High sugar consumption is associated with the increasing prevalence of obesity, type 2 diabetes and cardiovascular diseases. Since a large share of sugar is consumed in beverages, taxes on sugar sweetened beverages are becoming more and more popular. A number of jurisdictions have already implemented such excise taxes using different tax designs. In a new DIW Aktuell, Renke Schmacker summarizes what we can learn from the experiences that various countries have made.
In all cases that have been evaluated, a decline in consumption of taxed drinks can be observed. However, a number of factors have to be considered which could jeopardize the health effects of these taxes. On the one hand, in Mexico a new study shows that the demand for other sugary, but untaxed, beverages like fruit juices has increased in reaction to the tax. Therefore, the net effect on sugar consumption may be smaller than previously thought. On the other hand, in Berkeley, California, the tax is not fully passed through to consumer prices since retailers are competing with retailers in neighboring cities. Thus, the effectiveness of such a local tax, that consumers can easily avoid by shopping elsewhere, is likely to be limited.
The example of the United Kingdom shows that clever tax design can give producers an incentive to reformulate their products. The UK have decided to implement a tax that is higher for soft drinks with a sugar content exceeding a certain threshold. Consequently, even before the tax was enacted, several producers reduced the sugar content of their products in order to fall below the threshold and be subject to the lower tax rate. The tax in South Africa goes even one step further and varies the tax rate continuously with sugar content. Thus, producers are given a sustained economic incentive to reduce the sugar content of their products.
The full DIW Aktuell article (pdf, in german) can be accessed free of charge.