Taxing sugary drinks works

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Around the world, governments and beverage makers are locked in battle over taxes on sugary drinks.

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Opinion

Hey there, time traveller!
This article was published 29/11/2015 (2626 days ago), so information in it may no longer be current.

Around the world, governments and beverage makers are locked in battle over taxes on sugary drinks.

Hungary has been taxing them since 2011. In 2012, the French government introduced a tax on all drinks with added sugar or artificial sweetener, now eight cents (in euro currency) a litre.

The Mexican government followed suit last year, with a tax of six cents (in euro currency) a litre on all sugary drinks. Chile and the city of Berkeley, Calif., introduced similar measures in January, with Barbados following suit in June and Dominica in September.

Adam Rountree / Bloomberg News files Concerns about obesity and health have led to nine years of falling U.S. soda consumption; Diet Coke is losing U.S. sales at seven per cent a year.

 

The soft-drink industry has won some victories too, defeating proposals for taxes on sugar in several American states and persuading the Slovenian government to backtrack on plans to impose a 10 per cent tax on sweetened drinks last year. In 2013 Denmark repealed its tax on soft drinks and ditched plans for a broader sugar tax.

Governments are adopting the taxes in the hope of trimming bulging waistlines and slowing the rise in diabetes, which costs taxpayers vast sums in spending on health care.

Mexicans, for instance, are the fourth-biggest guzzlers of sugary drinks in the world, according to Euromonitor, a market-research firm. In 2012 more than 70 per cent of Mexican adults and 34 per cent of five- to 11-year-olds were overweight. Diabetes is a growing problem: 12 per cent of Mexicans have it, and it was behind 14 per cent of all Mexican deaths in 2009.

In response, the beverage industry argues it is not the government’s business to decide what people should eat and drink. Pinning the blame for the world’s increasingly voracious and sedentary ways on sugary drinks is unfair, they add.

Whether taxes on soft drinks actually have an effect on consumers is a separate question. Some worry retailers may absorb the tax rather than passing it on to customers, thereby obscuring the signal governments are trying to send. Others fear higher prices will not lead to a change in behaviour, but simply will sap the incomes of the poor in particular.

There is little evidence to support these fears, however.

A working paper by economists at the French central bank, the Sorbonne and the University of Paris-Est Créteil suggests retailers passed along nearly all of the French tax. A working paper on the Mexican tax, by Raymundo Miguel Campos-V°zquez and Eduardo Medina-Cortina of the Colegio de México, suggests retailers there went even further, raising prices for soft drinks by 30 per cent more than the real value of the tax.

Higher prices do indeed seem to have crimped demand for sugary drinks.

FEMSA, Coca-Cola’s Mexican bottler, blamed declining sales in 2014 on the price jump that followed the introduction of the tax. A monthly manufacturing survey found overall sales of soft drinks fell by 1.9 per cent in 2014, having increased by an average of 3.2 per cent a year for the previous three years.

Another study, based on household surveys rather than industry data, suggests an even stronger effect: it found consumption of sugary drinks fell by six per cent relative to pre-tax trends during the tax’s first year. Some data suggest Mexicans switched to healthier alternatives: The manufacturing survey suggests that sales of bottled water jumped by 5.2 per cent in 2014.

Not all the evidence from Mexico is in the tax’s favour, however.

Researchers at the Mexico Autonomous Institute of Technology, who previously had collaborated with the industry on a study of the tax’s effects, found the reduced consumption of sugary drinks thanks to the tax saved Mexicans only five calories a day on average and, what is more, the poor did end up losing a bigger share of their income to the tax than the rich.

However, according to Barry Popkin of the University of North Carolina in Chapel Hill, low-income households were the most responsive to the tax, cutting their consumption of sugary drinks by 17 per cent within a year of its introduction. That means the poor will gain greater health benefits from the tax. That is especially important because they are hit harder by obesity and diabetes, due to having less access to health care.

Although the academic evidence suggests taxes on sugary drinks are working as intended, it also indicates bad design can undermine much of the benefit.

For one thing, relatively high taxes are needed to change consumer behaviour. Various states in America have had extra sales taxes on soft drinks of between three per cent and seven per cent. This has helped to raise revenue, but the impact on consumption has been marginal.

It also is hard to impose a tax on sugary drinks when customers can easily shop elsewhere. Retailers in Berkeley passed along less than half of the city’s tax, reckon John Cawley of Cornell University in Ithaca, N.Y., and David Frisvold of the University of Iowa in Ames, presumably for fear customers would drive to neighbouring cities to buy their groceries.

Taxes also work better if they distinguish between different degrees of sugariness. Hungary’s tax, which also applies to salt and fat, varies according to the amount of the offending ingredient used. A review of the policy found that 40 per cent of manufacturers had adjusted their recipes accordingly.

This fits with the inclination of the soft-drink industry, which has been experimenting with less-sugary drinks. Coca-Cola, for instance, recently launched a product called Coca-Cola Life, which is made with a mix of sugar and stevia, a calorie-free sweetener. France taxes sugary and diet beverages alike, however, giving the industry little incentive to make its drinks healthier. Mexico taxes all drinks that contain any added sugar at a flat rate.

Such examples may help governments design more effective taxes on soft drinks. In one crucial respect, though, the evidence is still wanting: the taxes have not been in place long enough to assess their impact, if any, on public health.

A proven benefit would really sugar the pill for wary politicians.

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