costs incurred from consumption of the taxed products and productivity gains from pricing policies aimed to reduce consumption of unhealthful products. The evidence suggests that affected industries can expect job losses from reduced consumption, and the economy will incur transient restructuring costs; however, consumer spending on other goods and services and spending of increased government tax revenue drives a sectoral shift resulting in either minimal, neutral job losses or even gains. Furthermore, the implementation of health taxes can help reverse the indirect costs to an economy from productivity losses attributable to morbidity and mortality from consumption of targeted products. It should be noted that most of the labour impacts of health taxes evidence were from industry-reported studies, which utilised inappropriate methodology showing partial, gross impacts, while the more robust studies provide no evidence of significant negative labour impacts. Further evaluations should include the potential unintended consequences of health taxes including labour market impacts.

The reduction in consumption of harmful products triggered by increases in health taxes has effects in multiple development dimensions beyond health. We firstly review the evidence on health taxes’ effects on Sustainable Development (SD), and secondly, we provide guidance for policymakers on how to make a stronger case for health taxes by emphasising their role as policy instruments for development. We show that the effects on SD go beyond income inequalities or the progressive/regressive nature of health taxes. In general, health taxes positively affect the three systems that sustain human life, namely, the global society, the earth’s physical system and the world’s economy. Despite the need for more research and for stronger monitoring and evaluation of health taxes, we provide enough evidence to support a strong case for health taxes from a SD perspective. Reframing health taxes with a SD perspective in all stages of the policy cycle has enormous potential to gain wider societal support for progress on global uptake and increase of health taxes.

The use of taxation to improve public health has been successful in tackling tobacco and alcohol, with positive and direct effect on health outcomes. However, the taxation of other unhealthy behaviours and activities negatively affecting health (e.g. the increased use of cars) has not yet been explored for the promotion of public health and societal well-being, in particular for reducing premature mortality from non-communicable diseases (NCDs), which account for 70% of global deaths. Taxation can be expanded to unhealthy behaviours and activities affecting individuals’ health and wellbeing, in the pursuit of public health goals. For unhealthy behaviours and some other activities, taxation might be defined at local levels of government, as a way to tackle local health problems. Local governments should be actively collaborating with other levels of government (e.g. federal level), to identify taxation-based solutions for health problems that directly affect their jurisdiction. We use the examples of air pollution, land use, gambling and farming practices to illustrate the challenges facing local authorities, and opportunities to deal with them through taxation and health promotion, particularly in tackling NCDs.

To maximise the effectiveness of health taxes in reducing consumption of tobacco, alcoholic beverages, and sugar-sweetened beverages (SSBs), the tax design must be considered. We study tax aspects including determining tax type (i.e., ad valorem, specific excise, sales, and import taxes), what products are going to be taxed (i.e., the tax base), tax structure, tax rate to be applied, and implications related to tax revenue and earmarking. We find that excise taxes, often used as ‘Pigouvian’ taxes, are preferable to correct for externalities from harmful consumption. We note numerous advantages of specific (applied per unit of product) versus ad valorem (applied as percentage of price) excise taxes. We find that the narrower the product tax base, the greater the opportunities for consumers to substitute away from taxed to untaxed products, reducing the effectiveness of a tax in promoting health, while also generating lower revenues. Regarding the tax level, economic theory suggests that the tax should be set so that it generates revenues that are sufficient to cover the external costs associated with the harmful consumption of the taxed product. Regarding tax structure, tiered tax structures with higher rates based on higher levels of harm associated with products (i.e., ethanol or sugar) can help to reduce consumption of the most harmful products to a greater extent and help to encourage reformulation. Additionally, earmarking the revenues of increased taxes can be used to offset potential unintended consequences, and to augment the health impact through other initiatives that discourage use – i.e., for education campaigns or prevention programmes. Finally, the type and magnitude of tax employed, and extent of earmarking should be based on country-specific situational analyses of public health challenges and in the context of related public health goals, revenue needs and tax administration capacity of the country.

Well-designed health taxes increase the price of the taxed good, leading to important price differentials with other countries, and potentially creating incentives to exploit arbitrage of price differences through illicit trade. This section reviews the discussion on health taxes and illicit trade, in order to give technicians and policymakers guidance on the available evidence on magnitude, effects, causes and possible courses of action to deal with the problem while simultaneously moving forward on health taxes. The section does not intend to be a systematic literature review about health taxes and illicit trade; instead, it focuses on the most robust evidence on this area, and the references cited provide a rich set of additional information for the reader to deepen the discussion in much further detail. The section focuses on illicit trade of tobacco and alcohol, because there is no evidence on illicit trade on sugar-sweetened beverages (SSBs). Finally, as a word of caveat, the evidence and policies on tobacco control are more robust than those on alcohol and that is also the case on illicit trade…

We examine the nature and impact of health taxes within the broader context of public financing systems, including considerations around earmarking of health tax revenue. As health taxes are part of larger tax systems, policies and administrations, the design and implementation of these taxes should be analysed within the context of countries’ overall tax, budgeting and governance systems. Part of these public financing issues include how the revenue from health taxes is ultimately allocated and used. As of 2017, at least 80 countries earmarked a specific source of revenues for health. While many of these country examples involve earmarking payroll or income taxes to fund healthcare, they also represent at least 54 countries that earmark all or a portion of tobacco, alcohol, or sugar-sweetened beverage (SSB) taxation for the health sector. Despite their prevalence, significant care must be exercised when considering earmarks due to clear concerns around fungibility with other sources of revenue for the sector and potential rigidities and inefficiencies that can be introduced. The specificities of earmarking vary greatly in practice and range from a spectrum of soft to hard. From a political economy perspective, soft earmarking has been shown to help to advance the adoption of new health taxes in some settings as having a notional revenue-expenditure link can boost public support. In general, the closer the practice is to standard budget process, where revenues are matched with political priorities and population needs, the more effective it is.

The following sections are included:

• Introduction
• Public support for ‘earmarked’ health taxes
• Government support for ‘earmarked’ health taxes
• Commercial sector opposition to ‘earmarked’ health taxes
• Conclusion

We draw from the well-established global monitoring of tobacco taxes by the World Health Organization and provide a proposed similar approach to develop new – or adapt existing – monitoring tools for taxes on alcoholic beverages and sugar-sweetened beverages (SSBs). Since 2008, the periodical and global monitoring of tobacco tax levels, prices, affordability and additional tax structure and tax administration information has enabled standardised comparisons across countries and over time, informed policymaking and institutional opportunities or barriers to apply tobacco taxes, led to defining best practices in the design of such taxes, and provided powerful tools for advocacy, especially with ministries of finance to promote fiscal and health policy coherence. Monitoring taxes on alcoholic beverages and SSBs in a similar way would require adjusting the methodology used to monitor taxes on tobacco products to the unique characteristics of these beverages – namely the fact that these products are more diverse than tobacco products in terms of product types consumed, and in volume sizes and content. In addition to collecting data on the tax structure, tax rates, tax bases and nominal retail prices on several different beverage types, monitoring taxes on alcoholic beverages and SSBs would require information on beverage volume sizes and sugar content and alcohol concentration. A balance would need to be reached between characterising the diversity of global or regional consumption patterns, ensuring the standardisation and precision of the indicators, and limiting the data requirements from national authorities. While institutional considerations are to be considered in expanding the global routine monitoring systems for taxes on alcoholic beverages and SSBs, there are lessons to be learned and potential synergies from the experience monitoring tobacco taxes. The successful monitoring of taxes applied on these three unhealthy products would play a great role in promoting global action and driving progress to reduce the burden of non-communicable diseases.

Multilateral, regional and bilateral agreements establish the rules governing international trade. This chapter examines the interplay between trade obligations and the rights states retain to impose domestic taxes for health purposes. Customs and monetary unions can establish very specific rules governing domestic taxation, such as through harmonised excise or sales taxes, or harmonised approaches to tax administration. These agreements set out the most detailed international obligations concerning health taxes, but are not described or compared in detail in this chapter as they are particularistic. This chapter focuses on World Trade Organization (WTO) law, which places relatively clear limits on the use of customs duties (whether used for health or other purposes) and establishes principles of nondiscrimination. Disputes can arise where it is alleged that the effect of a tax measure discriminates against imported products as compared to domestic products. The case law as a whole suggests that even where a health tax has the effect of favouring domestic products, it may still be lawful under trade agreements, so long as that effect is justifiable in health terms. This will be the case, for example, where any differential treatment of product categories is justified by reference to differences in the risks they pose to health. This requires care in establishing the tax base and in setting tax rates to ensure that these are related to a health objective and justifiable by reference to that objective. Overall, international trade rules protect freedom to adopt and implement domestic tax measures for health purposes.

Industry sectors involved in the production, distribution, sales and promotion of tobacco, alcohol, unhealthy foods, and sugar-sweetened beverages (SSBs) tend to oppose health taxes because they can decrease the demand for their products and thus reduce shareholder profits. This creates an inherent conflict of interest between the commercial goals of these industries and the public health responsibilities of governments. These industries have become increasingly concentrated into a small number of global corporations that account for a large proportion of the market for these products, especially in low- and middle-income countries (LMIC). There are similarities in the way these products are marketed and purchased, explaining the historical and emerging linkages across industries in how they conduct political activities that influence the policy environment for their products. To illustrate this development, we conducted a broad search for examples of the tactics used by these industries in their treatment of health taxes and pricing policies. Sixty-four documented examples were identified that illustrate how five general corporate political strategies are implemented in a wide variety of countries: (1) using information to gain access to political decision-makers; (2) constituency-building with influential political decision-makers; (3) promoting alternative policies or voluntary measures as substitutes for statutory regulation; (4) using financial incentives to influence government policymakers to act in ways favourable to industry interests; and (5) legal measures employing trade agreements as well as pre-emption, litigation, and circumvention…

The following sections are included:

• Seismic shift: The 2012 tobacco tax reform in a nutshell
• Citizen groups in the Philippines
• Lessons from the Philippine experience
• Tobacco tax reform: Improving health, equity while increasing revenues
• Capitalising on momentum: CSOs push for related laws

The following sections are included:

• How this book can be used, and by whom
• Understanding what health taxes are; when taxes are not health taxes
• Designing effective taxes, mitigating unintended impacts
• Understanding and managing the political economy of health taxes
• Taxes can be used to promote health
• Health taxes can have economic benefits
• Health taxes can support the achievement of broader development goals
• To reap the benefits of health taxes, tax design and implementation require careful consideration
• Challenges to the implementation of health taxes
• The future of health taxes
• Health taxes in the immediate post-pandemic era

The following section is included:

• About the Editors