As South Africa prepares for Pravin Gordhan’s medium term budget policy statement, many discussions turn to the next budget as to what new taxes may be implemented. A big talking point is the proposed sugar tax, and how the primary goal of raising prices of sugar related products is to cut back on obesity. Some see this as a smoke screen to raise further taxes, as past experiences show no distinct correlation between the two. In the below submission the Free Market Foundation’s Jasson Urbach looks at how well a sugar tax worked in countries like Mexico, France, Iceland and Denmark. The latter two abolishing the tax law soon after implementation, while there’s no clear evidence of a decline in sugar use in both Mexico and France. But what is evident is the increased revenues. As Urbach says, if the goal is to tackle obesity, there are far more effective ways to educate and empower people. – Stuart Lowman
By Jasson Urbach*
Many societies are trying to reduce obesity rates to limit associated chronic illnesses, increase quality of life, and lessen the strain on public health budgets. This is a laudable goal – but sugar taxes, as international experience confirms, don’t help achieve it.
The National Treasury is proposing to tax sugar-sweetened beverages (SSBs), which include both natural and added sweeteners, at the rate of 2.29c per gram of sugar. The tax is based on the idea that increased prices for taxed products will encourage people not to buy them. This will supposedly lower their sugar intake and so reduce the prevalence of obesity.
However, before deciding to implement the proposed SSB tax (as from April 2017), the Treasury should take careful account of the negative experiences of other countries that have gone this route.
In January 2014, for instance, Mexico, imposed taxes on SSBs (and also on various foods), the SSB tax being levied at the rate of 1 peso per litre. The taxes were introduced as part of a National Strategy for the Prevention and Control of Overweight, Obesity and Diabetes, which was adopted late in 2013.
The National Treasury cites the Mexican SSB tax as an example of what a similar tax here would achieve. It emphasises that the introduction of the tax was followed by a decrease in purchases of taxed products during 2014. What the Treasury fails to mention is that sales bounced back in 2015.
While sales of SSBs were 11.28 billion litres in 2013, the pre-tax period, in 2015 sales of SSBs came in at 11.24 billion litres. So the overall decrease was a mere 43.66 million litres, or 0.39 percent.
So SSB sales have not responded as intended to tax. By contrast, government revenues have done well out of the SSB tax, generated far more than expected: 18.3 billion pesos in 2014 and 21.4 billion pesos in 2015. Overall, thus, the Mexican SSB tax has raised billions of pesos in tax revenue without significantly reducing consumption – or having any measurable impact on obesity at all.
France introduced a soda tax in 2012 to discourage the consumption of sweetened drinks. Coincidentally, the tax also raised millions of euros in additional tax revenue at a time when the government was facing having to introduce austerity measures to prevent a debt crisis.
On 1 January, 2014, the Danish government scrapped its tax on soft drinks. (It has also abolished a tax on saturated fat and a proposed tax on sugary foods). SSBs had previously been taxed at DKK1.64 per litre.
The removal of the tax came after the Danish tax ministry had stated in 2012 that “the suggestions to tax foods for public health reasons are misguided at best and may be counter-productive at worst.” The ministry also warned that such taxes “can become expensive liabilities for the businesses forced to become tax collectors on the government’s behalf.”
The Danish government also decided to scrap the SSB tax because it had high administrative costs, contributed to cross-border shopping and job losses, and was regressive in its impact – hitting low-income households harder than wealthier ones.
The impending sugar tax in South Africa is causing concern in the soft drinks industry.
— ashli (@alsusiks) September 23, 2016
In 2015 Iceland abolished its tax on SSBs and sugary goods, the country’s treasury saying this was necessary to benefit households and simplify the tax system. Several countries have recently considered introducing taxes on SSBs and foods considered unhealthy, but have rejected the idea following public debate. Romania, for example, was thinking about fast food and SSB taxes in 2010 and 2011, but abandoned these proposals after concerns were voiced about the difficulty of implementing the taxes and the risk of job losses.
Despite the lessons from these countries, the South African government seems intent on introducing a SSB tax. It urgently needs more revenue, of course, and cannot easily raise the VAT rate without encountering heavy political opposition.
However, taxing SSBs could help it to raise R10.5 billion in additional revenue – which is roughly half of what it would gain by raising the VAT rate by one percentage point, from 14% to 15%.
The Treasury is also going back to the taxes on SSBs and mineral water which it imposed in 1993 – in order to help raise revenue – but then abolished in 2002. The Treasury says the aim of its proposed new tax is not to increase revenues but to overcome obesity, but this rationale is not convincing for three key reasons.
First, if it wanted the new tax to be revenue-neutral, it could reduce its VAT take on other products – but it has no plans to do so. Second, experience in Mexico shows that an SSB tax can be very useful in raising additional revenue, especially as demand for SSBs is often so inelastic that people will continue buying them, even if the price goes up. Third, even if consumers decide against buying higher-priced SSBs, they can always buy other untaxed sugary products, which means their sugar consumption will not decrease and obesity will not be reduced.
As the experience of these other countries confirms, the only thing that SSB taxes are highly effective in doing is raising revenues. However, South Africa simply cannot afford another tax that disproportionately affects lower-income households. Since SSB taxes clearly do not work in reducing obesity, the government must abandon its tax proposal and come up with far more effective ways to educate and empower people on how best to overcome obesity.
- Jasson Urbach is a policy fellow at the Institute of Race Relations. He did a Bachelors of Commerce with majors in Finance and Economics at the University of Natal in Durban, South Africa. He completed his honours and Masters in Economics. His masters’ dissertation was on The Determinants of Labour Force Participation of The Elderly. He is a director of the Free Market Foundation as well as Africa Fighting Malaria, and has published academic papers.