Global best practices of SSB Tax designs

Learning, challenges, and recommendations

Martha Yaneth Sandoval Salazar

Research Team

Global Health Advocacy Incubator

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Vietnam Economist Annual Meeting 2023

Da Nang, Vietnam

July 2023

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Contents

Sugar‐Sweetened Beverage (SSB) Tax designs: beyond the fiscal technique

Why are technical details important? Lessons learned globally

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Challenges

How are SSB taxes applied

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SSB tax design is based on fiscal technique, but these designs must be consistent with the Human Rights framework:  Fiscal justice  and  social justice.

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The Human Rights framework has implications for SSB Tax designs: The "healthy taxes" category.

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Should tax policy have a proactive role that generates changes in the decisions of market participants through prices? Or should tax policy be neutral and fulfill only its function of collecting and allocating public resources?

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Sugar‐Sweetened Beverage (SSB) Tax designs: beyond the fiscal technique

SSB taxes to advance Human Rights

The Special Rapporteur on extreme poverty and human rights stated that “fiscal policies are a critical tool that States can employ to comply with their international human rights obligations.” (2014)

Governments have the right and obligation to collect money and reduce negative externalities of unhealthy products, respond to increasing NCDs and the health costs,  and provide access to clean water as well as reduce environmental damage (GHAI, 2023 Working document):

“States are empowered, and on occasions obliged, to encourage or discourage certain conducts and correct externalities through specific fiscal policy instruments, and to adopt priority fiscal measures in order to guarantee human rights”. (Principles for Human Rights in Fiscal Policy, 2021)

11 final observations explicitly addressed the use of fiscal policy to guarantee and protect health and food rights. Specifically, the CESCR* has framed its recommendation on sugar-sweetened beverages and junk food taxation as protection and guarantee of the right to health as well as the right to food.

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In the concluding observations to Poland in 2016, the committee expressed its concern “about the increase in child obesity rates and the low rates of breastfeeding, particularly among infants between two and six months of age” and recommended the introduction of “higher taxes on junk food and sugary drinks” (CESCR, 2016: 7).

Normative Standards from International Human Rights Law

Technical design challenges

Designing a health tax that has a real impact on the effective enjoyment of the rights to health and food involves major challenges such as:

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• Defining the beverages included
• Rate
• Type of tax
• Tax Base
• Instance of taxation
• The pass-through effect
• Progressivity

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CESCR*. Committee on Economic, Social, and Cultural Rights

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Why are technical details important? Lessons learned

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• Evaluations of SSB tax have confirmed that it is a cost-effective measure to reduce consumption
• Evaluations have shown that many SSBs Taxes are not optimized to achieve health goals:

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• Some designs do not effectively create a price differential between taxed and untaxed beverages. 
• Rates are not enough to impact retail prices and reduce consumption
• Some designs leave loopholes that make it difficult to implement and monitor the tax correctly    
• Some designs prioritized tax revenue collection over public health objectives 

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Why are technical details important? Lessons learned globally

GHAI-Research Team: Sugar-Sweetened Beverage Taxation – Industry Arguments. Counter Messages and Evidence . May 2023

1. Alvarado M, Unwin N, Sharp SJ, Hambleton I, Murphy MM, Samuels TA, et al. Assessing the impact of the Barbados sugar-sweetened beverage tax on beverage sales: an observational study. International Journal of Behavioral Nutrition and Physical Activity. 2019;16(1):13

2. Silver LD, Ng SW, Ryan-Ibarra S, Taillie LS, Induni M, Miles DR, et al. Changes in prices, sales, consumer spending, and beverage consumption one year after a tax on sugar-sweetened beverages in Berkeley, California, US: A before-and-after study. PLoS medicine. 2017;14(4):e1002283.

3. Falbe J, Thompson HR, Becker CM, Rojas N, McCulloch CE, Madsen KA. Impact of the Berkeley excise tax on sugar-sweetened beverage consumption. American journal of public health. 2016;106(10):1865-71.

4. Caro JC, Corvalán C, Reyes M, Silva A, Popkin B, Taillie LS. Chile’s 2014 sugar-sweetened beverage tax and changes in prices and purchases of sugar-sweetened beverages: An observational study in an urban environment. PLoS medicine. 2018;15(7):e1002597.

5. Powell LM, Leider J. Evaluation of Changes in Beverage Prices and Volume Sold Following the Implementation and Repeal of a Sweetened Beverage Tax in Cook County, Illinois. JAMA Network Open. 2020;3(12):e2031083-e.

6. Bleich SN, Dunn CG, Soto MJ, Yan J, Gibson LA, Lawman HG, et al. Association of a Sweetened Beverage Tax With Purchases of Beverages and High-Sugar Foods at Independent Stores in Philadelphia. JAMA Network Open. 2021;4(6):e2113527-e

7. Cawley J, Daly MR, Thornton R. The Effect of Beverage Taxes on Youth Consumption and BMI: Evidence from Mauritius. National Bureau of Economic Research; 2021.

8. Osornprasop S, Phulkerd S, Gowachirapant S. Lessons Learned from Thailand's Obesity Prevention and Control Policies. The World Bank; 2018.

9.Dickson A, Gehrsitz M, Kemp J. Does a Spoonful of Sugar Levy Help the Calories Go Down? An Analysis of the UK Soft Drinks Industry Levy. 2021.

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Evaluations of SSB tax have confirmed that it is a cost-effective measure to reduce consumption.

• The tax did not include SSBs with non sugar sweeteners (NSS) ie: No caloric sweeteners

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• One type of industry response includes replacing sugar with a variety of non sugar sweeteners (NNSs) as is the trend globally. There are concerns that early exposure to NNSs among children affects their sweetness preferences. and the studies found there was no benefits to consuming non sugar sweeteners

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South Africa

Why are technical details important? Lessons learned globally

Compared to expected trends prior to the implementation of the tax, by March 2019, one year after implementation, there was a:​

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• 51% reduction in sugar, a 52% reduction in calories ​
• 29% reduction in volume of beverages purchased per person per day after implementation ​

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Observational study from Stacey et al., 2021 ​

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Sugar-content based tax of 2.21 cents ZAR for each gram of sugar in a beverage that contains over 4g sugar per 100mL, except for fruit juices

• Package size changes and selective passing‐through of the tax are other industry responses

• Future considerations of price effects of sugar-content based SSB taxes need to account for the opportunity for intra-firm heterogeneity in price response among large multi-product firms.
• Re-considering to change the design.

Nicholas Stacey, Caroline Mudara, Shu Wen Ng, Corné van Walbeek, Karen Hofman, Ijeoma Edoka. Sugar-based beverage taxes and beverage prices: Evidence from South Africa's Health Promotion Levy, Social Science & Medicine, Volume 238, 2019, 112465, ISSN 0277-9536. https://doi.org/10.1016/j.socscimed.2019.112465

Karen J. Hofman,Nicholas Stacey,Elizabeth C. Swart,Barry M. Popkin,Shu Wen Ng. South Africa's Health Promotion Levy: Excise tax findings and equity potential. 2021

Learnings

Learnings 1 peso/liter had non-uniform price-impositive transfers

Understanding heterogeneity in price changes and firm responses to a national unhealthy food tax in Mexico. Carlos Salgado ^a, Shu Wen Ng ^b

Changes in Prices After an Excise Tax to Sweetened Sugar Beverages Was Implemented in Mexico: Evidence from Urban Areas M. Arantxa Colchero1 *, Juan Carlos Salgado1 , Mishel Unar-Munguía2 , Mariana Molina1 , Shuwen Ng3 , Juan Angel Rivera-Dommarco2

Increases in prices were higher for the smallest package sizes, which may reflect producers’ strategies to avoid discouraging the consumption of large beverages that are more penalized by the excise tax.

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These results highlight the need for:

• Designs that complement the Price elasticity analysis with the base price análisis weighted by beverage size, to recommend the optimal tax rate.

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• SSBs tax rate is close to 10%, which is lower. a higher tax rate which is increased with inflation and incomes.  Low rates reduce the likelihood of pass-through of the tax to retail prices and the reductions in consumption required to impact public health.

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• Re-considering to change the design

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Why are technical details important? Lessons learned globally

Mexico: 1 peso per liter (~10% price increase) tax on all nonalcoholic beverages with added sugar ​

*CSD: Carbonated Soft Drink

NCSD: Non Caloric Soft Drink

• Reduced purchases of SSBs by 6% in the first year of implementation (2014) ​
• Reduced purchases by 10% two years after implementation (2015) ​
• Sustained its impact and decreased purchases by another 2% during the third year of implementation (2016) ​
• Observational study from Colchero et al., 2016​
• Longitudinal study from Colchero et al., 2017
• Longitudinal study from Pedraza et al., 2019​

• 50% tax on carbonated beverages. Includes any drink containing dissolved carbon dioxide gas
• 100% tax on energy drinks. Implemented in June 2017

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By 2018, six months following implementation, the tax led to a 33% reduction in carbonated drink volume sales

Why are technical details important? Lessons learned globally

Saudi Arabia:

Ad-valorem tax requires very high rates to achieve pass-through to retailer price, and and ultimately to the consumer

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Why are technical details important? Lessons learned globally

Excises taxes are a cost-effective measure to reduce the consumption of SSB

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Supply Response: What implications does the SSB reformulation? Or What implications does the change of package sizes on the reduction of NCDs? In other words, what are the implications of the producer's response to the tax?

What is the rate of reduction in consumption necessary to have an impact on public health?

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How are SSB taxes applied

SBB tax designs face challenges related to the legal/political system of each country, as well as to the economic and social contexts

What is the best technical design?

There are evidence-based best practices, but:

What is the best technical design?

• The pass-through effect:  the extent to which the tax is passed on by businesses to consumers in terms of higher prices, and
• The responsiveness of consumers: depends on the price elasticity of demand, rate, the tax base definition, beverages included and the possibility of substitution effects.  

Topics to consider when choosing SSB Tax Designs

Beverages included

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Tax Base: Type of excise tax

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The rate.

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Instance of taxation: Who and Where

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Earmarking

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The objective

The effectiveness of a SSB Tax in reducing consumption depends on:

Tax components

Legal/political system of each country, as well as to the economic and social contexts. Designs should recognize these contexts: Price-Setting Firms and oligopolistic markets

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outcome

outcome

A necessary economic context: Price-Setting Firms and oligopolistic markets

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Other brands

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A necessary economic context: Price-Setting Firms and oligopolistic markets

Globally: The market for these products is characterized by large multi-product firms that offer strongly branded products and are likely to enjoy significant market power: At the end of 2020, Coca-Cola Co was the market leader in most of the national markets. PepsiCo was market leader in 12 markets, nine of them in the Middle East.

Wood, B., Baker, P., Scrinis, G. et al. Maximising the wealth of few at the expense of the health of many: a public health analysis of market power and corporate wealth and income distribution in the global soft drink market. Global Health 17, 138 (2021). https://doi.org/10.1186/s12992-021-00781-6

Red dots represent the markets in which Coca-Cola Co is the market leader. Blue dots are the markets in which PepsiCo is the market leader. Green dots are the markets in which neither firm is the market leader

• In China, Coca-Cola Co, The Tingyi, and PepsiCo Inc.

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• In India: Coca-Cola Co., The PepsiCo Inc and Parle Bisleri Ltd in. 

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• In Egypt, PepsiCo Coca-Cola Co, The Juhayna Dairy Corp,

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• In Vietnam Coca-Cola Vietnam, Suntory PepsiCo (a fully foreign-owned joint venture between PepsiCo and Japan's Suntory Holdings Limited), URC Vietnam from the Philippines, Nestlé and Vietnam's Tan Hiep Phat.

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How do technical designs incorporate the implications of oligopolistic markets?

• The products are provided by firms who set their prices under conditions of imperfect competition (oligopolistic market)

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• In imperfectly competitive environments price is already in excess of marginal cost and externality correcting policy that fails to take account of this can reduce welfare.

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• Imperfect competition, alters the efficiency of the tax market power influences how the tax rate impacts prices.

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• Firms can absorb the tax and not impact the final price with strategies related to beverage size, among others.

• The base price on which the tax rate is estimated
• The tax rate
• Tax base

What does it imply for the tax?

What to focus on?

Topics to consider when choosing SSB Tax Desings

The objective of the SSB tax

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• Is the public health objective to reduce sugar consumption? Or is to reduce the consumption of sugar-sweetened beverages? all SSBs? which ones?

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• Does the public health objective includes beverages sweetened with non-sugar sweeteners (NSS)?.

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• Is reformulation a consequence of the tax or an objective of the tax?

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• Are tax revenues a public health objective? Or are they a consequence of the tax that can potentially be invested in public health?

Beverages included

Which sugar-sweetened beverages are public health concerns?

To guarantee that SSB taxes have an impact on public health and do not generate undesirable substitutions among other sweetened beverages it is necessary to include all sugar-sweetened beverages

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How will the set of taxed products be defined?  By tariff codes? By product categories? By NPM?

Specific Taxes

Volumetric

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Sugar-content based (Per gram)

Hybrid 

Tiered taxes by grams of sugar and volume. 

Examples: UK, Colombia, France

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Examples: South Africa, Philippines, Cook islands, Mauritius, and Sri Lanka

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Defining the Tax Base 

The tax base is the measure on which the tax obligation is calculated. To determine the tax obligation on the products subject to the tax. There are four types of tax bases  for SSB excise taxes : Ad-valorem, Volumetric, Sugar-Content based

VOLUMETRIC TAX

ADVANTAGES

• May reduce legal vulnerability as volume sold reflects the business footprint of the production in the country.
• Simple to calculate tax for any product based on its volume
• Include all ultra processed beverages (with any sugar or sweetener content-non sugar sweeteners )
•  Simple to design and administer ,  Easy to collect

DISADVANTAGES

• The industry may respond with market strategies, including adjusting the packaging size of SSBs.

SUGAR-CONTENT BASED TAX

ADVANTAGES

• Can incentivize consumers of sugary drinks to switch to lower sugar drinks (either consciously or subconsciously).
• Promotes reformulation

DISADVANTAGES

• This design does not favor including drinks with non sugar sweeteners 
• Encourage manufacturers to reformulate their products, prioritizing strategies to get out of the tax without public health criteria.
• Complex to administer (as need to verify sugar content and complex to design

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If your objective is to decrease ALL consumption of ultra-processed beverages, regardless of amount of sugar...

If your objective is to decrease sugar content of ultra processed beverages or reformulation then...

AD VALOREM

ADVANTAGES

• The tax is automatically updated for inflation.
• Simple to design
• The amount of the tax is easy to determine since the tax base is the final price of each product but How is the "base price" defined?

DISADVANTAGES

• Pass through less complete
• It does not reduce the price gap between more expensive SSBs and less expensive SSBs, which may incentivize substitution for cheaper SSBs, 
• To achieve retailer price impacts, very high tax rates are required.

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If your objective is to decrease ALL consumption of ultra-processed beverages, regardless of amount of sugar...

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Producer:

• Easier Administration and control.

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• The tax is included in the final price of the SSB

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Trader:

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Difficult to manage and control: There are fewer producers and importers than retailers.

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More possibilities of not transferring the tax to the final price

Instance of taxation: Who.

The rate.

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• Need a benchmark for SSB taxes

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• It is important to consider how the tax is passed through to the final price. That depends on the market of each country
• What is the reduction in the consumption of sugar-sweetened beverages that is needed to have an impact on the reduction of diseases associated with their consumption?
• Based on the reduction needed, what level of taxation could this allow?
• How is the "base price" defined
• What is the level of taxes that allow the reductions in consumption that public health needs?.
• ​Ensuring the price increase is sustained through regular increases (inflation)​

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Other analyses should accompany a price elasticity study to establish an optimal tax rate that guarantees the desired increase in prices of SSBs. . These analyses refer to the possibilities of transferring the tax to the final price and should focus on the following:

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• The conditions that affect or influence the formation of prices of sugary drinks; Oligopolic Market
• The pass-through effect: the extent to which the tax is passed on by businesses to consumers in terms of higher prices

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Challenges

Earmarking: Increasing public support for the tax, benefiting those from vulnerable communities and raising revenue for public health programs. Investments could include subsidies for healthy foods, nutrition programs, and/or universal healthcare.

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More information is needed on EARMARKING AND PROGRESSIVENESS.

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Industry opposition to SSB taxes, in an effort to delay the approval of a proposed policy or to undermine implementation process.

The evidence has shown that the industry's claims to oppose the tax are not supported reliable evidence. On the contrary, evidence free from conflicts of interest, have shown that SSB taxes do not lead to job losses or negative economic impact

Thank you

mysandoval@advocacyincubator.org

https://www.advocacyincubator.org/