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Sugar Tax: Lessons from International

Experience for Developing Countries

By Prof Corné van Walbeek

Sugar taxes: The international experience July 2019

The rationale for a tax on SSBs

• Growing obesity in South Africa

– South Africa has largest prevalence of obesity in sub-Sahara Africa and one of

the highest in the world

– Globally: 39% of adults were overweight (of these 39%, 13% were obese)

WHO Global Status Report on Noncommunicable Diseases 2014)

BMI Women Men

Underweight <18.5 3 10

Normal 18.5-24.9 30 59

Overweight 25.0-29.9 27 20

Obese 30.0-34.9 21 8

Severely obese 35.0 + 20 3


Slight digression: Body-mass

Index (BMI)

• Calculated as

[weight (in kg)]/[height (in meters)]2

• An example of a male who is 1.69 meters

BMI classification Weight range

Underweight < 52.8

Normal 52.8-71.4

Overweight 71.4-85.7

Obese 85.7-100.0

Severely obese > 100.0


The link between obesity and

Non-communicable Diseases

• What are the most important NCDs

that are caused by obesity?• Most heart diseases and strokes

• Diabetes

• Most cancers

• The situation in South Africa• 13% of women and 8% of men (15+) are diabetic

(have adjusted HbA1c level of ≥ 6.5%)

• 64% of women and 66% of men are pre-diabetic

(adjusted HbA1c level of 5.7%-6.4%). (SADHS 2016)


What are sugar-sweetened beverages

(SSBs)?

• Any liquids that are sweetened with various forms of added sugars like brown sugar, corn sweetener, corn syrup, dextrose, fructose, glucose, high-fructose corn syrup, honey, lactose, malt syrup, maltose, molasses, raw sugar, and sucrose.

• Examples:– regular soda (not sugar-free),

– fruit drinks,

– sports drinks,

– energy drinks,

– sweetened waters, and

– coffee and tea beverages with added sugars. https://www.cdc.gov/nutrition/data-statistics/sugar-sweetened-beverages-intake.html

https://www.cdc.gov/nutrition/data-statistics/sugar-sweetened-beverages-intake.html


Examples of some popular South

African soft drinks


Are SSBs worse than sugar in other

forms?

• Yes!! SSBs are typically “empty calories”

• Our bodies process liquid sugar differently than sugar in foods, especially those containing fibre (e.g. fruit)

• In fruit the sugar is “packaged” in fibre

• Fibre digests more slowly than liquid, and the sugar is thus released more slowly in the bloodstream

• In liquid form, more sugar goes into the body’s vital organs than the body can handle

• Over time this overloads the pancreas and liver, which can lead to diseases like diabetes, heart disease and liver disease

• The body responds to the blast of sugar by producing triglycerides (fat globules stored in the liver or exported into the bloodstream)

• These globules can line the arteries and increase the risk for heart attacks


The real price of SSBs have decreased

in most countries, including SA

Average annual percentage change in real prices of SSBs (1990 to 2016)


History of sugar taxation around the

world

• Early examples: Norway (1922), Denmark (1930s)– Generally motivated by revenue generation.

• As concerns about obesity have grown, SSB taxes have been motivated by health concerns, e.g.– Hungary (2011)

– France (2012)

– Mauritius (2013)

– Mexico (2014)

– the United Kingdom (2016)

– Ireland

– Portugal

– Saudi Arabia

– United Arab Emirates (UAE)

– Dominica

– Barbados

– South Africa (2018)

– Various US localities

Most countries aim to raise retail prices by at least 10%, with a few resulting in more significant increases (e.g. Saudi Arabia and the UAE's special 50% value-added tax on soft drinks and 100% value-added tax on energy drinks).


The structure of the excise tax

The WHO’s recommendation:• Set the tax to raise prices by at least 20% in order to

have a meaningful impact

• For countries with strong tax administration, base the tax on sugar content• Incentivize consumers to substitute to lower-sugar

alternatives • Encourage producers to reformulate their products

• In countries where tax administration is not strong, implement simpler tax systems (e.g. a volume-based SSB tax)

(WHO Fiscal Policies for Diet and Prevention of Noncommunicable Diseases 2015)


Examples of SSB taxes

• United Kingdom– Two tiered, with high-added sugar (>8 g/100ml) SSBs taxed at a higher rate (24p per

litre of drink) than low-added sugar (5-8 g/100ml) SSBs (18p per litre of drink)

– SSBs are taxed per volume of the beverage

• Chile– Tiers for high-sugar (≥6.25 g/100ml) and low-sugar (<6.25g/100ml) SSBs

– SSBs are taxed per volume of the beverage

• Mexico– A single rate to all nondairy and nonalcoholic beverages containing added sugar

– Do not tax beverages with zero added sugar or those that contain only artificial sweeteners

• Mauritius– Tax based on sugar content on all non-alcoholic beverages, including milk-based

products and juices, at a rate of 3 cents per gram of sugar content

– There is no exempt threshold


The UK levy in more detail

• The UK government:

– “The aim of the Soft Drinks Industry Levy is to

encourage companies to reformulate their soft drinks.

Since the levy was announced two years ago, the

expected amount of revenue has gone down from

£520m in Year 1 to £240m. Even before coming into

effect, the levy is already working – over 50% of

manufacturers have reformulated their drinks”

– Revenues from the Levy to be targeted to directly fund

new sports facilities and healthy breakfast clubshttps://www.gov.uk/government/news/soft-drinks-industry-levy-comes-into-effect

https://www.gov.uk/government/news/soft-drinks-industry-levy-comes-into-effect


The impact of the tax on consumption

• People respond to prices, not the tax rate

• The mechanism

∆Tax → ∆Price → ∆ Consumption

Tax pass-through


The impact of the tax on consumption

• People respond to prices, not the tax rate

• The mechanism

∆Tax → ∆Price → ∆ Consumption

The demand effect


The pass-through effect

• Pass-through: To what degree does a change in the tax gets passed through to consumers in the form of higher prices?

• Distinguish between – Full pass-through

– Under-shifting

– Over-shifting

• The degree of pass-through depends primarily on two things:– The price elasticity of demand

– The competitive situation in the market (i.e. does the producer have monopoly/pricing power)

– Possible reformulation of the sugar content


An example from SA

• Carbonates in SA showed partial pass-through for carbonates

but no significant pass-through for concentrates

• Within carbonates, the price increases for non-sugar drinks

were similar to that of sugary drinks

• There were no significant increases in the price of untaxed

beverages after the introduction of the Health Promotion Levy

(HPL) (as expected)


An example from SA

Carbonates Bottled water

Nectars 100% juices


The impact of price on consumption

• The crucial parameter is the price elasticity of demand

• Price elasticity of soft drinks (SSBs and artificially sweetened

drinks) is estimated at -0.8

• Price elasticity estimates for SSBs in HICs is about -1.2

• Limited number of studies from LMICs find a similar price

elasticity of demand for SSBs

• The substitution effect between SSBs and non-sugary drinks

is substantial


The impact of price on consumption


The well-known case of Mexico

• Tax was implemented in 2014

• 1 peso (about 0.08 USD) per litre of SSB, irrespective of the

sugar content

• Impact of the tax:

– Purchases of taxed beverages decreased by average of 6%

– The decrease in consumption was sustained and was 12% lower in

December 2014 relative to pre-tax levels

– Reductions in consumption were higher among low SES households

– Purchases of untaxed beverages was 4% higher


The supply effect

• Depending on how the tax is imposed, it can incentivise producers to change the formulation of the beverage

– The UK government: “The aim of the Soft Drinks Industry Levy is to encourage companies to reformulate their soft drinks. Since the levy was announced two years ago, the expected amount of revenue has gone down from £520m in Year 1 to £240m. Even before coming into effect, the levy is already working – over 50% of manufacturers have reformulated their drinks”

– Hungary: 40% of producers reformulated their products https://www.thelancet.com/pdfs/journals/landia/PIIS2213-8587(17)30070-0.pdf

– South Africa: 500 ml bottles were replaced by 440 ml bottles, without a change in price

– South Africa: The introduction of new products, e.g. Coca-Cola Life (37% less sugar)

https://www.thelancet.com/pdfs/journals/landia/PIIS2213-8587(17)30070-0.pdf


The supply effect (cont.)

• The tax-free threshold means that the marginal impact of a change in the sugar

content is larger, than had there not been a tax-free threshold

• Example:

– First 4 g/100 ml is not taxed

– Tax = 3 cents/gram above 4 g/100 ml

• The tax-free threshold could result in changes in the mixing instructions, that have

no meaningful impact on sugar intake, but that reduces the impact of the tax

Sugar (g/100 ml) No tax thresholdTax amount/100 ml

With tax thresholdTax amount/100 ml

0 0 0

4 12 0

8 24 12

12 36 24

16 48 36


The example of Nesquik powder

Pre-April 2018 Post-April 2018

Pre-April 2018 “total sugar content” per “14 gram serving in 200 ml low-fat milk”: 20.4 gram

Post-April 2018 “total sugar content” per “10 gram serving in 200 ml low fat milk”: 17.4 gram

But the product has not changed!Only the proposed mixture


Industry responses

No industry likes to be targeted for health taxes

• SSB excise taxes follow on long-standing taxes on tobacco and alcohol

The industry will strongly oppose the tax

Typical arguments:• Job losses• Loss to GDP• “Other interventions (especially education) are

more effective”• “The tax will hurt the poor more than the rich”• “Why SSBs; what about other unhealthy food?”• “Consumers are sovereign; government should

not be a nanny”• “The tax will not have the intended effects”


Some responses to the industry’s

claims

• Who carries the morbidity and mortality burden from SSBs

• An excise tax is a Pigouvian tax

• Money not spent on SSBs is not lost but is spent elsewhere

• Structural change in the economy

• The economy is dynamic and adaptable

• Often the claims of the industry are so exaggerated that they are not believable


Industry responses in South Africa

• Predictably very high pitched

– “The tax will have a negligible impact on obesity”

– “62 000 – 72 000 jobs will be lost”

– “The proposed tax could reduce the industry’s contribution to SA’s

GDP by R14 billion”

– “Other measures are more effective”


Conclusion

• An SSB tax is not a silver bullet, but certainly a low-hanging fruit, in

addressing the obesity epidemic

• An excise tax that substantially increases the retail price (>20%) is likely to

have a meaningful impact on obesity levels

• The structure of the excise tax substantially influences both consumers

and producers of SSBs

For more information about the Economics of Tobacco Control Project, visit

www.tobaccoecon.uct.ac.za

To contact the presenter, email

[email protected]

http://www.tobaccoecon.uct.ac.za/

mailto:[email protected]

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