Health Taxes: Policy And Practice

Lauer, Jeremy A. (Ed.); Sassi, Franco (Ed.); Soucat, Agnès (Ed.); Vigo, Angeli (Ed.) Book Health Taxes: Policy And Practice Provided in Cooperation with: World Scientific Publishing Company Suggested Citation: Lauer, Jeremy A. (Ed.); Sassi, Franco (Ed.); Soucat, Agnès (Ed.); Vigo, Angeli (Ed.) (2023) : Health Taxes: Policy And Practice, ISBN 9781800612402, World Scientific Publishing Europe Ltd, Singapore, https://doi.org/10.1142/Q0365 This Version is available at: https://hdl.handle.net/10419/279867 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. 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If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-nc-sa/4.0/ W orld Scientific This page int entionally left blank W orld Scientific Published by W orld Scientific Publishing Europe Ltd. 57 Shelton Street, Covent Garden, London WC2H 9HE Head office: 5 T oh T uck Link, Singapore 596224 USA office: 27 W arren Street, Suite 401-402, Hackensack, NJ 07601 Library of Congress Cataloging-in-Publication Data Names: Lauer , Jeremy A., editor . | Sassi, F ., editor . | Soucat, Agnes L. B., editor . | V igo, Angeli, editor . | W orld Health Organization, issuing body . T itle: Health taxes : policy and practice / editors, Jeremy A Lauer , Franco Sassi, Agns Soucat, Angeli V igo. Description: Hackensack, New Jersey : W orld Scientific, [2022] | Includes bibliographical references. Identifiers: LCCN 2022025017 | ISBN 9781800612389 (hardcover) | ISBN 9781800612396 (ebook for institutions) | ISBN 9781800612402 (ebook for individuals) Subjects: MESH: Health Policy--economics | T axes--economics | Economics, Medical | Health Promotion--economics Classification: LCC RA410.53 | NLM W A 525 | DDC 338.4/73621--dc23/eng/20220708 LC record available at https://lccn.loc.gov/2022025017 British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library . Copyright © 2022 by W orld Health Or ganization (WHO) All rights r eserved. Open Access book published by W orld Scientific Publishing Company on behalf of WHO and distributed under the terms of the Creative Commons Attribution-NonCommercial-ShareAlike 3.0 IGO (CC BY -NC-SA 3.0 IGO) License , which permits any non-commercial use, distribution and reproduction in any medium, provided the original author(s) and source are credited and license the new creations under identical terms. Disclaimer: The authors alone are responsible for the views expressed in this book and they do not necessarily represent the views, decisions or policies of the institutions or or ganizations with which they are affiliated. For any available supplementary material, please visit https://www .worldscientific.com/worldscibooks/10.1 142/Q0365#t=suppl T ypeset by Diacritech T echnologies Pvt. Ltd. Chennai - 600106, India Printed in Singapore ShiYing - Q0365 - Health Taxes - OA.indd 1 ShiYing - Q0365 - Health Taxes - OA.indd 1 4/1/2023 5:02:05 pm 4/1/2023 5:02:05 pm F orewords Each year , 41 million people die fro m pr e ven table no n-comm unicable diseas es (N CDs) suc h as car diovascular dise ases, cancer s, chro nic resp irato r y diseas es a nd diabetes. M ost o f t hese death s occ ur in lo w- and middle-inco me coun tr ies, a nd could ha ve been av oided by e limina ting tobacco use and alcohol mi suse and b y im pr oving unhealth y diets. One o f the most cost-eff e ctive wa ys of addr essing NCD s is t hr ough the in telligen t us e o f health taxes. One o f t he aim s of health taxes is to r educe the con sump t io n of unhealthy p roducts; an other is t o disincen tivise un health y beha viours tha t ar e t yp ically associ a ted with such p roducts. H e alth taxes achieve both these aim s by cha nging the price faced b y con sumers so that he a lt hie r c hoi ce s are promote d. H ea l th taxes can also s er ve as a r e ve n ue bo ost er for g ov er nmen ts, a fact which is particu lar ly r ele van t no w , as go vernments a re facing the ch a lleng es of fina ncing the Su staina ble De ve lop ment Goals. N ow mo re than ever health taxes can p lay a vi t al r ole in ach ieving the twin goals of im pro ving health ou tcomes a nd in raising p ublic-sec to r reven ues. Despi te their demon strated benefi ts, he alth taxes r emain underutilised global ly . T o addres s t his p roblem, WH O (through i ts he alth syst em teams and wi t h the su pport of i ts health pr omo tion tea ms), spearheaded a m ulti- year p rogramme o f knowledge exc hang e with leading experts in t he fiel d of h ealth, tax p olicy , pu blic fina ncia l ma nag emen t, trade law an d pu blic go vernance. Th e dis cussio ns ar e no w chro nicled in t his book, H ea lt h T axes: P olicy and Practice . This book rep resents the fir st cohe ren t discussion o f hea l th taxes as an independen t domain, a nd au thorita t iv ely addre sses the expr esse d co ncerns © 2022 W orld Health Organization (WHO) https://doi.or g/10.1142/9781800612396_fmatter Fore wo rds vi of policymakers, an d fis cal-se cto r practitio ners, in partic ular . I t a lso pr ovides a lon g-nee ded bridg e between g lobal health and fi sca l policy concerns. Zsuzsanna J akab Depu ty Directo r -G eneral W or ld Health Or ganiza tion H ea l th taxes (excise taxes o n tobacco , alcohol a nd sugar -sweeten ed be vera ges) ar e an im portant t o ol to s im u lta neous ly im pr ove health a nd fiscal out comes. I n troducin g or re fo r ming h e alth taxes can im pr ov e health b y red ucing the con sum ption a nd asso cia ted negativ e externalities of health-ha r ming comm odities. They can also imp ro ve fisca l balances b y increasing tax reven ue and r educing health car e costs associated wi th il lnes ses and in juries in the lon g r un. The se taxes ar e a pr o-p oor a nd pr og r essive policy once o ne acco unts fo r hea l th and p rod uctivity benefits o f reduced co nsum ptio n on ho useholds. I n this curren t envir onmen t where health a nd fiscal systems a re under serious strain, heal th taxes ar e more im portan t than ever befo re. H ow e ver , to achieve maxim um benefit, health taxes need to be designed and a dminist ered well. W e em phasise here the im portance of looking a t health taxes in a holi stic mann er , incl uding the str uctur e of the tax system a nd the incidence o f t hese taxes, all whi le a iming a t rat e le vel s tha t maximise health and fiscal benefits. Equally im p ortan t, ref orms m ust be underpinned b y the unders t an ding tha t tax p olici es ar e only as eff ect iv e as t he tax adminis t ra t io n systems tha t im plemen t them. I welco me the pub lica tion o f H eal th T ax es: P ol ic y a nd Pr actice . This timely p ublica tion p resents a b road perspec tiv e and rich set o f con tributio ns from a wide-ra nging gro up of experts on health taxes. I t is a useful resour ce fo r researc hers, policymakers an d practitio ners, and will be an im p ortan t ref erence to all of them as we con tinue t o su pport p olicies that bring a b ou t susta inab le econo mic develop ment a nd great er welfar e – includin g in terms of h e alt h outcom es – for a l l. M ar cello E st evão Glo bal Dir ecto r M acroecon omics, T rade & In vestmen t, W orld Bank © 2022 W orld Health Organization (WHO) https://doi.or g/10.1142/9781800612396_fmatter Contents Chapt er 1 Intro duc t i on ............................................ 1 F ra nco Sassi, J erem y A Lauer , A g ne s S ou ca t, A nge li V igo , and J erem ias Pa ul Chapt er 2 The Place f or H e alth T axes in the W ider F iscal System .............................23 Cél ine Col in, G ioi a de M el o , a nd Ber t B r ys Chapt er 3 Pr otecting and P rom oting H e alth Thro ugh T axa tion: E vidence and G ap s ........................................................ 57 L i sa M P owe ll and F r ank J Cha loup ka Chapt er 4 Su ppl y-Side Responses to H ealth Ta x e s .......................................................87 A nn al i sa Be llo ni a nd F ra nco Sassi Speci al F oc us 1 Th e UK Soft Drinks Ind ustr y Le vy as an I ncentiv e for Be vera ge R e for mu lat i on .....................................116 M artin W hi te, J ea n A da ms, Cherr y La w , and Peter Scarborough Chapt er 5 The Labour M ark et Im pac t o f H ea l th T axes ........................................127 Sar ah M ou ns ey , Lisa M P owe ll, and Fr ank J Ch aloupka Fore wo rd s ............................................... v A ck now led gements ................................ xi H eal th T axes: P ol ic y a nd Pr actice 2 incr easingly f oc used on health p romo tion and im pr ove men t, and today alcohol taxe s ar e widely used world w ide as h ealth taxes. The na rrativ e of health taxes began with the co ncept o f ‘ sin taxes ’ on s ugar , to bacco and alcoho l. A focus on the taxatio n of ‘ unnecessar y’ con sump t io n go ods has been reflected in the wo rk of eco nomists s ince A dam Smi t h ’ s widely quo ted state men t ‘ sugar , rum, and t obacco ar e commodities which ar e nowher e necessaries of life , w hich a re become ob jec ts o f a lmost univ ersal cons ump tion, a nd which ar e theref or e extremel y pr oper subjects of taxa tion ’ . 1 The clas sica l ra tionale fo r t axing s uch co mmo di t ies was t o raise the r even ues necessar y for collect iv e us e wi thou t interf ering with essen t ial fo rms o f con sump t io n. The wo rk of F rank R am s ey , 2 a cen tur y ago , added t he co ncept tha t efficient co mmo di t y taxa tion r e q uires a f o cus on g o ods whos e dema nd is not sensi tive to p r ice cha nges, ho lding firm the princi ple in A dam Smi th ’ s quot e. Art h ur Pigo u fur ther str engthened the ra t io nale fo r commodity taxa tion b y link ing i t to nega t iv e externalities, or so cially undesira ble co nse quen c es no t reflected in the mark et price, that a re associated wi th the pr o duction or co nsum ption o f t he g oo ds to be taxed. 3 Pr o du cts that toda y we know a re associated wi th p oor health o utco mes ha ppen to ha ve al l these cha rac teristics: they ar e not necessi t ies, their dema nd is r ela t iv ely insensi t iv e to price an d they genera te nega t iv e externalities. The fact that suc h commodities ha ve been t axed lo ng befor e e vidence o f t heir health im pacts emerged make s it possib le to purs ue health goals in fiscal policies sim ply b y repurposing existing tax es, tha t is, ada pting their design to ens ure they genera te meaningful health impacts; i t is no t necessar y to iden t ify new objec ts o f t axa t io n. I n recen t year s, we ha ve se en a co nsidera ble c han ge in go vernmen t a ttitude s to wards the taxa tion of p roducts with adv erse he alth im pac ts, an d the health ra tionale has in creasin g ly taken cen tre stage . Thus, taxes o ften discusse d in the past as ‘ sin taxes ’ , based on a na rrativ e foc used on indi v id ual res p on sibility f or unhealthy a nd so cially stigmatised cons ump tion, ha ve been emb raced a nd r ebra nded as he alth taxes that h a ve b road so cietal b enefi ts and I nt roduction 3 externalities a nd can thus be con sidered as Commo n G oo ds f or h ealth. a , b Other taxes, such as en v ir onmen t al taxes, can also fit in to a health taxes framewor k, as we shall se e in the fo llowin g. Consum ption tax es typically in vol ve unif orm tax rates a cros s a wide ran ge o f produ cts, to ensur e an efficien t t ax admini stra tion a nd to no t ca use ‘ dis to rtions ’ in con sum ption pa tterns; ho wever , ra te differ en t ia t io n is used in man y taxatio n system s, either thro ug h differ entia t io n of general con sump t io n t ax ra tes or b y imposing ex cis e taxes o n sp ecific goo ds. An interna tional rev iew 4 chair e d b y No bel Prize winner J ames M irrlees pr ovided a visio n fo r t ax syst em re fo r ms in the 21st cen tur y , dw elling a t length o n the issue o f consum ptio n t ax ra te differ en t ia t io n. The revie w con cl uded that ‘There a re co n vincing a rgumen ts for […] diff eren t ia ted tax rat es w her e t he co nsum ption o f a partic ular good or ser vice crea tes sp ill-over cos ts or benefits ’ , inc luding costs o r b enefi ts face d b y one ’ s futur e self. Su ch fut ure sp ill-ove r effects, realised within an individ ua l, ca n be iden t ified as ‘in ternalities ’ . I n practice, theref or e, in addi t io n to addr essing traditio nal mark et externalities, ‘ t axes ca n encourage peop le to a voi d acting aga inst their o wn self-inte res t’ [o p . cit.] as we ll. I n ternalities, ho wever , var y between individuals a nd addr essing con sumer heter ogenei ty in the design of co nsum ption taxes is c hal lengin g. 1.2. Scope of the b ook This book is the resul t of kno wledge excha nge between the staff o f the W orld H ea l t h Orga nizatio n (WHO) and a m ultidisciplin ar y team o f resear chers a nd policy maker s. I ts purp ose is to b r ing s harper focus to the sub j ect of health taxes a nd to expose its va rious facets in t urn. W e aim to en umera te the key health taxes o f inter est, explo re their effects, both a Y azbeck AS, Soucat A. When both mar k ets and governments fail health. Health Systems & Reform . 2019; 5(4): 268–279. b Soucat A. F inancing common goods for health: fundamental for health, the foundation for UHC. Health Systems & Reform . 2019; 5(4): 263–267. H eal th T axes: P ol ic y a nd Pr actice 4 positiv e and n ega t iv e, and ho w thes e eff ects are infl uenced by the design of these taxes a nd b y t he co ntext in which they ar e ap plied. W e ask ho w and wher e the y can be im plemen ted. Critically , we b ui ld thr ougho ut the bo ok a n argumen t fo r w h y p olicymakers acr oss go vernmen t should car e abou t hea l th taxes. A s such, this book is in tended fo r those w ho ha ve p rimar y res p on sibility fo r t he design a nd im plemen t a tion of h ealth taxes, name ly fisc al polic ymaker s, and f or those w ho ha ve p r imary respon sib ility fo r the hea l th of indi viduals and pop ul a tions, na mely health policy maker s. The former will benefit fro m this bo ok thr ough an im pro ved understa nding o f t he co ndition s requir ed fo r health taxes to ha ve meanin g ful health impacts, an d of the facto rs that ma y aff ect t he su ccess o f health taxes as fiscal p olicy instrumen ts. The lat ter , on the other ha nd, wil l benefi t from a n imp ro ved unders t an ding o f t he wider fiscal p olicy con text in which health taxes ar e use d, a nd o f the con strain ts within which health taxes o p era te, and the book sho u ld acco rdin g ly p ut health polic ymaker s in a stro nger positio n to be effec tiv e adv ocates f or health taxes within g ov er nmen t. B eyon d these cor e con stituencie s, we also hope to en gage the in terest o f officials in health and fin ance mini stries, stakeho lders a nd ac tivists in ci vi l societ y , s taff in in ternatio na l o rganisa t io ns, yo ung pr ofess ion als and s tuden ts in global hea l th and fiscal polic y , a nd academic rese ar chers. H ea l th taxes exist within a uni verse of policy tools (Figure 1.1 ). W e wil l not co nsider all fisca l policies, no t ab ly excl uding ‘ nega t iv e ’ taxation s uch as subsidie s, some o f w hich a re widely discussed in the public h ealth polic y deba te, a nd we will not con sider al l r e ven ue-raisin g fis cal policies, although most o f t hem ha ve a t least some effect on h ealth. As exp l ain e d furt her in Cha pt er 2, the focus of this book wil l be on indir ec t taxes tha t t ar get con sump t io n (primarily excise taxes), a nd affect the mark et prices of the pr o d ucts concerned, th us sha pin g consume r behavio ur . Ho wever , the bo ok will not addr ess all go vernmen t policies designed to infl uence the prices of pr o d ucts that ma y ha ve detr imen tal he alth eff ects. In particu lar , r egu la tor y I nt roduction 5 policies such a s minim um pricing, which ar e ap plied to alcoholic beverag es and t obacco products in a n umber of j urisdic tion s, are beyon d the scope of this bo ok. W hile we recognise the im portance of p rice regulatio n for health polic y , a nd w hile some o f t he co nten ts of this book will b e a pplicab le b oth to p r ice r egulatio n and to health taxes, w e feel that the fiscal polic y co n text of h ealth taxes warran ts a detailed examina tion of i ts own. 1.3. Questio ns addresse d by this b ook The book reflects discussion s amo ng pu blic health experts, econom ists a nd other experts, and i t rep resen ts, p erha ps, the first a ttem pt to discuss health taxes com pr ehensi vely . The book aim s to addres s the follo wing questio ns. 1.3.1. Can taxes be us e d as health int er ven tions? T axes, which ha ve been histo r ically used as reven ue-raising m e asur es, can also be designed to help ac hie ve h ealth-rela ted objectives . Cha pt er 3: Pro tecti ng a nd pr omo tin g heal th th ro ugh taxa tio n: E vidence a nd ga ps expla ins the path ways thr ough w hich tax es on t obacco , alcohol Public expenditure and revenue policies (including subsidies) Taxes on income and profits Social security contributions Other taxes Tax policies Fiscal policies Price policies Minimum unit pricing · Tobacco, alcohol, and SSB taxes · Taxes on sources of environmental pollution · Taxes on other dietary components Specific emphasis of the book: Other price policies Consumption taxes Taxes on wealth F ig. 1.1. The specific emphasis of this book within related policy spheres. H eal th T axes: P ol ic y a nd Pr actice 6 and s ugar -sweetened be verag es (SSBs) im p act con sump tion and heal th ou tcom es an d how s ubsti tutio n and tax a voida nce behavio urs ma y affect the net im p act of the taxes. Can health taxes influence the beha v io ur of man ufacturer s of the taxed pr o du cts? Chap ter 4: Su ppl y-side r espo nses to he alt h taxes descr ibes the stra tegic re sponses o f fir ms a nd lo oks a t whether firms raise the selling price o f the taxed pr o ducts as a r esult o f the im position o f the hea l th tax. This iss ue of pas s-thro ug h is im p o rt a n t, since the im p act on co nsum ption larg ely depends on whether the tax raises the p rice of the taxed pr o d uct re la tive t o other s. The same cha pter also exa mines whether taxes ca n b e used to enco urage man ufacture rs to r eform ul a te their pr o du cts, or to incr eas e the pr omo t io n of p roducts with a lo wer con cen t ra t io n of the taxed ingredien t. Wha t abou t t axe s on o t her activi ties which nega tively a ffec t health (e.g. the incr eased us e of ca rs)? Chap ter 7: Expand in g heal th taxa tio n to other unhealth y behaviours and harmf ul ac tivities explor es the ap plicatio n of taxe s to discourag e other unhealth y beha viours, lookin g a t examp les on air pollu tion, gam bling, farming p ract ices an d other s. 1.3.2. Wha t are the econo mi c impacts of health taxes? Gov ernmen ts hav e lon g relied on t obacco and alco hol taxes a s steady strea ms o f reven ue. If taxes o n thes e p rod ucts ar e designed with a health goal in mind, ca n taxes on these p roducts still genera te stable r e ven ue fo r coun tr ies? Chap ter 2: The p lac e fo r heal th taxes i n the wider fisca l sys tem explo res this ques t io n and exa mines the reven ue-raisin g p ot en t ial of health taxes an d ho w general princi ples o f t ax policy may be a pplied in this con text. Opponen ts of h ealth taxes oft en claim tha t these me as ures will ha ve nega tive labour im pac ts a nd r esult in eco nomic do w n turn, partic ularly in lo wer inco me con texts. Cha pt er 5: The la bou r ma rket i mpa ct of he alt h taxes assesses whether these claims a re s upported b y e vidence. The c hap ters delv e in to the impact of h e alth taxes o n emp lo ymen t and pr o d uc tivity us ing em pirical and modelled e vidence. I nt roduction 7 1.3.3. Can he alth taxes adva nc e the achie veme nt o f the susta inable de velop ment goals? The S D Gs r epr esent a sha red bl ueprin t for peace and p rosperity fo r people an d t he p lanet, no w and in to the fut ure . C an h ealth taxes hel p coun tr ies ac hie ve their S D G-rela ted targ ets? Cha pt er 6: I mpa c ts o f hea lth taxes o n the a tta in men t of t he SDGs examines h ealth taxes using a wider lens a nd explor es the links b etween health taxes an d br oader de ve lop men t goal s. 1.3.4. Wha t are the co nsid era tions f or designing and impleme nting health taxes? These con sidera tions a re exp l a ined extens ive ly in thr ee cha pters. Ch apt er 8: The de sign o f effecti ve he al th t axes explain s how tax type, tax structur e, tax ra te affect the impact o f the tax on con sump tion and i ts imp lica tion s on reven ue. Cha pter 9: Pu bli c gov ernan ce an d fina ncin g, an d earma rki ng he alt h tax es places h e alth taxes wi thin the br oader con text o f pub lic f inan cing system s and also explains the co nsidera t io ns ar ound ea rmarking o f health tax reven ue. Cha pter 10: M oni tori ng an d measu r i ng h eal th taxes exp lains the im portance of trackin g health taxes im plemen t a tion and p ro pos es a n a ppr o ach f or mo nit oring taxes o n alcoholic beverag es and SSBs, based on the methodolog y used in the field of to b acco taxa tion. 1.3.5. Do hea lth tax es aff e ct countries ’ commi tmen ts under int erna tional trade law? T o ef fectivel y design and struc t ure h ealth taxes in com pliance wi t h in ternatio nal obliga tions, policymakers m ust unders t and the rules of in ternatio nal trade law . Chap ter 11: H eal th taxe s a nd t r ade la w examines ho w t he rules of in terna tional trade la w and agreemen ts go verning custo ms and m on etar y union s and ho w t hese ma y affect the imp lemen tation o f health taxes. H eal th T axes: P ol ic y a nd Pr actice 8 1.3.6. Wha t is the p oli tic al e cono my o f he alth tax poli c y? Cha pter 12 : A po li tic al eco nom y ana lys i s o f he al th t axes examines the key pla yers in the health taxes a ren a and h o w these actors infl uence the polic y en vironm ent. The ch a pter also lists r ecommen datio ns fo r interacting wi t h ind ustries aff ected by health taxes. 1.4. A b rief hist or y of hea lth tax es The idea of h ealth taxes was born befor e t he t erm. A t t he end o f t he las t cen tur y , it began to be co mmo n place to tal k abou t a limited set of ex cis e taxes as health in ter ven tion s. 5 , 6 This inno vatio n c an be seen as pr es aging a n idea subsequen tly popularised by the WH O e ar ly in the era o f the Millennium Develop ment Goals (MD Gs), nam ely that the heal th system is the sum o f ‘ all t he activities whose prima r y p ur pos e is to p ro mo te, r estor e or ma intain heal th. ’ 7 This co ncept, altho ugh clearly in lin e w i th the thin king o f t he drafte rs o f the WHO Cons t i tu t io n, ne vertheless r epr esent e d a b roadenin g of the p redomina ntly medical-an d-pub lic-hea l th focus of pr e vio us thinking. Sho r tly a fter war ds, staff a t the WHO a nd others 8 , 9 began t o analyse the cost- effectivenes s of the taxatio n of alcoh ol and to bacco , and to mak e explici t com parisons wi t h tha t of other usual health-syst em ac tivi ties, giving furt her im p etus t o t he co ncept. Later , co m p ara tive st udies of h undreds o f int er ven t io ns 10 , 11 helped estab lish the idea tha t alcohol taxe s and t obacco taxes wer e not o n ly cost-effective wa ys of im pr oving pop u la t io n hea lth b ut wer e in fac t mo re cost-effective tha n man y w idel y recognise d health in ter ven tion s. Prio r to these publica tions, alco hol tax, cigar ette tax, b ut also road-saf ety me asur es and a h ost o f other action s outsid e of the healthca re sector as n arr o wly unders tood — were no t ro utinel y t ho ug h t of as ‘health policies ’ . Y et it soon bec am e impossibl e to igno re them. Thi s rep resen ted a fundamen tal chang e in thinking abou t the health system a nd about h ealth int er v en t io ns. I nt roduction 9 Tha t t hinking is no w being extended, a nd part of tha t sto r y in vol ves the birth of health taxes as a t erm. H owever , i t is help f ul to r e cognise that, a t le ast p rior to the incr e ased regula t io n of tobacco p rod ucts and smo k ing fo llowin g the adop t io n of the WHO F ramewo rk Con ven tion o n T obacco Con trol (FCT C), t her e were f e w in ter ven tion s in the medical or pu blic-health repertoir es capab le of addr essin g the harms ca use d b y a lcoh ol and to bacco , as well as b y a host o f other ca uses outs ide of the ra nge of p ro ximal r isk factor s, such as pa thogens o r p oor sani tation, tha t had been t he tradi tional focus of p ublic health. I t is said that o ut o f necessi t y co mes in ven tion and so two of the h umb le fiscal instrumen ts originally designed to co nsti tu te the reven ue backbon e for the earl y mo dern sta te (i.e . alcohol a nd tobacco taxes) acquir ed new lustre a s leading health in ter ven t io ns. The im p era tive o f a globalising ep idemiological trans itio n, a lo ng with an in creasin g prevalence o f non-co mmun icable di se ases (NCD s), rein fo rced this trend. T obacco use (in an y of i ts man y forms), the ha r mful use of alcoho l, unhea l th y diet and p hysical inactivity a re amo ng the main ca uses of ill-health. R a pidly rising obesi ty and ov er n utrition in pa rtic ular bec am e increasingly unde rst oo d as ca us es o f i ll-health in termedia te between the distal behavio ural-and-socia l facto rs and the p ro ximal biom ed ic a l on es . A series of st udies con ducted by the O ECD and b y the WHO 12 , 13 we re early in linking these tren ds (i.e . taxatio n, on the one h and , and diet a nd obesity , on the other). The r esulting p ublicatio ns demon strate tha t by the en d of the fir st decade of this cen tur y it wa s possible t o tal k meanin g fully abou t a pr e vio usly unhear d-of co ncept, n ame ly ‘ fis cal measur es fo r hea l th ’ . The use of the term ‘ fis cal measure s ’ was int ended to inclu de health-pr omo ting subsidies , such a s fo r f ruits and v egetables, alo ngside h ealth-pr omotin g tax es , fo r exam ple o n foo ds high in fa t. ‘Fi sca l measur es ’ , traditionally the do main of s peci alists in tax an d pub lic finance, became thencef orth wo rd s frequen tly in the mou ths of p ublic h ealth pr ofess ionals, m ost o f whom w ould ha ve bar ely no tice d the term in i ts traditio nal doma in of a pplica t io n. H eal th T axes: P ol ic y a nd Pr actice 10 F ollowing a H igh-le vel M e eting o n NCDs held in M os co w in 2010, taxes on sw e eten ed pr o ducts (sometimes r eferred to a s ‘ sugar taxes ’) — as well as fa t taxes an d other taxes dir ec ted a t reducin g t he co nsum ptio n of variou s dietar y com ponen ts — b egan t o be imp lemen ted by n umero us go vernments, su pported b y a public h e alth ra tionale. E ver y where in the wo rld it is saf e to sa y tha t alcohol a nd tobacco taxes had as their o r iginal purpos e no t t he im pro vemen t of health b ut ra ther the raisin g of p ublic reven ues. Con versely , ho wever , it is saf e to a ffirm that in mos t c o untries where taxes o n SSBs ha ve been implem ented (i.e . in ver y man y jurisdic tion s 14 ), t he f or emost aim o f such taxe s has been to im pro ve health b y incentivis ing a mo re balanced diet, and n ot t o raise pu blic reven ues (although the 2008 in ternatio nal financial crisis tha t left go vernmen ts s cram bling fo r reven ues to co ver b udget deficits was am on g t he facto rs tha t crea ted the condi tions f or this tr end). Tho ug h under -recognised at the time, tax es on SS Bs pr o ved in the year s fo llowin g 2010 to be a though t inno vatio n, m uch as the wor k of o t her s on t obacco and alcoh ol had be en decades earlie r . I t was a ga me-cha nging inno vatio n fo r one o ver w helm ing r e ason: in the wak e of the in troduction o f SSB taxes i t bec am e p ossib le — a t le ast in p rinciple — t o reim agine taxes, o r e ven fiscal policies alto gether , prima r ily as health in ter ven t io ns. 1.5. The ra tionale fo r he alth taxes 1.5.1. The ne oclassic a l rat i o nal e f or taxa tion: Public goo ds and ext ernalities The o riginal notion o f t axa tion has ever yw her e b een that o f an obliga tion (‘ duty’) o wed to an a utho r ity , with little no tion of r ecipr o ci ty . F or most o f h uman histo r y , taxation ha s b een concei ved as the right o f t he str ong to extract resour ces f r om the w eak. S ome o f the first fo r ms o f (direct) taxation wer e ‘ corvee ’ (fo rced labour) a nd ‘ tithe ’ (a shar e of incom e, or ‘ re n t ’). L a ter , taxatio n but t r ess ed the powe r of me rca n t ilist sta tes in the fo r m of ta riffs and excises o n trade. W ith the Enlig h tenmen t, how e ver , the con cept o f t axa tion I nt roduction 11 cha ng ed. F or the first time, a d uty of the s tat e to wards the in divid ual was needed to justify the le vy of taxes. This r evolu tion in though t arose in part in res p on s e to r e vo lu tions in deed, aga inst the Fr ench an d Britis h cro wns, moti va ted in p art b y burden s om e taxatio n. Reducing the ha r ms o f financin g the sta te r emains a cen tra l co ncern of tax policy . 15 A rela ted view is t ha t thos e who benefit the m ost fro m t he sta te sho uld con t ribu te mor e to its fina nces [op . cit.]. Th e thinking of Smi th, R am s ey and P igo u f alls squar ely in to this clas sical polic y frame. The m ain additio ns to i t ar e t he twin ideas of n eoclassical econom ics tha t (i) unfet tered mar kets in perfect com p etitio n resul t in a kind of social optim um and (ii) the goal of taxa t io n should theref ore be to dis tort mark et prices and the beha v io ur of econo mic agen ts as li ttle as possib le. N eoclassical tax policy t h us seeks to finance the sta te fo r a narro w s et o f purposes ancillar y to the act io n of the free ma rket: fixing exte rnalities (Pig ou v ian taxe s), corr ect ing m ark et failur es, sup plying p ublic goods and elimina ting tariffs an d barriers to trade. M ost wo rk on tax polic y has ado pted the ref erence poin t of econ omic efficiency : taxa tion, a necessar y evi l perha ps, should be designed so as to determine the least dis to rtionar y yet s till v iab le tax regime ena bling the sta te to perfo r m i ts ro le. The most efficien t fo rm of taxa t io n is a lum p-sum tax. As the la tter has a n umber of un desirab le pro p erties, the next-best fo r ms o f taxation in the neoclassical concep t are dir ec t taxes o n income or g eneralis ed con sump t io n t axes (e .g. value-added tax, V A T) that do no t cha ng e the rela tive p r ices o f con sump t io n go ods. I n OECD co untries, incom e t axes, both indi v id u al and co r pora te, make u p on a verage a bout a third o f gov er nmen t reven ue, g eneralised consum ptio n t axes o n goo ds a nd ser vices make u p an other thir d, soci al secur i ty con tribu t io ns con tribu te abou t a quarter , a nd pr oper ty taxes p ro vide the balance. 16 The p icture differ s in develo pin g c o untries, bu t, in general, excise taxes o n tobacco and alcohol acco unt f or a small shar e of go vernmen t reven ue since, in the lens of n eoclassical economi c theor y , such tax es ar e rela tively und esirab le as in terfering with (re l a tive) mar ket p r ices. H eal th T axes: P ol ic y a nd Pr actice 18 addi t io n, t he types o f cons um ption ta rg eted b y health taxes ar e typically mo re comm on a mong peop le of lo w so cio-econo mic stat us. H o wever str ongly jus tified health taxes ma y be on in ternality and ext ernality gro unds, their inco me distribu tion im pac ts mak e them vulnera ble to cla ims of in e qu ity and exa cerbating po vert y . I n fact, there sho u ld be no expec ta tion f or h ealth taxes to be pr og r essive . They ar e small additio n to a muc h larg er p ool of co nsum ption taxes, whic h ma y b e either p rogre ssiv e or regr essive as a who le, b ut which rep resen t a fundamen ta l co m p on en t of an y fisca l syst em, raising su bstan tia l sha res of all tax reven ues. The fairness o f a fisc al syste m m ust be assessed globa lly , b ased on the ext ent to whic h the distribu t io nal effec ts o f differen t types of taxes can be bal a nced. H ow e ver , in ma n y instances, fiscal system s have becom e less p rogres siv e in recen t years, partly because of a n increased relian ce on con sump t io n t axes (e .g. the weigh t of V A T has incr eas ed con siderab ly after the 2008 financial crisis in ma ny co untries), partly b eca use of the fla ttening o f incom e t ax schedules o r t he r e d uce d use of w ealth taxes, not t o mentio n t he corpora te tax b ase er osio n and loop holes, especial ly f or ma j o r m u l tina tional bus inesses. This has cr eated a n especial ly ho stile en v ir onm ent fo r measures like health (an d en vironm en t al) taxes, which ar e designed to be s alien t and highly visible t o c o nsumers in o rder to a ccom plish their g oal of deterring the con sum ption o f prod ucts that ha ve poten tial ly detrimen ta l health an d en vironm ental impacts. Amidst in creasin g s ocial ine q ualities within a nd acr oss co un t ries, fiscal systems o ug h t to pr ovide the means t o mitiga te ineq ualities and their im p acts. Wh en, in 2018, the F ren ch go vernmen t slashed wealth taxes a nd incr ease d fuel taxes, the la tter measur e gav e r ise to the so-cal led yello w vest prote st . 41 D esp ite a str ong en viro nmental an d health ra tionale, fuel taxe s wer e highly visible a nd stro ngly percei ved as hit ting lo w-income rural work ers whose livelihoods depend on fuel. A s ar gued extens ive ly in this book, an y assessmen t of the di stribu t io nal im p acts of heal th taxes m ust co nsider the w elfare eff e cts of those taxes global ly , that is, their eff e cts on h ealth and w ell-being and their di stribu t io n, I nt roduction 19 as we l l as their e ffects on inco me a nd i ts distribu t io n. B eyond the co mp lexity of as s essin g t he wide-ran g ing im pacts of health taxes an d their distribu tion, the evidence ava i lab le today fr om heal th taxes that h a ve been imp lement e d acro ss the wo rld p o ints co nsis ten tly to an o verall welfar e effect in t he dir e ction of a mi tigatio n, ra t her than exa cerbatio n, of inequalities. Y et, health taxes will con tinue t o a ttract cr i ticism on the gr oun ds of their po ten ti ally r egressi ve finan cial impacts, bo ost ed by their high visib i li t y an d p olarisin g effec ts, and policymakers will ha ve t o design a coher ent set o f p olicy measures and a con sisten t narrati ve to s up p o rt t hem in o rder to f ores t all such criticism. References 1. Smi th A. The W ea lth o f N at ions: A n I nq uiry in to the N a tu re a nd Causes o f the W ea lth of N a tio ns. Pet ersfield: H arriman H ouse Limited; 2010, p . 731. 2. 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Sassi F , C ecchini M, Lauer J A, Y ong YL, G uajar do-Barro n V , C hish olm D . T ackling of unhealthy diets, p hysical inactivity an d ob esi ty : health effects and cost-eff ect iv eness. Lancet. 2010; 376: 1775–1784. H eal th T axes: P ol ic y a nd Pr actice 20 13. Sassi F , C ecchini M, Lauer J , Chisholm D . I mp rovin g Li festyl es, T ackl ing Obe si ty : The H eal th a nd Econo mic I mpact o f Pr e ven tion S tra tegie s. Pa ris: OECD; 2009 (OECD H e alth W orking P apers, N o . 48). 14. W o rld C an cer Research F und In ternatio na l. B uilding mo men tum: lessons o n im plemen ting evidence-informed n utrition policy ; 2018, w ww .wcrf.or g/buildingm om ent um (accessed 9 Oc tober 2018). 15. W einzier l M. Revisiting the classical view of benefi t-based t axa t io n. The Economic J ourna l. 2018; 128(612): F37–F64. 16. OECD . T ax reven ue statistics, h ttps://sta ts.o ecd.or g/ (accessed 1st September 2021). 17. Sassi F , B elloni A, Mir elman A J , et al. Equity im pacts of price policies to p ro mote health y behavio urs. Lancet. 2018 (p ublish ed online A pril 4). 18. Gr ossma n M. On the concep t of health cap ital and the dema nd for health. The J our nal of P oli tica l Econ om y . 1972; 80(2): 223–255. 19. Report of the Commissio n on Ending Childhoo d Obesity . W o rld Health Orga niza tion; 2016. 20. Sir Alleyne G. Keyno te speech: health, NCDs, an d human ca pital. W orld Bank N on- Commun icable Diseases and H uman Cap ital W orks hop , T oro n to , 9–10 J u ly 2019. 21. Sen A. Inf orma tional bases of alt erna tive w elfar e app roaches: a ggrega t io n and incom e distribu t io n. J ourna l of Pu blic Ec ono mics. 1974; 3(4): 387–403. 22. Sen A. Equality of wha t? In M cM urr in S (ed) T ann er Lectur es on H um an V alu es. Camb r idg e: Camb ridge U nive rsi t y Pr ess; 1979, p p . 197–220; Sen A. Iss ues in the measur emen t of poverty . The Scand ina v ia n Jo urnal o f Econ om ics. 1979; 81(2): 285–307. 23. N ussbaum M. W omen a nd H uma n D eve lopmen t: The Capa bil ities A ppr oach. Camb ridge: Camb r idge U niver sity P res s; 2000; N ussbaum M. F ron tiers of J u stice: Disab ili ty , N a tiona lity , Specie s Mem bersh ip . Camb ridge, MA: H ar var d U niv ersi ty Pr ess; 2006. 24. N ussba um M. Creating Cap abilities . C am bridge, MA : H ar vard U niv ersi ty Press; 2011. 25. Sen A. “Develo pm en t as freedom . ” Devel op men t in Pr actice–O xfor d. 2000; 10(2): 258–258. 26. W o rld Economic Ou t look: The Gr e a t L ockdo wn, W ashingt on, D C: I n terna tional M onetar y F und; 14 A pril 2020. 27. Summ ers LH. T axes for heal th: ev idence c lears the air . Lancet. 2018; 391(10134): 1974–1976. 28. Ma nsfield CY . T ax administra tion in develo ping coun tr ies: a n econo mic perspect iv e. IMF St aff pa pers 1988; 35(1): 181–197. 29. Hinric hs HH. A General Theory of T ax Structur e Chang e During Econo mic Develop men t, C am bridge , MA: Law School of H ar var d U niversi t y ; 1966. 30. Lotz JR, Mo rss ER . M easu r i ng ‘ ‘ T ax Effo r t ’ ’ in Devel opi ng Cou ntries. S taff P apers. W ashingto n: In ternatio nal Mo netar y F und, V ol . 14; 1967, pp . 478–497. 31. Chelliah RJ . T rends i n T axa tion i n D eve lop ing Cou nt ries. St aff P apers. W ashingt on: In ternatio nal Mo netar y F und, V ol . 18; 1971, pp . 254–327. I nt roduction 21 32. Chellah RJ , Baas HJ , Kelly MR. T ax Rati os and T ax Effo r t in Devel opi ng Cou ntries, 1969-71. ” S taff P apers. W ashingto n: In ternatio na l M onetary Fund, V ol. 22; 1975, pp . 187–205. 33. T ai t AA, Gratz WLM, Eic hengreen BJ . In te rnational Compar is ons of T axation for Sele cted Deve lop ing Cou ntrie s. St aff P apers. W ashingt on: In ternatio nal M onetar y F und, V ol. 26; 1979, pp . 123–156. 34. Roussea u JJ . So cial Contract. Oxf or d; 1999. 35. Ka n t I. Gr oun dwo rk for t he M eta ph ysics of M or als. Y ale U niversi ty Press; 2008. 36. W o rld Health Or ganiza tion. “ C on stitu tion o f the W o rld H ea l th Organiza tion ”; 1995. 37. W o rld Health Or ganiza tion. Glo bal A ction Pla n for t he Preven tion a nd Con tro l of N onc omm uni ca ble Diseases 2013–2020 (A ppend ix 3). G eneva: W orld H e alth Orga niza tion; 2013. 38. P olitical declara t io n of the thir d high-level meeting of the General A ssembl y on the pr e ven tion and co ntro l of no n-comm unicable di seas es, Resol utio n adop ted by the General Assemb ly on 10 October 2018, A/RES/73/2. 39. P olitical Declara tion fo r the UN High-Le ve l M e eting M eeting on UH C, R esol utio n adop ted by the General Assemb ly on 10 October 2019, A/RES/74/2. 40. J unquera-V arela RF , V erhoeven M, Sh uk la GP , Ha ven B, M or eno-Dodson B. St r engthen ing Do mes tic Reso ur ce M obi liza tion: M oving fr om Theo r y t o Pr actice i n Low-a nd M iddle-I ncom e C o un tries. W orld Bank Publica tions; 2017. 41. Sassi F . Global public health ch allenges, fiscal policies, and y ellow v est. The Lancet. 2019; 393(10173): 745–746. This page int entionally left blank © 2022 W orld Health Organization (WHO) https://doi.or g/10.1142/9781800612396_0002 This is an o p en access article p ublish ed by W o rld Scientific Pub lishing Com pany o n behalf of WHO and dis tribut ed under the terms o f the Crea t iv e Common s A ttribu t io n-N onCommer cia l-Sha reAlike 3.0 IGO (CC BY -NC-SA 3.0 IGO) License . Chapter 2 The Place for Health T axes in the Wider F iscal System a C éline Colin * , Gioia de Melo * , and B e r t Br ys * H e alth taxes o n tobacco and alcoh ol ha ve a lon g history and on a verage raise significan t amoun ts of r e ven ues acros s coun tr ies. M or eover , int erest in – and a dop t io n of – tax es on s ugar -sweetened beverage s has incr e ased in recen t years as evidence o f the nega t iv e health effects of unhealth y diets has become mo re pr e valen t . Overall, there is a tr end to wards a wider u se of health taxes as part of co untries ’ health pr otection and p rom otio n policies. On a verag e, H ealth tax reven ues account f or 0.8% of GD P in hig h an d middle- incom e coun tr ies a nd 0.4% o f GDP in lo w-income co untries. S cope exis ts to enhance the r ole of health taxes, b ut h ealth tax refo r m needs to be embedded within the design an d functioning o f t he b roader tax system. T ogether with en vironmen tal t axe s that a im at r educing p ract ices which ca use d am age t o the en v ir onmen t and people ’ s health, health taxes co uld pla y a ro le hel ping res tore p ublic finan ces once eco nomies ar e on a mo re solid pa th to recov er y from the CO VID-19 cr isis. I n addition t o increasing health tax ra tes, there might be subs t an tia l r even ue p ot en tial f ro m extending health taxes t o other pr o du cts that gen erate nega tive externali ties linked to health. W e beg in b y a The authors wish to thank Da vid Bradbur y , Stéphane Buydens and Alastair Thomas from the OECD Centre for T ax P olicy and Administration and Alan Car ter from the UK HMRC for their input, comments and suggestions. * Organisation for Economic Co-operation and Development (OECD), France. H eal th T axes: P ol ic y a nd Pr actice 24 describing h ow h ealth taxes ar e generally levie d an d we then co nsider their reven ue-raisin g ca pacity . W e cons ider gene ral tax p olicy design princi ples and discuss ho w health taxes may in teract with these princi ples. F ro m an econo mic p ers pec tive , health taxes can be jus t ified where they in terna lise the external costs an d c o r rect fo r int ernalities associated wi t h the con sump t io n of pr o du cts for which all co nsum ptio n has a nega tive im pac t on h ealth, such as to b acco , and p roducts fo r w hich e xcessi ve con sum ption is harmful, suc h as suga r . H ea l th taxes raise reven ues tha t generally flow t o general budg ets and can su pport the financin g of the health sector . H ea l th taxes on to b acco an d alcohol h a ve a lo ng histo r y a nd raise, on a verag e, significan t amoun ts of reven ues acr oss co un t ries. M or eov er , in terest in – a nd adop tion o f – t axes on s ugar -sweeten ed be verag es (SSBs) has incr eas ed significan tly in recen t year s as evidence of the nega tive health eff ects of unhealth y diets has become mo re p revalent. O ve rall, ther e is a tr end to war ds a wider use of health taxes as part of co untries ’ hea l th pr otection and p ro motio n p olicies. This then rai ses the questio n on h ow t o design hea l th taxes aligned w i th best tax practice. This cha pt er starts by d escribing ho w health taxes ar e generally levied and co nsiders their r e ven ue-raisin g c a pacity . The ch a pter ar gues that ther e is scope to enhance the r ole of health taxes b ut tha t this needs to be embedded within the design an d functioning o f t he b roader tax system. The c ha pter then con siders general tax polic y design p rincip les an d a pplies these princi ples to health taxes. 2.1. H ea lth tax es in the br o ader tax syst em T axes a re co mp u lsor y , unr equited pa yments ma de to the gen eral go vernmen t. T axes a re unr equit ed in the sense t ha t b enefi ts pro vided by the go vernmen t to taxpay ers ar e not n ormal ly in p ro portion to their pa y men t. They can be classified acco rding to the eco nomic function o f their base: income a nd The Pla ce for H eal th T ax es i n the W ider F i sca l Sys tem 25 pr ofi ts; payr oll and wo rkfor ce; pr operty ; g oo ds a nd ser vices; and com pulsor y so cial se curity con tribu tions. 1 T axes o n goo ds and ser vices (GST) inc lude, a mo ngst o t her s, sales taxes, value-added taxes (V A T), excise taxes a nd t axe s levie d o n t he im p o rt and export of g oo ds a nd ser vices. They are levied on the p roduction, extraction, sale, transf er , leasing o r deliver y of g o ods and the r endering of ser vices; or in res p ect of the use of goods, per mis sion t o us e goods or t o perform activities. They ar e oft en c a tego rise d as indir ec t taxes as they ar e generally no t levied dir ect ly on the perso n w ho is su pposed to bear the b urd en of the tax, bu t are ra t her im p osed on certain transaction s, pr o d ucts or even ts. Governmen ts generally co llec t the tax from p roducer s and dis t ribu tor s a t vario us poin ts in the value ch ain, while the bur den of the tax falls in princi ple o n consum ers assumin g t ha t it will be p assed on t o them in the prices cha rged b y su pp liers. 2 H ea l th taxes ar e generally levied in the fo r m o f exci se du ties. Excise du ties, un like o t her g eneral goods and ser vices taxes, ar e le vied only o n specific goo ds a nd ar e usually assessed by r efer ence to the weigh t, volum e, stren gt h o r quan t i ty of the p roduct and ma y be comb ined in s om e cases with the value o r sometimes calculated o n a va l ue basis o nly . 2 H ealth taxes ar e levied on goods that ad versel y aff ect hea l th such as alcoho l, tobacco , SSBs and certain foods (e.g. con fectiona ries, chocola te, ice cream s, s alt, fa ts, etc.). They can be levie d dir e ctly on the co mponen t tha t crea tes nega tive health effects (e.g. alcohol v olume , gram o f suga r , sa l t or sa tura ted fat) o r on the pr o d uct that co ntain s t he co m p one n t tha t is harmful to co nsum er health (e.g. per litr e of so ft drink or alcoho lic beverage o r p er pack o f cigaret tes). They can also b e levied w hen these com ponen ts or p roducts ar e used as in puts in the p roduction p rocess. En vironm en t ally re l a ted taxes typically o verlap with health taxes in tha t they correct externalities linked to the en viro nment a nd often t o he alth as well. En viro nmen tal ly r elat e d taxes a re taxe s whose t ax base is a ph ysical uni t tha t has a p ro ven, s pecific, nega t iv e impact on the en viron men t. 3 They incl ude taxes o n energ y (CO 2 taxes, taxes on en erg y pr oducts such as fos sil fuels and e lect ricity), tran sport, p ollu tion (taxes o n air pollu tion, H eal th T axes: P ol ic y a nd Pr actice 26 ozo ne-depleting s ubstances, wa ter pollutio n or wast e mana gemen t) and reso urces (m ining, fres h water , san d, etc.). Some o f thos e taxes ha ve an indir ect p osi tive im pact on health and , in this res pec t, they could be con sidered as health taxes. The V A T in teracts with exci se du ties. Excise du t ies ar e part of the V A T base, meaning tha t V A T is usually lev ied on the t otal va lu e of the p roducts, incl usiv e of ex cise duties . Ther efor e, an in crease in ex cis e d uties will als o incr ease t he V A T tha t has to be p a id. 2 2.2. The revenue-raisin g c a p acity o f hea lth tax es T ax-to-GDP ra tios and tax structures va r y significan tly acr oss coun tries and b y coun tr y inco me grou ps. A cross the coun tries cover ed by the OECD Global Reven ue S tatistics da tabase, on a verage , t he tax-to-GD P ra t io is 14.8% in 2017 fo r low-inco me coun tr ies, 18.6% f or lo wer -middle-incom e coun tr ies, 21.5% f or up p er -middle-income co untries and 32.6% f or high income. b T ax str uctur es als o var y widel y acros s coun tries and coun tr y gro ups. E ven if all coun t ries r ely ext ensive ly o n t axes on g o ods and ser vices (between 9% and 11% o f GDP) (Figur e 2.1 ), co untries use a mor e diversified ran ge o f t axe s to ra ise reven ues when their per c a pi ta income in creases (Figure 2.2 ). T axes on g o ods and ser vices rep resent e d 63% o f tax reven ues in lo w-incom e c o untries in 2017, bu t only 34% in high-income co untries. H igh-income co untries re ly significan tly on person al income taxe s and so cial se curity con tribu tions, while these tax categ ories ar e utilis ed less in less developed coun t ries. b The OECD Global Re venue Statistics database covers 98 countries. Based on W or ld Bank income groups: 8 low-income countries, 22 lower-middle-income countries, 26 upper-middle- income countries and 42 high-income countries. The Pla ce for H eal th T ax es i n the W ider F i sca l Sys tem 27 0 20 40 Low-income Lower-middle income Upper-middle income High-income Other taxes Taxes on goods and services Taxes on property Taxes on payroll and workforce Social security contributions Taxes on income, profits and capital gains of corporates Taxes on income, profits and capital gains of individuals F ig. 2.1. Level and str ucture of taxes, as a % of GDP , 2017. Source: OECD Global Revenue Statistics database. Note: This figure includes only countries for which there is information available in the OECD Global Revenue Statistics database. 0 20 40 60 80 100 Low-income Lower-middle income Upper-middle income High-income Other taxes Taxes on goods and services Taxes on property Taxes on payroll and workforce Social security contributions Taxes on income, profits and capital gains of corporates Taxes on income, profits and capital gains of individuals F ig. 2.2. T ax structure, as a % of total tax revenues, 2017. Source: OECD Global Revenue Statistics database. Note: This figure includes only countries for which there is information available in the OECD Global Revenue Statistics database. For some categories, the total does not exactly round up to 100% as averages are considered. H eal th T axes: P ol ic y a nd Pr actice 34 qua n tity sold (qua ntity eff e ct). A dro p in demand will not o n ly r educe the reven ue fro m health taxes, it will also resul t in lo wer V A T r even ues. Which effect will prevail depends o n the price elastici ty of the demand cur ve. Th e mo re e lastic the deman d is, the higher the likelihood t ha t upon a n incr ease in the price, r e ven ue will drop (the q u an tity effect do mina tes the price effect). The com bina tion of the p r ice an d quan t i ty effects res ults in a no n-linear re la tions hip between the t ax ra te and tax r e ven ues. 6 A wide ran ge o f other factor s determines the re la tion shi p b etween health tax rat es an d tax reven ues. An incr ease in t ax ra tes ma y induce hou seholds t o a void the tax incr ease by shifting t o other mor e lig h tly taxed con sump t io n go ods. The r even ue impact of a tax incr e ase will t her efor e a lso depend on the tax ra tes lev ied o n close substi tut es and the ext ent to which tax bas es a re b road or n arr o w . The im pac t o f a health tax increase will a lso depend on the exten t to which the tax incr ease is passe d o n to cons umers in the fo r m of h igher after -t ax p rices. If p roducers r educe the con sum ption good ’ s befor e-tax price in respo nse to a health tax increase, the co nsumer might n ot ha ve to pa y a higher after -tax price; inst e ad, p roducers w ould absorb (pa rt ially or fully) the tax increase thro ug h a r eduction in their p rofi t mar g in o r b y lo wering the wag es t hey pay t o t heir w or kers. Th e increase in health tax r even ues ma y t hen be o ffs et b y low er income tax reven ues. I n fact, the reven ue impact in res p on s e to a ch an ge in the befo re-tax p r ice will dep end o n w hether health taxes a re levied on a n “ ad qua ntum ” or “ ad valor em ” basis, an d t his eff ect is fur ther enhanced thro ug h the V A T , w hich is levied on to p of health excise taxes. Finally , il lici t trade and o pportuni t ies fo r cross-bor der shop ping a re o ther fac to rs that migh t hav e an im pact on the reven ue poten tia l o f health taxes. I n theor y , on e c o uld tr y to find the level of a heal th tax rate tha t would maximise health tax reven ues. H owever , the discussio n in the pr e viou s paragra phs indica tes tha t a wide ran ge o f f acto rs has to be ta k en in to accoun t and tha t in practice, this is less s t raigh tfor war d t ha n it looks a t first sigh t. In additio n, t ax econ omi sts wo uld argue tha t gov er nmen ts sho uld not set tax ra tes to maximise tax reven ues bu t t ha t the y sh ould set ra tes to m aximise so cial welfa re . A reven ue maximising tax ra te is indeed no t nec essa rily an The Pla ce for H eal th T ax es i n the W ider F i sca l Sys tem 35 “ optimal ” tax rat e as i t, fo r instance, does no t ta ke in to acco un t t he ma in health tax goal (i.e. corr e cting fo r negati ve externali t ies an d internali ties). N e ve rt hele ss, incr e asin g health tax rat es is exp ected to incr ease t ax reven ues as em pirical ev idence s ho ws t ha t, in man y coun tr ies, the tax ra tes ar e ver y likely no t s et a t t heir tax r even ue maximising poin t. Fo r alcoholic be vera ges, the emp irica l lit erat ure s ug ges ts tha t the price elastici t y o f demand is relatively inelastic . 7 E vidence fo r F rance , P olan d and S pain suggests tha t tax ra tes for beer and win e ar e well below the r even ue maximising poin t while t he evidence fo r sp irits is inco nclus ive . 6 Regar ding cigar ettes, the price elas ticity o f deman d also se ems t o b e re la tivel y inelastic. 8 , 9 The relatively inelast ic demand of tobacco has in duced ma n y OECD coun tr ies t o incr ease t ax ra tes on ciga rett es gradually o ver time to re la tivel y hig h levels. Thi s gives rise to the q uestion: d oes the tax rat e re main belo w the negati ve sp il l-o ver effects induced b y smoking? H ow ever , tax rate s in develo pin g and emergin g coun tr ies a re typ ica lly far below the ra tes set in OECD co untries. St udies fo r both In don esia an d L a tin America and the Caribbean ha ve fo und that heal th tax reven ues could increase b y abou t 30% f ro m raising t obacco excise taxes by 50% per pack. 8 , 10 O n the other ha nd, fo r t axes o n SSBs the ca pacity o f raising r e ven ue by in creasin g t ax ra tes could be mor e limited as the dema nd fo r SSBs seems con siderably m or e elast ic. 11 , 12 H o wever , as the tax base for SS Bs is larger tha n for o t her p roducts, there is poten tia l to ra is e a modera te amo un t of tax reven ue from in creasin g the taxatio n of these prod ucts as well. I n additio n to increasin g t ax ra tes, there migh t b e subs tan t ial reven ue poten tia l fro m extending health taxes t o other p roducts that g enerat e nega tive externalities linked t o health. H e alth taxes co u ld a im a t red ucing nega tive externalities o n health ou tco mes gen erated fro m t he co nsum ption of f o od or in puts u sed in t he p roduction o f cert ain types o f food t ha t ar e harmful to health such a s plastic a nd pesticides. The r ela t io n b etween en vironm entally rela ted taxes and h e alth taxes r emain s an ar e a tha t has received li ttle at tentio n in t he tax policy deba te. En viro nmen tal ly r elat e d exci se taxes penalis e the pr oduction and con sump tion of en vironm ental “bads ” to imp ro ve en vironm ental ou tcomes. Cer tain en viron men t ally r ela ted t axes co uld b e con sidered as health taxes H eal th T axes: P ol ic y a nd Pr actice 36 to the exten t tha t some pollu tan ts ha ve a direct nega tive im p act on h ealth. F ur thermor e, there is incr easing evidence that ex cessive co nsum ption o f cert a in food item s, such as m e a t, c a n be harmful for health while a t the same time i ts produ ction pla ys a significan t ro le in the emissio n of CO 2 and ther efor e genera tes nega tive externalities both linked to h ealth and the en vironm ent. H ig her taxes o n fossil fuels ma y induce people t o le a ve their car a t home a nd c yc le or walk, which will crea te p osi t iv e hea l th externalities. H ow to de sign green and h ealth-fr iendly tax r efo r ms r emains a n area tha t deser ves fur ther wo rk. The COVID-19 crisi s crea tes an o pportunity f or a “health-fr iendly a nd green ” tax refo r m. The crisis sh ould ind uce coun t ries to r e co nsider the use and de sign of health taxes, inc luding in develo ping co untries. Public r evenu es as a sha re of GD P are expected to decrease wo rldwide, inc ludin g in low- a nd middle-incom e c o untries. As co untries mo ve to re sto re their pu blic fina nces beyond the CO VID-19 crisis, ma ny o f them wil l ha ve to i m plemen t tax measur es at some s t ag e in the futur e. While i t is now widel y acknowledged tha t the reco ver y f ro m the C O VID-19 crisis should be green, the pu blic deba te has p ut less em phasi s on the fact tha t the reco ver y should also be health-fr iendly . H ealth taxes ar e p articularly a ttractive tax instrumen ts to incr e ase r even ue in t he sh ort r un in coun tries with low adm inistra tive ca pacity an d with na rro w income tax bases b eca us e of a la rge info rmal econo my . In fact, the argum ents in fa vour o f he alth taxes a re partic ularl y stro ng in the con text o f the COVID-19 pa ndemic as sm oking and o besity , as well as local air pollu t io n, ar e lin k ed to incr ease d risk facto rs of COVID-19. 2.4. H ea lth tax es int erac t with other tax es A discussion o n the optimal level o f health tax rates sho uld incl ude in its scope and evalua t io n of the op timal mix bet ween health (a nd o ther) excise taxes an d the V A T . While the level o f indirect tax reven ues in t he O ECD has been rela tively co nstan t ov er time, this tren d hides a chan ge in the mix of co nsum ption taxes. Coun tr ies ha ve gradually mo ved awa y from s p ecific con sum ptio n t ax es, inc luding trade- re la ted impo rt and export d uties, The Pla ce for H eal th T ax es i n the W ider F i sca l Sys tem 37 to wards a n increased use of the V A T . The stren gt hened r ole of the V A T has been overall a sto r y of grea t success. The op timal design of health taxes and the V A T needs to be int eg ra ted. Optimal tax p olicy calls for a b road V A T bas e wher e all goo ds an d ser v ices ar e le vied a t a standa rd V A T rate wi t ho ut the use of r educed ra tes. H e alth excise taxes tha t are levied in additio n to the V A T play then a cen tra l r ole in the taxatio n of unhealthy g o ods. In r ea li ty , ho wever , man y coun t ries im plemen t reduced V A T rat es and these generally co ver food and, in some coun tr ies, beverag es. I n these circumstan ces, there a re ar guments t o excl ude alcoholic beverag es and SSBs fr om the lis t of p roducts tha t benefit fro m t he red uce d V A T ra tes, des pi te the fact t ha t this may in crease tax com plexity . Similarl y , coun t ries tha t de cide to levy a reduced ra te on ra w food may still con sider t axin g pr o cessed food at the stan dar d V A T ra te. I n practice, almost all OECD coun tr ies a ppl y a standar d V A T rat e to alcoholic beverages while man y a pply a r educed V A T rate t o other be verag es. 2 If, in t ur n, unhealth y con sump t io n items benefi t f r om a r educed V A T rat e (as is the case fo r SSBs in ma ny co untries) and a V A T refo r m is no t (e.g. p oli tica lly) feasi ble, this tax reduction co uld b e com pensat ed by us ing higher ex cise taxes. T ax differ entia t io n for unhealth y prod ucts can also b e im plemen ted through higher V A T rat es, w hich is f or ins tance the case in India wher e tobacco pr o d uc ts a nd suga r y dr inks ar e taxed at higher V A T/GST ra tes, al though the use of exci se taxes rema ins the pr eferred tax p oli c y cho ice. Countries ma y cons ider re balancing the tax mix to ward s mo re h ealth excise taxes ra ther than incr easing V A T ra tes fur ther . After the 2008–2009 crisis, ma ny O ECD coun t ries rai sed t heir s t an dar d V A T ra tes in or der to res tor e their budg ets, and ra tes ar e no w rela t iv ely high in ma ny co untries. This rai ses the questio n of whether a nd to wha t exten t t her e is s co pe to con tinue in creasin g st a ndar d V A T ra tes. On the other han d, there r emain s scope to br oaden V A T bases in man y coun tr ies. I n rela t io n to hea l t h, there is an addi tional ar gumen t that needs to be con sidered. M an y hea l th-f riendly con sump t io n goo ds suc h as bi o-pr o d ucts ar e typically mo re expensiv e to pr o d uce and a re there fo re re lati vel y more e xpensiv e fo r t he co nsumer to b uy . This effect is exacerba ted by the V A T , w hich i s levied on the price irres p ect iv e H eal th T axes: P ol ic y a nd Pr actice 38 of the q u ality o f t he p roduct. This sugges ts tha t excise (incl uding health taxes) ma y hav e an im portant r ole to pla y in the tax mix. H igh import tariffs levied on unhealth y im p orted p rodu cts wi ll no t lead to better heal th ou tco mes if co nsum ers can s hift to locally pr oduced goods that a re a c los e subs t it ute t o the im ported goo ds. I mport du ties resul t in price diffe ren tiatio n between domes tical ly a nd for eign-prod uced goods and ther eby me re ly enco urage con sumers to su bstit ute co nsum ption to ward s it ems p roduced loca lly (see also C ha pter 8). I nstead, i t may p ro ve mor e effective fro m a hea l th perspe ctive to l ow er import tariffs on the unhealth y pr o d ucts and in troduce exci se taxes on f or eign and dom estically pr o du ced unhealth y item s. H ow ever , higher im p o rt tariffs ma y pr ov e effective in s mall coun tr ies tha t do not p roduce close su bstit utes in the do mestic econo m y . I ndeed, small islands s uch as B ermuda, P alau , Fiji a nd S eychelles levy impo rt tariffs on SS Bs. 13 2.5. G ene ra l tax cons id era tions p ro v i din g guid ance when designing taxes This sect io n describ es the gen era l p rincip les tha t ar e ap plied to design individ u al taxes a nd the o verall tax system. The f ollowing section will t hen a pply these princi ples to health taxes. 2.5.1. Effici enc y T ax policies sho u ld aim a t being efficien t. An efficient tax syst em is designed in such a wa y that the a fter -tax mark et e quilib rium stay s as close as possibl e to the mark et equilibrium tha t wo uld ha ve o ccurred in the absence o f t axa tion. Put di ffer ently , the t ax sys tem sho uld induce ag ents t o cha nge their beha viour as lit tle as p ossi ble in r esp o nse to the t axe s levied. The efficiency cr i terion ind uces tax system s to be as neu tral as p ossi ble to m inimise discriminatio n in fa vo ur of , or a gain st, an y p a rt icular econo mic cho ice. I n cer tain cases, ho wever , t her e are g o od reason s to dist ort b eha viour . This is the case in The Pla ce for H eal th T ax es i n the W ider F i sca l Sys tem 39 the pr es ence o f p osi tive o r negati ve sp il l-o ver effects where an effici en t t ax system w ould induce a gen ts, fo r instan c e, t o internalise externalities, as w ell as in the pr esence of other m ark et failure s. I n this case, there a re effici ency ar gumen ts for taxe s to cr e a te a disto r tion. Finally , for taxes t o be effect iv e in in terna lisin g external effects, t he tax wo u ld ideally be le vied as close as possible t o the source o f the externality . 2.5.2. E qui ty A parallel bu t p ot entially conflicting ob j ective o f tax p olicy is equi t y . Ther e ar e differen t fo r ms o f equity : horizo ntal equity , w hich r equires tha t taxp a yers in an equal si tuatio n p a y an equal amo unt o f tax; and v ert ical equi ty , which req uire s that taxpa yers with a grea ter ab i li ty to con tribu te, pa y rela tively mo re tax. Gr eater effi ciency in t ax syst ems is usually con sisten t with stro nger ho rizon t al equi ty , while go vernmen ts ar e often faced with trade-offs between efficiency an d vertica l equity . While looking a t efficiency-equity trade-off s on a tax-b y-t ax basis is critical, it is n ot sufficien t. T o ensur e a coheren t tax system, i t is essen t ial to view the t ax syst em as a whole ra t her than con sider i ts differen t elemen ts in isola tion. I ndividual parts of the tax syst em ma y b e well-designed, b ut looking in isola t io n at o ne tax pr ovisio n or one type of tax can l ead to po o r tax polic y cho ices and sub-o ptimal econo mic an d so cial ou tcomes. 14 For insta nce, a n individ u al tax can be pr og r essi ve (r eg r essiv e), w hile the whole tax system is r eg r essive (p rogres sive). The distrib utio na l co nsequences o f tax mix shifts should be examin ed in concert with the p ublic s pending mix. Gr eater r eliance o n t axes tha t ma y be regres sive ma y actual ly incr ease t he a moun t of o verall redis tributio n due to the tax and tran sfer syste m if the spending associat e d with the r efo r m has pr ogressi ve eff e cts. In deed, a tax that ra is es significan t amo unts o f reven ue bu t is slightly r eg r essive ca n hel p to increase the ov era ll pr ogressi vity o f the tax and benefi t system if the tax r even ue is spent in a ma nner that benefi ts th e poo r . H eal th T axes: P ol ic y a nd Pr actice 40 The distrib utio na l im pac t o f the tax system sho uld a lso be consider ed from a lifetime perspective. Some taxes such as incom e taxes ma y be hig hly pr ogressi ve when co nsider ed in a g iv en p eriod, bu t ma y b e less p rogres siv e from a lif etime p ers pe ctive , as individ ua ls who ma y hav e low inco mes at on e time might ha ve higher inco mes lat er in life . 15 Finally , the ab i li t y to s hift the final tax burd en on to other taxpa yers will aff ect t he dis tribu tional im pac t an d the efficiency-equity trade-off s of a tax ref orm. The taxpay ers dir e ctly payin g the tax ma y not be the o nes ultima tely bearing the bur den of the tax. The in cidence o f the tax not o nly depends on beha vioural res p on s es bu t als o o n the degree of co mpetitio n and the linkages acr oss mark ets. 16 2.5.3. A dministrat ive simplicity , transpare nc y and tax certainty A dministra t iv e c a pacity needs to be t aken in to accoun t when designing the tax system. T ax r ules sho u ld be clear an d designe d wi th as m uch sim plicity as possib le in or der to minimise the tax co m pliance cos ts fo r househo lds and b usinesses and the enf or cemen t costs fo r tax administra t io ns. T ax r ules need to be trans par ent a nd give indi v id u als a nd b usines s es tax certain t y . T ax ru les tha t hav e nice efficienc y an d equi ty chara cteristics when designed on the tax policy drawing boar d might a chieve j ust the opposi te if the t ax administra tion does not ha ve the da t a, inco me t ax tools a nd ov era ll h uman and t e ch nical capaci ty to make the tax wo rk in practice. T ax com pliance cos ts can also be impacted b y the tax collec tion p rocess a nd, in r eturn, im p act the incidence o f a t ax. 16 2.5.4. T ax revenue-raising pot ential The am oun t of r e ven ues tha t can be collected do es ma tter . T axes allow go vernmen ts to raise reven ues, bu t t he ma rginal cost of ra ising these funds can be larg er t ha n the amo unt o f t he tax reven ue itself. A s poin ted out, taxes migh t disto r t beha viour and r esult in co m plian ce and en fo rcemen t The Pla ce for H eal th T ax es i n the W ider F i sca l Sys tem 41 costs. This exp lains wh y op t imal tax polic y does not a im at maximis ing tax reven ues, bu t ta ke s br oader welfar e considera tions a nd com pliance costs in to accoun t. 2.5.5. N on-tax syst em fac t ors tha t aff e ct the effici enc y and equit y implicatio ns of tax es A n umber of no n-tax system facto rs also ha ve a n im p act on the efficien c y a nd equi ty im plica tions o f t axes, whic h need to be ta ken in to co nsidera tion when designing efficien t and in cl usiv e t ax syst ems. 16 These incl ude, amo ng others: • The econo mic str uctur e, which inc lude s the functioning o f the ind ustr y that is a ffected by the tax, the econo m y’ s labour and ca pi tal in tensity a nd return s, the distribu t io n of incom e and w e alth, the pur chasing po wer of ho us eho lds across the in come di stribu t io n, info r mali ty levels, p rod uctivity levels, etc. • The info r mal econo my . The info rmal s ector h as an im pact on ho w coun tr ies ha ve designed an d c an r efo rm their tax systems. The tax system s ho uld be designed such that i t pr o vides incen t iv es to the info r mal sec to r to fo r malise and p reven ts formal bus inesses fro m becoming inf ormal. • Time h orizo ns. Equi ty-efficiency t rade-o ffs tend to be mor e significan t in the sho rt term than in the lon g run. Fo r instance, in divid uals who ar e consider ed as p oor toda y mig h t not be po or in the fu tur e and the nega t iv e distributio nal implica tions o f a pro-gr owth tax ref orm ma y b e o ver estimat e d when looking o nly a t short-term im pacts. On the other ha nd, behavio ura l eff ects of high tax rate s ma y b e higher in the lon ger r un as i t typically ta ke s time befor e agen ts chan ge their b e h a v i o u r. • The political econo m y . T ax decisions, s uch as the level o f the t ax ra te im p osed, may be infl uenced by political econo my co nsidera t io ns (e.g. su pra-na t io na l setting; in dus t r y lobb ying; pub lic oppositio n; populari t y o f t he measur es; the political part ies in po wer and the time to the next election). H eal th T axes: P ol ic y a nd Pr actice 42 2.6. Designing hea lth tax es to address ext ernalities 2.6.1. Ensurin g that the design of health taxes is effic ient an d effe ctive The costs o f t he nega tive health o utcom es genera ted by ha rmfu l p roducts fo r health ar e often n ot bo rne onl y b y t he co nsumer , b ut also by society as a whole . This ma rket fa i l ure is the main jus tificatio n for the im p osi t io n of a co r r e ctive health tax tha t aim s a t ind ucing co nsumers t o in terna lise these external costs. Other tax p olicy reasons f or im plemen t ing h ealth taxes incl ude time incon sistency of p ref erences (a p refe ren ce fo r short- term gra t ifica tion o ver lo ng-t er m heal th) and in fo r ma tion co nstrain ts (a lack o f kno wledge of the under lying heal th imp lic a tions o f consum ptio n of cert a in pr o d ucts). Standa rd econo mic the o r y sugge sts setting the tax ra te a t a le vel that in ternalises, a t the mar g in, the nega tive external eff ects of the con sum ption, o r to higher levels if the aim is t o a lso corr ect for time incon sistency of p refer ences or o t her ma rket failur es. 17 , 18 Determining the size o f the nega t iv e external ef fects is im p ortan t bu t extremely c hal lengin g. Significan t wor k to estima te nega tive external effects has be en undertaken r egar ding con sum ption o f tobacco and alcohol . Ho wever , even in the case of tobacco – wher e there i s a direct link bet ween co nsum ption o f a unit o f pr oduct and the ext ernal cost due to passi ve smo k in g, fo r exam ple – em pirical estimat es var y widely . F or alcohol a nd SSBs, i t is even mo re difficult as external costs depend o n exces s con sump t io n. W ith SSBs, nega tive ext ernal effects are ma inly asso cia ted to fina ncial healthcar e c osts, whic h ar e shar ed through p ublic insura nce. Em pirical evidence that guide s the setting of tax level s to in ternalis e the nega tive external effects of co nsum ption o f SSBs has incr e ased in recen t year s (see e.g. Refs. 19 , 20 ). The aim o f the t ax is t o offset externali ties and in ternalities witho ut pr e ve n ting the con sump t io n of the unhea l t h y goo d alt ogether . Regulatio n can be a mo re eff e ctive wa y of p reven t ing unhealth y beha viour , an d in this The Pla ce for H eal th T ax es i n the W ider F i sca l Sys tem 43 case the challenge lies in det ermining which g oo ds sh ould o r sho u ld no t be ban ned. 12 The effectiven ess o f a he alth tax will dep end o n a num ber of factor s, incl uding the exten t to which it is pas sed on by b usinesses to co nsumers in terms o f hig her p r ices; the r esp o nsivene ss o f con sumers to those higher prices, which also will dep end o n t he salience of the tax an d the im pact of those b eha vioural re sponses o n long-run health. While a detailed anal ysis is needed in each case, emp iric al evidence does suggest tha t, in general, health taxes ar e to a larg e deg r ee passed on to con sumers via higher prices, if in t r oduced a t a ra te that is s ufficien t ly high, they do alter co nsum ption beha viour , an d they can positivel y impact health ou tcomes. 4 , 17 , 18 , 21 A key decision co untries face in designing a h ealth tax is w hether t o a pply the tax to a p roduct or t o a n utrien t or pr o d uc t con ten t (e.g. alcohol vol ume, qua ntity o f sugar , salt or sa tura ted fat). A ppl ying a con ten t-base d tax can be expec ted to bett er targ et t he neg a tive h ealth effects of co nsum ptio n than a p rod uct-bas ed tax. In addi tion, it will also encourag e product im pro vemen t and inno vatio n by p rod ucers to r educe the con ten t of the taxed n utrien t (s ee e.g. Ref. 22 ). I f a pr o d uct-bas ed tax is chosen, a key cho ice is whether to a pp ly i t on an ad qua n tum or ad valo rem basis. Overall, ad quan tum exci ses – als o r eferred to as “ specific ” excises – ar e pr eferred to ad valor em excise taxes fo r a num b er of r eas o ns. An ad q uant um prod uct-base d tax can targ et t he nega tive health externali ty mor e closely than a n ad valor em tax. This is because the q uan tity of the p roduct, ra ther than i ts value, i s mo re c losely linked to the a mo un t of the unhealthy p roduct o f concern (e.g. s ugar , to bacco , a lcoh ol). A d valor em taxes ma y encourag e consum ers to switc h to low er cost bra nds ra ther than red ucing the qua n t i t y co nsumed of the unheal th y prod uct (“ trading do wn ”). A d quan tum exci se taxes also pro vide pr o ducer s less o pportunities t o attract con sumers and s t im ul a te con sum ption o f un health y pr o ducts thr ough price adj ustmen ts. 23 A d valorem tax es wo u ld also discourage e xpensiv e pr o d uct inno vatio n by p roducer s. Ano ther ar gumen t that fa vour s ad qua n tum taxes is tha t hea l thier pr o du cts might be mo re expens ive a nd that a n ad valorem H eal th T axes: P ol ic y a nd Pr actice 50 Annex T able A2.1 p resen ts dis aggrega ted info r ma tion o n health taxes a t t he co un t r y level tha t is con sidered in the de scripti ve a nalysis o f health tax reve n ues. Some coun tries mig h t lev y other health taxes o t her than those list e d in T abl e A2.1 bu t, as disaggrega ted info r ma tion was no t ava ilable in the da tabase, they were no t consider ed in t he r e ven ue analy sis. T able A2.1. Health taxes considered in the revenue analysis. Countr y T obacco Alcohol Other High-income countries Austria T obacco Beer ; wine; spar kling wine; special duty alcoholic drinks Beverage tax Belgium T obacco Spirits; consumption tax on alcohol and spirits; beer ; Inter mediate alcoholic products Fermented sparkling beverages; fermented fruit beverages; non- alcoholic beverages; coffee, sugar and syr up Canada T obacco (federal and provincial taxes) Liquor (federal taxes) Chile Cigarettes and tobacco Czech Republic T obacco products Alcohol and liquor ; beer ; wine Denmark Cigarettes and tobacco duties; duties on cigars, cheroots and cigarillos Duty on beer ; duty on wine; duty on spirits; duty on restaurant sales of alcoholic beverages Sales duties on chocolate and sugar ; ra w material duty on chocolate and sugar ; special tax on chocolate and sugar ; duty on ice cream; duty on coffee Estonia T obacco Alcohol F inland Excise on tobacco products Excise on medium, strong beer ; tax on alcoholic beverages Excise on sweetmeats; excise on non-alcoholic beverages; excise on cer tain foodstuffs; excise on margarines; excise on sugar products F rance T axes on tobaccos and matches; fees on tobacco stores T axes on wines, cider s and meads; taxes on alcohol; taxes on beer and mineral water T ax on cereals; fees on potash salt; tax on flour ; sur tax on appetiser s; tax on beet, sugar and alcohol; tax on food fats; tax on meat; sugar market fund tax ID:c0002-p1630 The Pla ce for H eal th T ax es i n the W ider F i sca l Sys tem 51 Countr y T obacco Alcohol Other Germany Duty on tobacco Duty on alcohol; duty on beer ; duty on champagne Duty on coffee; duty on sugar ; duty on tea; duty on salt; duty on beverages; duty on ice cream Greece Duty on tobacco products Duty on alcohol and spirits Duty on sugar Hungar y T obacco (central budget excise) Alcohol production duty; alcohol (central budget excise) Coffee (central budget excise) Ireland T obacco Beer ; spirits; wine, cider , per r y Israel On domestically processed tobacco products Italy Duty on spirits; duty on beer ; alcohol, spirits, liquor Duty on sugars; duty on bananas; duty on coffee; duty on cocoa; duty on olive oil; meat Japan Prefectural tobacco tax; municipal tobacco tax; tobacco tax; special tobacco tax Liquor tax Sugar excises Korea T obacco sales tax (local); tobacco consumption tax (local) Liquor tax Latvia Excise duty on tobacco Excise duty on alcoholic beverages; excise duty on beer Excise duty on coffee and non-alcoholic beverages Lithuania Manufactured tobacco Alcoholic beverages; wine and sparkling wine; beer ; other alcoholic beverages Sugar Luxembourg Excise duties on tobacco (par t on national production); excise duties on tobacco T ax on the consumption of national alcoholic beverages and spirits; excise duties on impor ted alcoholic beverages; excise duties on beers (par t on national production); excise duties on nationally produced alcoholic beverages Excise duties on fermented spar kling beverages; excise duty on sugar T able A2.1. (Continued) (Contin ued) H eal th T axes: P ol ic y a nd Pr actice 52 Countr y T obacco Alcohol Other The Netherlands Excise on tobacco Excise on spirits; excise on beer ; excise on wine Excise on sugar ; excise on soft drinks New Zealand T obacco On alcoholic beverages; beer ; wine; spirits Refined sugar Norwa y Stamp duty on tobacco T axes on spirits and wines; excise on beer Chocolate and sweets; sugar ; non-alcoholic beverages P anama Cigarettes Beer ; wine and liquor Soft drinks P oland On domestic and impor ted excise products of tobacco On domestic and impor ted excise products of spirits, beer , wine P or tugal Excise duties on tobacco Excise duties on beer ; excise duties on alcoholic beverages; excise duties on alcohol Seychelles T obacco Alcohol (beverages spirits and vinegar) Singapore T obacco Liquors Slovak Republic On tobacco products On alcohol and liquors; on beer ; on wine Slovenia T obacco; duty-free shops – tobacco Alcohol and alcoholic drinks; duty-free shops – alcohol and alcoholic drinks Spain T obacco Beer ; wine; alcohol Sweden T obacco tax T ax on spirits; tax on wine; tax on beer and soft drinks Switzerland Excises on tobacco Beer tax T rinidad and T obago Cigarette products Beer ; alcohol products; malt beverages T u r key Sugar consumption taxes United Kingdom T obacco Beer ; wines, spirits, cider and perr y United States T obacco taxes federal government; T obacco taxes state and local government Alcohol taxes federal government; alcohol taxes state and local government Sugar tax federal government Uruguay T obacco products Beer Non-alcoholic beverages Upper-middle-income countries Argentina T obacco products Alcoholic beverages; beers Non-alcoholic beverages Botswana Alcohol levy T able A2.1. (Continued) The Pla ce for H eal th T ax es i n the W ider F i sca l Sys tem 53 Countr y T obacco Alcohol Other Brazil T obacco Beverages Bulgaria T obacco products Beer and other alcoholic beverages Colombia T obacco Beer ; liquors Costa Rica T obacco Alcoholic beverages Non-alcoholic beverages Dominican Republic T obacco products Alcoholic beverages Ecuador Cigarettes Beer F izzy drinks Guatemala T obacco and derivatives Beer ; alcoholic beverages Soft drinks; other beverages Kazakhstan T obacco Alcohol Mauritius T obacco products Spirits, liquor s and alcoholic beverages Sugar content of soft drinks; sugar brokerage L ower -middle-income countries Côte d’Ivoire Ad valorem tax on tobacco; T ax on tobacco for spor ts development; T ax on tobacco T ax on drinks Egypt T obacco and cigarettes El Salvador Cigarettes Beer Soft drinks; special contributions sugar Honduras Cigarettes Beer ; liquors Soft drinks Kenya Sugar levy Nicaragua Cigarettes Beer ; alcoholic beverages Soft drinks Philippines T obacco Alcohol Senegal T axes on tobacco T axes on alcohols T axes on fats; tax on colas; tax on teas; tax on coffee Solomon Islands T obacco Beer ; spirits T unisia T obacco Alcoholic drinks Lo w-income countries Burkina Faso T ax on tobacco and matches Drinks T axes on coffee, tea and cola nuts Congo, Democratic Republic Domestic excises and excises on impor ts – tobacco and matches Domestic excises and excises on impor ts – beverages T able A2.1. (Continued) (Contin ued) H eal th T axes: P ol ic y a nd Pr actice 54 Countr y T obacco Alcohol Other Mali Local taxes on tobacco T axes on alcoholic beverages Special tax on drinks Niger Domestic tobacco and cigarette tax Alcoholic beverages tax Uganda Excise tax on cigarettes Excise tax on beer ; excise tax on spirits/ waragi Excise tax on soft drinks; excise tax on sugar Source: OECD Global Revenue Statistics database. References 1. OECD . Re ven ue Sta tist ics I n ter pr eta tive G uide; 2018a. h tt ps://ww w .oe cd.o rg/tax/t ax -policy/o ecd-classifica t io n-taxes-in ter p reta t iv e-guide.pdf . 2. OECD . Consum ptio n T ax T rends 2018: V A T/GS T an d E xcise Rat es, T r ends a nd P olicy Issues. Paris: O ECD Publishing; 2018b . 3. OECD . Revenue S tat i st ics 2019. Pa ris: OECD Publi shing; 2019. 4. W o rld Health Or ganiza tion. U si ng Price P ol icies t o Pro mot e He alth ier Diets, 2015, h ttp s://ww w .euro .who .int/__da ta/assets/p df_file/0008/273662/U sing-price-policies -to-pr omot e-he althier -diets.pdf?ua=1 (accesse d o n 11 J une 2020). 5. OECD . The H eavy B urd en of Obes ity : The Ec onom ics of Pr e ven tion, O ECD He alth P olicy Studie s. Pa r is: OECD Pu blishin g; 2019. 6. Bi ttschi B , et al. Price Elast iciti es a nd I mpl ied T ax Reven ue fo r A lcoho lic Bever age s E vidence fr om Po land , F ra nce a nd Sp ai n, 2019. h ttp://www .wifo .ac.a t/w wa/p ubi d/ 61732. 7. N elson J . M et a-anal ysis of alco hol p rice and inco me elasticities – W ith corr e ctions f or pub licatio n bias. H eal th Eco nomi cs Review . 2013; 3(1). D OI: 10.1186/2191-1991-3-17. 8. Goo dchild M, San doval R, B ela usteguigoi ti a I. Genera t ing r e ven ue by ra ising to b acco taxes in Latin America and the Caribbean. Revista P ana merica na de Sal ud Públ ica. 2017; 1–7. DOI: 10.26633/r psp .2017.151. 9. Chelwa G, V an W a lbeek C. Does C igar ette Dema nd Re spo nd to Price I ncrease s in U gan da? Price Elast ici ty Esti mat es usin g the U ganda N a tiona l Pa nel S urvey and Deaton ’ s method, BMJ Publishin g Grou p, 2019 . ht tps://bm jopen.bm j.com/co nt ent /9/3/e026150 . 10. Ahsan A. I mpact of incr easing to bacco tax on go vernment r e ven ue and tobacco con sum ption. 2014. DOI: 10.13140/RG.2.1.3350.2563. 11. Andr eyeva T , Long M, B rowne ll K. The impact o f food prices on co nsum ption: A systema tic review of resear ch o n the price elastici ty of dema nd fo r foo d. A mer ican J ourna l of Pu blic H ealt h. 2010; 100(2): 216–222. 12. Allcott H, Lockwood B, T aub insky D . Regressi ve sin taxes, wi t h an a pplica t io n to the op timal so da tax. The Quarterl y J ou rnal o f Econ omics. 2019; 134(3): 1557–1626. T able A2.1. (Continued) The Pla ce for H eal th T ax es i n the W ider F i sca l Sys tem 55 13. Cawley J , et al. The econo mics of taxes on s ugar -sweetened beverages: A r e view of the effects on p rices, sales, cross-bor der shop ping, a nd consum ption. Annual Re v i ew of N utrit ion. 2019; 39(1): 317–338. 14. Slemr o d J , Gil li tzer C. I nsigh ts fro m a T ax S ystems P erspe c ti ve. CESifo Econ omic St udies; 2014. htt ps://academic.oup .c o m/cesifo/a rticle/60/1/1/380383?login=tr ue 15. Levell PB. Re dis trib utio n fro m a L if eti me P erspe cti ve; 2015. 16. Br ys B , et al. T ax design f or incl usive econ omi c gro wth. OECD T ax a tion W ork in g P apers, No . 26, OECD Publishin g , P aris; 2016. D OI: 10.1787/5jl v74ggk0g7-en. 17. Sassi F , B elloni A, Ca pobianco C. The Role of F iscal P olicie s in H ealt h Prom otio n, OECD H ealth W orkin g Pa p ers, N o . 66; 2013. 18. Ma r r on D M. Should W e T ax U nheal th y Fo ods an d D rin ks? U rban-Br o okings T ax P olicy C entr e W orking P aper , De cember; 2015. 19. W ang C, Coxson P , Shen Y , G oldma n L, Bibbin s-Doming o K. A Pe nn y-Per -Ounce T ax o n Suga r-S weetened B everages W o u ld C ut H ealth and Cost Bur dens o f Diabetes. H eal th A ffa irs. 2012; 31(1): 199–207. 20. Long M, et al. Cost effectivenes s of a sugar -sweetened beverage exci se tax in t he U .S. A merican J ournal o f Preven tive M edici ne. 2015; 49(1): 112–123. 21. Allcott H, Lockwood B, T aub insky D . Should we tax suga r-sweeten ed be vera ges? An o ver view of theory and evidence. J ournal o f Econo mic P erspecti ves. 2019; 33(3): 202–227. 22. Briggs A, M ytton O , K ehlbacher A, T iffin R , Elhussein A, Rayner MS, J ebb T . H ealth im pact assessmen t of the UK soft drinks ind ustr y levy : A co mpara tive risk assessm en t modelling stu dy . Lancet Public Heal th 2017; 2: e15–e22. 23. Chaloup ka F , et al. NBER W ork ing P aper Series. C igar ette Exci se T ax a tion: Th e I mpa c t o f T ax S tructur e on Prices, Reven ues, an d Ci gare tte Smo kin g, 2010, ht tp:// ww w .nber .org/pa p ers/w16287. 24. Crawf ord I A. The Fa t T ax. London: I nstit ute o f Fisc al St udies; 2004. 25. OECD/KIPF . The Distri bu tiona l Effects o f Cons um ptio n T ax es i n OECD Cou n tries, OECD T ax Po lic y St udies, N o. 22, O ECD Publishing, P aris; 2014. DOI: 10.1787/ 9789264224520-en. 26. Gruber J , K oszegi B. T ax incidence when individuals ar e time-inconsis tent: The case of ciga rette ex cise taxes. J ourna l of Pu blic Ec ono mics. 2004; 88(9–10): 1959–1987. 27. F uchs A, González I caza F , Paz D . Distribu tion al E ffects of T obac co T axatio n: A Com par a tive A nal ysis; 2019. 28. M ytto n OD . T axing unhealth y food and drinks to imp rov e hea lth. Briti sh Medica l J ourna l, 2012; 344. 29. J eff C, Sarah H. St r uctu re a nd T actics of t he T o bacc o , Alco hol, a nd S uga r y Bevera ge I ndus tries. Edinbur gh: U niver sity o f Edinbur g h; 2019. 30. H e ady C. Th e Eff ect of A gein g on the F ina nci ng o f S ocia l He al th Pro v isio n, OECD , Fiscal Sustaina bility of H ealth Syste ms; 2015. 31. I g lesias R. Incr easing excise taxes in the pr esence of ilegal cigaret te market: The 2011 Brazil tobacco r efo r m. Rev P ana m S al ud Pub lic a. 2016; 40(4): 243–249. This page int entionally left blank © 2022 W orld Health Organization (WHO) https://doi.or g/10.1142/9781800612396_0003 This is an o p en access article p ublish ed by W o rld Scientific Pub lishing Com pany o n behalf of WHO and dis tribut ed under the terms o f the Crea t iv e Common s A ttribu t io n-N onCommer cia l-Sha reAlike 3.0 IGO (CC BY -NC-SA 3.0 IGO) License . Chapter 3 Protecting and Promoting Health Through T axation: Evidence and Gaps L isa M P owel l * and F r ank J C haloupka * *    University of Illinois Chicago, USA. W e pr ovide evidence o f t he exten t to which health taxes o n tobacco , alcoholic be ve rages, s ugar -sweetened beverages (SS Bs) and other f o od and n utrients red uce demand fo r t hese pr o d ucts. W e open with a concep tual framewo rk that o utlines the mecha nisms thr ough w hic h health taxes im p act con sum ption and h ealth out comes, and h o w substi tution a nd tax avo idance behavio urs ma y affect the net impact of the taxes. W e then review emp irical e vidence on the tax r espons iven ess o f demand based on estima tes from both dema nd models and tax evalua tions, sho wing that higher p r ices/taxes o n prod ucts are associated wi th low er quan tity deman de d fo r t axed p roducts. W e als o evalua te the differ ential impacts of the health taxes b y demograp hic and socio-e con omic sta tus (S ES), finding tha t deman d fo r tobacco and suga r y beverag es is mo re price sensi t iv e amo ng low er SES popula t io ns. N ext, we exam ine the exten t to which health taxes ma y induce subs t it ution to o ther prod ucts and the exten t that con sumers m a y underta k e explici t tax av oidance beha viours such a s cros s-bord er sho pp ing, as these affect the net impact of a gi ven tax. Finally , we r e view the e vidence o n t he im pac t o f health taxes on h ealth out comes – i.e., if the taxes tra nsla te int o impr ov emen ts in hea lth a nd r eductions in o ther H eal th T axes: P ol ic y a nd Pr actice 58 con sum ption-r ela ted r isks. W e find that while higher tobacco an d alcohol prices/taxes a re associated with ad van tageousl y red uced health and socia l ou tcomes (i.e ., lower e d levels o f tobacco-rela ted cancer an d res pira tory dis ease and lo wered level s of alcoh ol-r ela ted liver cirrhosis, acciden ts and violen t acts), there is le ss evidence on the eff ectiveness o f t axes o n SSBs and o ther foo ds o n health ou tcomes. Overall, the evidence sho ws tha t health taxes ar e effective fiscal measures f or r e d ucing the ha rmful consum ption o f products suc h as tobacco , alcohol a nd SSBs and a re an im port an t tool tha t policy maker s c an im plemen t to ach ieve goals o f red ucing the bur den of no n-comm unicabl e diseases and other co nsump tion-rela ted adver se out comes. H ea l th taxes ar e us ed to p ro mote h ealth and ra ise reven ue. The focus of this cha pter i s on p ro v iding evidence o n t he g oal of health pr omo t io n. I n this rega rd, as pa rt of a p ublic h ealth strat eg y to pr om ot e health, health taxes ar e used as a fisca l policy instr umen t aimed a t reducin g individuals ’ harmful con sump t io n of pr o du cts such as to bacco , alcohol an d suga r -sweetened be vera ges (SSBs) wi t h the ultima te goal of r e d ucing adver s e health and other o utco mes linked to the con sump tion of s uch pr o ducts. 1 , 2 Figur e 3.1 depicts the co ncept ua l framewo rk t hr ough which health taxes ultima tely ar e expec ted to im pact c o nsum ptio n and health. As di scusse d in the in t r oduction of this book, the ra tionale f or a heal th tax is to correct individ ua ls ’ harmful levels o f consum ptio n of certain p rod ucts, given tha t t hese pr o d uc ts ’ prices do no t accoun t fo r their external costs. The idea is tha t t he fiscal p olicy instrumen t of taxatio n chang es rela tive prices o f t axed v ersu s un t axed p rod ucts which, in turn, im p acts beha v io r re la ted to co nsum ptio n. The key mecha nism thro ugh which this o ccurs is tha t t axes g eneral ly r esult in higher p r ices fo r cons umers, kno wn as tax pass-thro ug h (see Chap ter 4 of this book fo r a discussion r elated t o factor s aff e cting tax pass-thr ough). A ccor ding to the la w of dem and f or no rmal goods, an incr e ase in the price o f a given p roduct, all else constan t, will reduce the quan tity dema nded of tha t pr o duct. H ow la rge or s mall the reduction depends on the p r ice elastici ty of deman d (the percen t ag e chang e in t he qua n tity dema nded resultin g from a 1% in crease in price). P rice elasticity is a function of va r io us factor s, includin g con sumer pr eferen ces and whether the good is a necessity o r a luxur y item, ho w m uch o f a c o nsumer ’ s incom e Pr otect in g and Pr omo tin g H ea lt h Thr ough T axat ion: E vidence a nd Gaps 59 is spen t on tha t good and the a vailab ility o f substi tut es. F or exa m ple, if a con sumer has a str on g pref erence f or a good or i t is a necessi ty for them then they wi ll tend t o be rela t iv ely less p r ice r espon siv e; if they spend a large pr oportion to their inco me on the p roduct then price ma tters m or e to them and they will tend to be mo re price r esponsiv e; and, if ther e are m an y no n- taxed substi tute s a vailab le then they wi ll also b e mo re p rice respon siv e as they can easily satisfy their demand b y substit uting to sim ilar no n-taxed pr o d ucts. Fo r man y years, co nv ention al wisdom held tha t the demand fo r addic tiv e pr o d ucts was unre spons ive to cha nges in p r ice. A dvances in econo mic the o r y a nd em pirical e vidence sho w that this i s not n ecessarily the case, with deman d fo r addic tiv e pr o d ucts somewhat r esponsi ve to p rice in the sho rt r un, an d mo re r esponsi ve to price in the lo ng run. 3 O ver the pas t few decades, extens ive evidence has a ccumula ted on the im pact of prices a nd t axe s on the dema nd fo r tobacco p rod ucts and alcoholic beverag es, and, in r e cen t years, similar evidence has em erg ed on the deman d fo r SSBs. M uch o f the early evidence o n tobacco and alcoho l deman d came fro m high-income co untries (HICs). Al t ho ugh there has been considera ble resear ch on the dema nd for t obacco produ cts in low- to middle-inco me coun t ries (LMICs) o ver the past 15–20 yea rs, similar evidence on alcoho l demand is limi ted. A num b er o f deman d mo dels ha ve been estimat ed fo r SSBs, mo stly based on da ta from HI Cs. Ho wever , mo re recen tly , there is a n emerging li terat ure on the im pact of SSB taxe s on sales/ pur chases/con sum ption f or both LMI Cs and HICs. T o fu lly und ersta nd the underpinni ngs o f the net im p act o n con sum ptio n and ul t ima tely heal th ou tco mes, as dep ic ted in Figur e 3.1 , it is also impo rt an t to under stand the ext en t to which taxes ma y induce subs t it ution wi t hin types of the taxed p roducts (e.g. to chea per brands) o r pr o ducts taxed a t rela t iv ely lo w ra tes and to n on-taxed p roducts (some o f which ma y als o be harmful to health) and the ext en t t ha t cons umers ma y underta ke e xplici t t ax a voidan ce beha viours s uch as cross-bo rde r sho pp ing as these can cha ng e the net im p act of a giv en t ax. Tha t is, substi tutio n and tax a voida nce b eha viours infl uence con sump t io n of taxed and un taxed prod ucts and ma y to some ext en t offset im pro vemen ts in health and o ther ou tcomes. H eal th T axes: P ol ic y a nd Pr actice 66 valor em excise tax is ap plied to the pr o ducer p r ice, whic h is a lo wer bas e value, wher eas in Chi le, the ad valor em excise taxes ar e ap plied to the r et a il price exc luding V A T . Theref ore , even in cases where sta tut or y ad valorem excise tax ra tes ma y be t he same a cros s c o un t ries, if they are a pp lied at differ ent poin ts in the value distrib utio n chain, their eff ect iv e impact on prices (a nd, hen c e dema nd) may be differ ent. The 2012 incr e ase in the Danish SS B t ax an d the subsequen t 2014 repeal of the tax wer e asso cia ted, res pec tivel y , with significan t de cr e ases and then incr eases in househo ld pur chases of taxed beverages wi t h similar leve ls of res p on s e estima ted for the tax incr e ase and d ecrease equivalen t to a price elastici ty of −1.3. 38 E v idence fr om a n e valua tion of the 2012 F renc h sweetened be vera ge tax on pur chases finds tha t t he tax was associat ed with a red uc tion in soft drink pur chases fo r heavy con sumer s bu t not fo r cons umers g enerally ; ho wever , this is no t surprising given the lo w tax ra te which onl y raised prices b y about 5%. 39 F ollo wing pu blic health ca lls fo r indus tr y to redu ce suga r con ten t in food and beverage s alon g with the 2016 anno uncemen t of the in troduction o f t he 2018 UK tier e d soft drink indus t r y lev y (SD IL) tax (24 pence/L for beverage s with >8 g suga rs p er 100 mL a nd 18 pence/L fo r b everag es with 5–8 g/L), a r ecent s tudy fo und that between 2015 and 2018, sales of soft drinks in the top s ugar s tier (>8g/L) fell b y 41%, s ales in the mid-suga rs tier (5–8 g/L) fe ll by 73% a nd s ales in the lo w-sugars tier (0.1–4.9 g/L) incr ease d b y 41%; and, the net r eduction in the vol ume sold of s ugar s per day fro m s o ft drinks was 4.6 g p er ca pita per day (eq uivalen t to a 30% r e d uction). 40 I n the U nited S t a tes, ev idence fr om the 1-cen t per ounce tax in B erke ley , CA, the first o f t he r e cen t lo cal jurisdictions to im pos e SS B excise taxes, f oun d tha t SSB co nsum ption f ell 21% com pared to a 4% in crease in com parison cities, while re la tive wa ter con sump tion incr ease d 63% co m par ed to 19% in the same co m parison ci ties. 41 Ano t her st udy fo und tha t B erkeley su permarket vol ume sold of taxed beverages f ell 9.6% com p ar ed to an incr e ase of 6.9% in no n-B erk eley sto res and tha t sales of un t axed beverages r ose 3.5% in B erkeley vers us 0.5% in non-Berkeley sto res; bu t foun d no significan t chan ges in SSB Pr otect in g and Pr omo tin g H ea lt h Thr ough T axat ion: E vidence a nd Gaps 67 in t ake when usin g individ ua l-level da t a. 42 Y et ano t her Berkeley stud y , bas ed on in divid ual-level data thr ee years post-tax, f ound tha t SSB co nsum ption fell b y 0.55 times per d a y whi le wa ter con sump t io n increased by 0.85 times per day – both r ela t iv e to chan ges in com paris o n cities. 43 A stud y fo r Oak land ’ s p enn y per ounce SSB tax f ound n o sta t istically significan t effects fo r either p urcha ses (excep t for soda) or co nsum ptio n of taxed SS Bs. 44 A stu dy o f the Se a ttle, W ashingto n, 1.75-cent per oun ce SSB tax fo und that in the first y ear post-tax imp lementa tion vo lum e sold of tax ed SSBs f ell by 22% and ther e was no evidence of this im pac t being o ffset by cr oss-border shoppi ng . 45 T wo US local jurisdic tion s imposed excise t axe s that a pp lie d to both SSB a nd NSSBs. Regar ding the 1.5-cen t per ounce tax on SS Bs and NSSBs im plemen ted in Philadel phia, P ennsylvania, a st udy base d o n repea ted cros s-s ect io na l ra ndo m-digit-dial pho ne sur veys found a r eduction in the odds of daily r egular so da (−40%) and en erg y drink (−64%) cons ump tion as well as a n increase in daily bottled wa ter con sum ption (+58%). 46 U sing sto re scanner da ta, a recen t Philadel phia st udy fo und a 51% reduction in vol ume of taxed beverages in the taxed jurisdict io n w i th a net decrease of 38% when accoun ting fo r cross-bor der shop ping. 47 A study o f the C ook County , Illinois, 1-cen t p er o unce tax on SS Bs and NSSBs (r ep ealed after 4 mo n ths) fo und a 27% reductio n in sales vol ume o f taxed be vera ges wi t h a net r eduction o f 21% after accoun ting fo r increased sa les vo lume in Co ok County’ s 2-mile border a rea. 48 Ther e is also some limi ted evidence ava i lab le f ro m e valua tions o f t axe s tha t hav e foc used on o ther food categ ories o r n utrien ts. F or exa m ple, an evaluatio n of the im p act of the 2011 Danish tax o n s a tura ted fa t on the pur chases of f oo d p rod uct cat ego ries such as b utt er , bu tter blen ds, marga r ine and o ils found tha t the tax was asso cia ted with a decrease in purc has es in the rang e of 10–15%. 49 S everal studi es ha ve eva l u a ted the impact of M exico ’ s 8% tax on no n-essential energ y-den se foo ds a nd ha ve fo und t ha t hou sehold p urchases o f taxed foods were 4.8–5.1% lo wer 1-yea r fo llowin g the im plemen tatio n of the tax and tha t t his im pac t was sligh tly larg er 2 year s post-tax (−7.4% at 2 y ears ’ post-tax). 50 , 51 H eal th T axes: P ol ic y a nd Pr actice 68 3.2. E v idence of diff ere ntial impac ts o n demand M an y studi es of t obacco us e based on sur vey data ha ve assessed the differ ential effects of taxes a nd prices on diff eren t p op u la tion subgr ou ps, incl uding those defined by ag e, gender a nd socio-e co nom ic sta tus (SES). I n con trast, re lati vel y fewer studies h a ve done this f or alcohol a nd SSB dema nd. 3.2.1. Diff eren tia l impacts fo r to bac co pr o ducts St udies generally find tha t youn ger and/o r lower S ES grou ps are r elativ ely more resp ons ive to pri ce . 4 , 5 Estimat es of p rice elasticity fo r you t h smo k ing pr e valence fro m LMICs an d HICs, f or exam ple, t end to be two to three times grea ter than those for ad ults, while a few studies fro m HICs estima te tha t a 10% price incr e ase wo u ld r e du ce yo uth smo k ing ini tiation b y 4% or mo re (the a verag e impact acros s age s), with lar ger r e d uctions in the tran sition from e xperimental smoking t o regular smokin g . 4 , 5 One r ec en t stud y from Chile similarly f oun d that a 10% in crease in price reduced the likelihood of smokin g initia tion b y 4%. 52 Also , studie s find grea ter price effects on ces s a t io n amo ng yo ung smok ers. M ost st udies assessing diff eren c es b y SES find tha t high-SES pop u la t io ns ar e larg ely unr espon siv e to ciga rett e prices, while lo w-SES pop ul a tion ar e hig hly r esponsi ve. 4 , 5 Con sist en t w i th this, studies tha t ha ve assessed differen ces b y educa tional a ttainm en t generally find tha t mo re ed uc a ted p o pula t io ns ar e less sensi t iv e to price than less-ed ucated p opul ati ons. 5 In co ntrast, n o con sisten t p a tterns a re seen in t he r elativ ely few st udies tha t hav e assessed gender diff erences in p r ice r esp o nsiven ess of toba cco u se. 53 Finally , li ttle ev idence exis ts about diff ere nces in p rice res p on sivenes s b y smokin g in tensi ty ; one st udy f r om the U nited S t a tes fo und tha t heavier s mok ers reduced co nsum ptio n by mo re than ligh ter smo kers when cigar ette p rices increased. 54 3.2.2. Diff eren tia l impacts fo r a lcoholic b e ve rages Se veral st udies hav e explor e d differ ences in elastici ties by a ge and g ender , pr o d ucing som e evidence that drinking an d exces siv e drink ing a mong y oung Pr otect in g and Pr omo tin g H ea lt h Thr ough T axat ion: E vidence a nd Gaps 69 men ar e mor e respon sive to p r ice than drinking am on g older men an d amo ng wome n. 15 H owever , ther e do es no t ap pear to be a consis tent pa ttern o n the exten t of p r ice r espon siv eness a mong y oung co nsum ers, particu lar ly acr oss drinking int ensi ty le ve ls. 2 I n con trast to the evidence fo r tobacco , estimat es of p r ice elas ticities fo r alcoholic beverages a ppear similar acr oss coun tr ies of diff eren t income level s, while t her e is some limi ted evidence that wi t hin a given co untr y , drinking in low er SES popula t io ns is mor e respo nsi ve to price than drinking in higher inco me p o pula t io ns. 55 3.2.3. Diff eren tia l impacts fo r SSBs and sele cted other f oo ds and nu tri en ts Findings fr om several studi es indica te that SS B demand a mo ng lo wer incom e p op u la t io ns respo nds mo re to p r ice than dema nd amo ng higher incom e p op u la t io ns. 56 – 58 A tax e valua tion from M exico found tha t low er SES hou seholds r esponded mo re t o t he SS B t ax than higher S ES household s. 32 , 59 I n terms o f difference s by co nsum ption leve l, an other evalua tion of the M exico SSB tax fo und differen c es based on ho us eho ld purc has e levels, with lar ger r e d uc tion s (16.1–20.0%) amo ng ho useholds tha t initially had higher p urc hases of taxed beverag es co m p ar ed to sligh t increases (0.6–1.9%) amo ng hou seholds who ini t ially had lo wer pur chases of taxed beverages. 60 A ddition ally , this same st udy fo und that the r e d uction in pur chases amo ng the high pur chasers o f t axed beverage s was grea ter fo r t hose who wer e lo w SES. 60 An evalua tion o f Mexi co ’ s t ax o n no n-essen tial energ y-dense foods fo und t ha t the decline in pur chases of taxed foods was grea ter fo r low-SES (−10.2%) and m iddle-SES (−5.8%) h ouseho lds, w her eas purc hases were uncha nged amo ng high-SES ho us eho lds. 50 A meta-analysi s of f o od price elastici ties global ly f ound tha t cha nges in prices ha ve the grea test im p act on dem and in lo w-incom e coun tr ies: fo r exam ple, the es t ima ted elasticity o f demand fo r low-inco me coun tr y , middle-incom e c o untr y and HI C, re spec tiv ely , was −0.74, −0.68 and −0.56 fo r sweets and −0.60, −0.54 an d −0.42 fo r fats an d oils. 61 H eal th T axes: P ol ic y a nd Pr actice 70 3.3. E v idence on subs tit ution a nd tax avo i dance I t is importan t to unders tand the exten t to which taxes ma y induce substi tutio n and to ward which types of p roducts an d the exten t t ha t con sumers ma y undert ake expli cit tax a voida nce beha viour s as these can cha ng e the net im p act of a giv en t ax. Tha t is, substi tutio n and tax a voida nce beha viours will to some e xten t offset the purpos e o f the tax. Consumer s w ill substi tute a wa y from tax ed pr o ducts to war ds un t axed pr o d ucts as a res ult o f t he ch an ge in r elativ e prices in troduced b y the tax. If the tax bas e o f the pr o du ct categ or y b ein g taxed cap tures the full rang e of targ eted produ cts then substit ution fro m say taxed SSBs t o untaxed wa ter or milk would no t b e an unin tended co nsequence a nd, hence, w ould no t offset the health aim o f the tax. But if a tax was p laced, fo r examp le, on beer and not win e and as a r esult som e substi tutio n o ccurred to wine then this wo uld offset the in tended ou tcome o f reducin g alcohol in take. Similar unin tended con s equences ca n exist if, fo r exam ple, o nly cigar ett es, bu t not o ther fo r ms of t obacco pr o d uc ts ar e t axed . A ddition ally , there m a y be cross-p r ice/tax substi tutio n to pr oducts ou tside of the taxed pr o du ct categ or y that ma y be an unin tended co nsequence. F or e xam ple, a tax o n SSBs ma y indu ce substi tutio n to mor e sweets if the consum er is looking to o btain suga r in ano t her f orm. T ax av oida nce may also take the fo rm of su bstit ution wi thin taxed pr o du ct categ ories. F or exa mple , in t he p resence of a n ad va lo rem excise tax, to minimise the im p act of a tax, co nsumers ma y substi tute do wn to ch eaper b rands o r chea per (p er vo lume) packag e sizes of taxed pr o d ucts. A ddition ally , in the cases of local-level taxes, o r na tional taxes in places witho ut h ar d b or ders, con sumer pr oximi t y to the border of a n untaxed jurisdiction will a llo w fo r rela t iv ely easy tax av oida nce in t he f orm o f cross- bor der sho ppin g, which ma y d a m p en the net im p act on co nsum ption o f a given tax. A dditio na lly , a l though no t discusse d belo w as part of cr oss-border sho ppin g, it sh ould be not e d tha t t ax pass-thr ough (the exten t to which taxes rai se consum er prices) within loca l tax jurisdictions ma y be lower in reta il ou tlets loc a ted closer to an un taxed b o rde r ar e a which, fo r exam ple, has r e cen t ly been fo und in a study f or SSB tax pass-thr ough. 62 Pr otect in g and Pr omo tin g H ea lt h Thr ough T axat ion: E vidence a nd Gaps 71 Finally , firms in the taxed ind ustr y and their allies oft en argue tha t new or higher taxe s will result in ext ensive tax evasio n, incl uding unreco rded man ufacturing, larg e-s cale sm uggling of un taxed prod ucts, pur chases from l ow-tax j ur isdictions f or r esa le in higher tax jurisdictions, sale of coun terfe it p roducts a nd other activi t ies. E vidence f or ciga ret tes sho ws tha t other facto rs, such as high levels o f corr u ption, ineff e ctive custo ms and tax admini stra tion a nd weak go vernance a re as or m ore im port an t than tax and p rice differen tia ls in exp lainin g tax e vasio n. 5 Is sues rela ted to illicit trade and en fo rcemen t mechanis ms a re addr essed com preh ensivel y in Cha pt er 9 of this book. 3.3.1. E v id ence f or to b acco pr odu cts M ost stu dies of deman d fo r mul tiple t obacco prod ucts find evidence of substi tutio n amon g products in r esponse to cha nges in r elativ e prices, partic ularl y amo ng mo re ‘lik e ’ prod ucts (e.g. ro ll-your -own tobacco , little cigar s and cig ar ettes), while increases in inco me lead us ers to ‘ t rade u p ’ to pr o d ucts the y percei ve as higher quality (e.g. swi tching fro m lo cal cigar ette bra nds to in terna t io nal brand s or s wit chin g f ro m bidis t o man ufac t ured cigar ettes). 6 I n L eban on, f or exam ple, in creases in ciga ret te prices r ela t iv e to wa ter pi p e to bacco prices led some ciga rett e smok ers to swi tch t o wa ter pip e. 63 One r ec en t stud y based on US sales data fo und t ha t cigar ettes wer e substi tut es fo r a variety of other co mbus t ibl e tobacco p rod ucts, inclu ding ro l l-yo ur-o wn tobacco , lit tle cigars a nd cigarillos, as well as fo r e-cigaret tes. 64 Se veral ciga ret te demand s tudies based on tax-paid sales da t a fro m US sta tes ha ve inc lud ed measure s of the in cen t iv es for cr oss-borde r activity , reflecting a mix o f b oth indi vidual smok ers cros sing sta te lines to p urchase cigar ettes in nea rb y lo wer tax sta tes, as well as m ore o rganised lar ger scale pur chases of ciga rett es in lo wer tax stat es fo r resale in higher tax stat es. 65 , 66 Others ha ve used a simil a r a ppr o ach t o c a ptur e cross-bo rder a ctivity in the E uropean U nion. 67 These st udies gen erally find tha t t he gr eat er t he differ ence in prices acr oss bor ders, the larg er t he exten t of cr oss-bord er activity . A dditio nal ly , s o me tobacco use sur veys that inc lude que stion s about H eal th T axes: P ol ic y a nd Pr actice 72 pur chase beha viours r ep o r t tha t t he lik elihood of cr oss-bor der p ur chases rises as respo nden ts are n ear er bor ders wi th low er prices and as the p r ice differ ences acros s bor ders a re la rg er . 68 , 69 3.3.2. E v id ence f or alc oholic be verages A limit e d li tera tur e from HI Cs has assessed the substit utabili ty of alcoholic be vera ges, generally findin g consis tent evidence o f substit ution between alcoholic beverag es in t he sam e cat egor y , b ut mo re mix ed ev idence o f substi tutio n across ca tegories. On e com pr ehensiv e study fro m A ustralia, fo r exam ple, f ound re la tivel y consis ten t e vidence o f substit ution a mo ng diff eren t varieties of beer (pr emium, full strength, mid s tren gth and lo w alcohol), as well as between red a nd w hi te wines and ligh t and dark sp irits, bu t found le ss con sisten t ev idence o f substit ution acr oss be vera ge ca tegories. 70 Similarl y , on e US stud y prod uced incon sist en t and mostly s tatistically insignifica nt estima tes fo r t he eff ects of wine and s pirits p rices on beer cons um ption, suggestin g lit t le cr oss-categ or y substi tu t io n. 71 Similarl y , alb ei t fewer , st udies hav e assesse d cr oss-b o rder s hopp ing fo r alcohol beverag es. One st udy base d o n US sta te-le ve l t ax-paid alcoho lic be vera ge sa les, f or exa mp le, co ncl uded t ha t cross-bor der shop ping acco unted fo r b etween 20% an d 40% of the p r ice elastici t y o f disti lled spiri ts s ales. 72 Ano ther stu dy based on sales data fro m Swedish m unicipali ties conc luded tha t there was co nsiderab le cross-bor der price elasticity a nd that this elastici ty increased as m unicipalities wer e closer to the bord er . 73 C on ce rn s abou t cross-bor der shop ping led Denmar k, Fin land a nd Sw eden to lo wer alcoholic beverag e t axes when they joined the E uro pean U nion. 74 3.3.3. E v id ence f or SS Bs and sele cted other f o o ds and nutr ients Ther e is gen erally con sist en t e vidence o f substi tutio n amo ng differ ent types of n on-alcoh olic beverages in r esponse to c han ges in rela tive p r ices, suc h Pr otect in g and Pr omo tin g H ea lt h Thr ough T axat ion: E vidence a nd Gaps 73 as subs tit utin g to bot tled wate r and milk in r espon se to higher SSB p r ices. 75 I ndeed, se ve ral tax e valua tions ha ve fo und increases in sales/pur chases/ con sump t io n of un taxed be vera ges, partic ularly bo ttled wa ter , follo wing the in troduction o f SSB taxes. 32 , 35 , 41 , 45 F or exam ple, a r ecent evalua t io n of the 10% ad valo rem SS B exci se tax in Barbados fo und a 5.2% incr e ase in sales vol ume for un taxed b everag es. 35 H owever , r e cen t e valua tions o f the Co ok Coun ty , IL, and Philadel phia, P A, sweetened beverag e t axe s fo und no significan t increases in vol ume s old o f untaxed beverage s. 47 , 48 A recen t meta-analysis o f SSB taxes f ound mixed r esults o n subs tit utio n with significan t increases in un t axed beverage co nsum ption in thr ee of f our jurisdictions as sessed but no significa nt cha nge in o ne o f the jurisdictions (Chile). 31 I t sho uld be noted tha t most of the r e cen t ly im plemen ted SSB taxes even with health goals p ro vide exem ption s to 100% f ruit j uice which con tain free sugar s and to milk pr o du cts includin g t hose with added suga rs such as fla vo ured milk and ther eby ca n lead to subs tit utio n to untaxed pr o d ucts con taining suga rs, which ma y offset the in tended health benefits o f the tax. A few modelling st udies hav e estimat ed substi tu t io n between b everag es and o t her so urces o f ca lo r ies, co ncl uding that in creases in beverage p r ices can lead to som e substi tutio n to various f o ods, part ially offsetting the red uc tion s in added sugar and/o r caloric intake fro m reduced co nsum ptio n of the higher p r iced be vera ges. 76 , 77 T ax eva l u a tions to da te ha ve generally used data tha t are a g grega ted b y be vera ge cat ego r y and while scanner da t a ha ve distinguis hed fo r ma ts, individ ual-level con sum ptio n data ha ve no t, and hen ce we do n ot ha ve a clear unders tanding o n the exten t to w hic h con sumers ma y b e bra nd switc hing t o lo wer cost bra nds or swi tchin g to differ ent f orma ts. F urt her , tax evalua tion s on the ext en t to which cons umers ma y be substit uting to o t her f orms of ‘ sugars ’ suc h as pur chasin g mo re sw e ets o r other vices such as salty snacks or alcoh ol a re lac king. S ubsti tu t io n to other fo r ms o f discretiona r y (f oo ds and beverag es no t necessar y fo r t he p ro v isio n of n utrients) calories ma y offset the in tended health benefits o f SSB taxe s and evalua tions a re needed H eal th T axes: P ol ic y a nd Pr actice 74 to under stand these tax a vo id a nce beha v io rs a nd poten tia l unin tended con se q uences. Se veral evalua t io ns o f t he local-level sweeten ed be verag e t ax es in the U nited S t a tes ha ve examined the exten t of cr oss-border s ho pp ing associ a ted with those taxes. A stud y of the Philadel phia, P A, tax found tha t cross-bo rder sho ppin g in the neighbouring zi p co des o ffset the decrease in vol ume sold of taxed beverag es in Philadel phia by 24%. 47 S imilarly , a stud y of the Cook County , IL, sweetened be vera ge tax found significa nt cr oss-bor der shop ping in the 2-mile border a rea of Co ok Coun ty which offset the red uc tion in vol ume sold of taxed beverages b y 22%. 48 H oweve r , unli k e the loca l taxes in Philadel phia a nd Co ok Coun ty , a recen t study o f t he local SSB tax in S ea ttle fo und no significan t chang e in vol ume sold o f taxed be vera ges in the 2-mile b orde r a re a. 45 These mixed r esults suggest when cr oss-bord er sho ppin g does occ ur i t somewha t offsets the tax im pact but does no t f ully wipe it o ut an d tha t geogra phic co ntext a nd the pr o ximity wi t h which the pop ulatio n lives to the bor ders ar e im p ortan t considera tion s fo r w hether in fact it will occ ur and b y ho w m uch. A t t he na tional level , it ha s been reported that the Dani sh SS B tax was associat e d wi th Danish-Germa n cro ss-bor der sho pp ing (with a r ep o r ted estima te of 23% of so ft D a nish drink pu rc hases) and, in t urn, was a significan t concern r elated t o the repeal of tha t tax. 78 3.4. E v idence on health and othe r cons ump tion-re l a ted out comes I t is im portan t to understa nd the exten t to which taxes tha t ar e int ended to cha nge health beha viors actually tran sla te int o im pro vemen ts in health and r eductions in o t her co nsum ption-r elated risks. F or exa mple , do tobacco taxes r educe l ung cancer? Do taxes on alco hol r e d uce cir rhosi s of the li ver , drinking and driving, alcoho l-rela ted violence inciden ts? Do SSB taxes red uce t he p revalence of type 2 diabetes and obesi t y? Pr otect in g and Pr omo tin g H ea lt h Thr ough T axat ion: E vidence a nd Gaps 75 3.4.1. E v id ence f or to b acco pr odu cts E v idence s ho ws increases in cigar ette taxes an d prices ar e associated wi th red uc tion s in t he diseases and p rem a ture dea t hs ca used by smo king. One US st udy , for exa mple , found tha t higher stat e cigaret te taxes red uce d o verall mortality a t t he sta te level, as w ell as deaths fro m t hr o a t, lung a nd other ca ncers a nd r esp irato r y diseases. 79 Another r ecent US s tudy usin g coun ty-level data co ncluded tha t hig her ciga rett e taxes wo u ld incr eas e life expec tancy , with a on e-dollar tax incr e ase raisin g life expe ctancy by o ne y e a r. 80 Other studi es find tha t hig her ciga rett e taxes lo wer hosp italis a tions fo r hear t fail ure and r educe the se veri t y o f child hood asthma. 81 , 82 Estima tes sho w t ha t smoking a mong p regnan t wo men is particul ar ly respo nsi ve to price, wi t h p revalence elastici t ies two t o t hr e e times grea ter than fo r adults. 83 A s a res u l t, higher taxes an d prices r e d uce lo w-birth weight b ir ths, sudden infan t death syndr om e and o verall infan t morta li t y . 84 , 85 On e recen t study using co untr y-level da t a fro m t he EU es tima ted tha t a one eur o incr ease in the price o f a pack of cig ar ettes was as so cia ted with a dro p of 0.23 dea ths per 1,000 live b ir ths in the same y e ar , a nd an additio nal drop o f 0.16 de a ths per 1,000 live b ir ths in the f ollo wing yea r . 86 The posi tive im pact of cigar ette taxes and p rice on health is illustra ted in Figure 3.3 , sho wing tha t the incr eases in the Fr ench ciga ret te tax in t he 1990s a nd e a rly 2000s w ere associated with immedia te reduction s in cigaret te con sum ption, f ollo wed s oon a fter b y red uc tion s in lung can cer deaths a mong y oung men. 87 3.4.2. E v id ence f or alc oholic be verages M or e con sisten t e vidence f or the im pac t o f t axes a nd prices on ex cessive drinking comes fro m the rela t iv ely larg e e vidence base, aga in limited almost en t ir ely t o st udies fro m HICs, o n various ha r ms fr om ex cessive drinking. Research ers ha ve st udied a variety of o utco mes, inc ludin g moto r vehicle crashes a nd fatalities; dea t hs fr om li ver cirrhosis, alcoho l dependence and vario us other diseases caused by e xcess iv e drinking; incidence o f s exually H eal th T axes: P ol ic y a nd Pr actice 82 22. P owe ll L, Chriqui JF , Khan T , W ada R , Chalou pka FJ . Assessin g the poten t ial effectivenes s of f oo d an d beverage taxes a nd subsidies f or imp rovin g public health: A systema tic review of prices, dema nd, a nd body weight o utcomes. Obe sity Reviews. 2013; 14(2): 110–128. 23. Cabr era E scobar MA, V eer ma n JL, T o llman SM, Bertram MY , H ofman KJ . 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Long MW , Gortmaker SL, W ard ZJ , Resch SR, Moodie, Sacks G, S winburn B A, C arter RC, W ang Y C. C ost eff ectiveness o f a sugar -sweetened beverage ex cis e tax in the US A merican J ournal o f Preven tive M edici ne. 2015; 49(1): 112–123. 97. V ecino-Ortiz AI, Arro yo-Ariza D . A tax on sugar sweetened beverages in Colo mbia: Estimatin g the impact o n ov er w eig h t and obesity pr e valence acr oss s ocio econo mic levels. Socia l Science & M ed icin e. 2018; 209: 111–116. This is an o p en access a rticle publish ed by W o rld S cien tific Publishin g C om p an y on behalf of WH O and dis tributed under the t erms of the Cr e a t iv e Commons A ttributio n-NonComm ercial-Sha reAlike 3.0 IGO (CC BY -NC-SA 3.0 IGO) License . © 2022 W orld Health Organization (WHO) https://doi.or g/10.1142/9781800612396_0004 Chapter 4 Supply-Side Responses to Health T axes Annalisa Bel loni * and F r anco Sassi † H ea l th taxes ar e typically levied on ma nufact urer s. The impact o f hea l t h taxes o n con sum ption, an d ultima tely o n health, depends on the ext en t of which taxe s ar e t ran sferred from m an ufac t urer s on to the prices faced by co nsumers, r eferred to a s tax pass-thro ugh. W e disc uss the theor etica l econo mic argumen ts and the em pirical e vidence o n key factor s influen cing tax pass-thro ugh for t obacco , alcohol, a nd sugar -sweetened beverage (SSB) p roducts, and p rovide g eneral concl usio ns a nd reco mmendatio ns fo r gove rnmen t polic y . K ey dr iv ers o f tax pass-thro ugh include s t ra tegic behavio urs of ma n ufacture rs an d retailer s (pr o ductio n and ma rketing stra tegies, particu larl y for m ulti-pr oduct firms), mark et str uctur e (especial ly the degree of co ncentra t io n of a mark et), and sup ply and d emand p rice elastici t ies. Based on em pirical obser va tions, taxe s on t obacco , a lcoh ol and SS Bs are us u ally passed on to co nsumers thr ough increases in mar ket prices, sometime s exceeding the amo unt o f t he tax. The exten t of tax pass- thro ug h can vary widely , depending on type of p roduct, package size , brand cha racteristics, sto re type, etc. F urt hermo re, stra tegic fir m beha viours ma y b e trig ge red b y feat ures o f tax design. For in stance, ad valor em, or mixed specific *  W or ld Health Organization, Switzer land. †    Imperial College London, UK. H eal th T axes: P ol ic y a nd Pr actice 88 and ad valo rem tax struc tur es may in cen tivise man ufac tur ers to differ entia te their bra nds and price level s, while spe cific exci se taxes tend to r educe rela tive price diff erences between p roducts, stiflin g p ot ential subs tit utio ns. M oreo ver , specific taxes base d o n ingredien ts (e.g. grams o f a lcoho l, or suga r), may incen t ivise ma n ufacturer s to refo rmulat e t heir p rodu cts, or to incr eas e the pr omotio n of pr o ducts wi th a low er concen tratio n of the taxed ingredien t. The evidence pr es en ted underscor es the im portance fo r p olicymakers to car efully adju st the design, and c los ely m onito r the impacts, of health taxes, to ens ure that heal th benefits ar e not hinder e d b y fir ms ’ stra tegic res ponses. 4.1. In troduc tio n H ea l th taxes alter the co ndition s in w hich the ma rkets fo r t he taxed p rod ucts opera te. M ark ets adju st to the in troduction o f he alth taxes thr ough chan ges on both the dema nd and the su pply side s. Altho ugh we discuss cha nge s, or res p on s es, o n the two sides separa tely in this book (demand-si de res p on s es ar e dis cussed in Chap ter 3), they are cl osely in terdependen t. In this ch a pt er , we discuss su ppl y-side res ponses, limi ting the focus on the actio ns unde rt aken b y man ufacturer s and reta ilers to saf egu ar d the pr ofi tability a nd sustaina bili t y of their b usinesses in the jurisdictions in which health taxes ar e intr o duced. The r espon ses disc ussed in this cha pter a re pur ely the econo mic respo nses, in volvin g aspects of the pr o du ction and m ark et ing o f the prod ucts concerned, and s trat eg ic ind ustri al decision s regar ding aspects of the firms ’ core b usiness. These ar e distinct f r om, b ut oft en com plemen t ar y to , the p oli t ical re spon ses examin ed in Chap ter 12, and they excl ude il lici t respon ses. I n theor etical e co no mic models ass uming per fectly com petitive ma rket dyna mics, dema nd an d su pp ly ad justmen ts follo w ing the in troduction o f con sump t io n t axes a re larg ely a uto ma t ic. I n t hese mar kets, individ ual fir ms ar e price ta k ers an d t her e is little scope, if an y , for di scretional action. I n real-life cir c ums t an ces, and es p ecial ly in the ma rkets fo r t he p roducts that ar e typically target ed by h ealth taxes, com pet i tion is fa r from perfect (se e Cha pt er 12 fo r an assessmen t of ma rket con cen t ra t io n). In fact, a significan t Su ppl y-Side Res ponses t o H eal th T axes 89 scope exists fo r sup ply-s ide pla yers to act stra tegical ly in r esponse to the in t r oduction o f health taxes in o rder to mi tigate a ny ad verse con sequences on their b usinesses. H ea l th taxes, as other ex cis e du ties, are u sually levie d o n man ufactur ers and n ot o n f inal con sumers. T axing ma nufactur ers red uces the administra tive b urden a nd the risk of no n-com pliance. H ow e ver , this also incr eases oppo rtunities f or su pp liers to sha p e the ma rket im pacts of health taxes, poten tial ly und ermining the effectiven ess o f a t ax in the pur sui t of pub lic hea l th goals. The im p act of health taxes o n cons um ptio n, and thu s health, is dependen t on the degree to which ma rket prices f or the taxed pr o d ucts ar e incr ease d. A k e y determina nt o f the effect of heal th taxes is the degree to which taxes, o r tax increases, ar e transf erred on to the prices faced b y con sumer s, which is o ften r eferred to as tax pass-thro ugh. When the pass-thro ug h ra te is grea ter than 1, there i s ov ershift of the tax (i.e ., prices rise above the tax incr e ase) while if it is lo wer than 1, the tax is under -shifted (i.e., p r ices rise below the tax incr e ase). The final tax pass-thro ugh rat e is determined as the ra t io between the price incr e ase faced by co nsumers and the a moun t paid fo r the tax at the r elevan t t ax poin t. In termediate pass-thro ug h ra tes can also be c alculated — e.g. a t the man ufac t urer ’ s level — b ut wha t mat ters the most in the case of h e alth taxes is the final pass-thro ug h ra te. W hen health taxes a re ad valo rem (see C ha pter 8 f or a detailed disc uss ion o f ad valorem v ersus specific excise taxes), the pass- thro ug h ra te is still c alculated as a p ropo rt io n of the amo unt paid f or the tax. The percen t ag e increase in prices faced by co nsumers sh ould not be expec ted to ma tch the tax ra te in the cas e o f ad va lo rem taxes. H ea l t h taxes ar e in fact t yp ically levie d o n man ufacturer s (i.e., on ex-facto r y o r ex-custo ms prices) an d the prices paid by man ufacturer s do not r efle ct the prices faced b y consum ers, as they typically ex clude tran sp o rt and distribu tion costs an d reta il mark-u ps. I t is im portan t to no te that r et ail mar k-ups ma y be s et as a percen tage o f man ufacture r prices, so they may infla te pass-thr ough rate s. I n this case, a port io n of the price incr e ase H eal th T axes: P ol ic y a nd Pr actice 90 faced by co nsumers is pa id to retailers, in dependen tly of m an ufacturer s ’ pass-thro ug h stra tegies. I ndu str y pricing policies in r esponse to health taxes a re to some ext ent pr edic table beca use the y ar e driven, o r a t le ast infl uenced, by m ark et for ces and b y tax design. Ho wever , the mar kets in which health taxes m a y be ap plied var y widely . The specific characteristics o f thos e ma rkets ma y influence the res ponses o f comm ercial pla yers t o a degree tha t c o u ld significan tly im p act the ab ility o f the tax to fulfi ll its p ublic health purpos e. Th e plann ing of eff e ctive heal th taxes req uires full con sidera tion of possib le respon s es from the in dus t ries con cerned as well as fro m consum ers (discussed in Cha pt er 3) and r equires ca reful design (dis cussed in Chap ter 8). I n this cha pter , we di sc us s the theoretical econo mic argum en ts and the em pirical e vidence o n key factor s influe ncing the degr ee to which taxes a re passed on to co nsumers. W e also dis cuss the exten t to which these factors var y acr oss p roducts, coun tr ies o r other r elevan t dimensio ns. Basic econo mic t heo r y sugge sts tha t prices ar e s et a t t he leve l a t w hich deman d and s upp ly meet. I n com petitive ma rkets, taxes ar e passe d thro ug h to co nsum ers (u p to fu ll pass-thro ugh, dep ending o n the underlyin g deman d and su pp ly price elas t ici ties) when there is a con stan t marginal cos t of pr o d uction. H ow e ver , the mar kets in which most to b acco , alcoholic a nd no n-alcoholic beverag es are sold t end to ha ve levels o f con cen tratio n t ha t set them apart fro m c o mpetitive m ark ets. In mo re concen trat e d ma rkets, su pp liers ha ve ma rket po wer and ther efor e mor e s cope fo r exercis ing their discretio n in re spondin g to health taxes. I n practice, this o ften transla tes in to an o ver -shifting of tax es on to co nsum ers. H ow e ver , su pplier s may decide to adop t differe n t stra tegies le adin g to diff eren t levels o f p ass-thr ough. Su pp liers decision will depend on the ch aracteristics o f t he dema nd the y face, o n their pr o d uction costs, o n t heir p roduct portfolio a nd o n the com pet i tive en vironm ent in which they opera te. This is beca use in less co m petitive mar kets p r ices ar e set above ma rginal cost. Theref ore , man ufactur ers can under -shift the tax and still ha ve p osi t iv e margins o r ove r -shift the tax to main tain reven ues in the face of declin ing sales vol ume. Su ppl y-Side Res ponses t o H eal th T axes 91 I n addi t io n to mar ket structur e, other fact or s p ot entially aff ec ting the effectivenes s of a tax a re s trat eg ic beha v io urs of ma n ufactur ers a nd reta ilers (e.g. p rod uction and m ark et ing s t ra tegies, part icularly f or m ulti- pr o d uct firms), sup ply a nd dema nd elastici t ies, the c haracteristics o f the jurisdiction in which the tax is a pp lied and the design o f t he tax (e.g. specific or ad valo rem; tiered ra tes, etc.). I n t he next section, we illu stra te several con sideratio ns co ncer nin g the abov e elemen ts tha t ar e of general val ue and can be a pp lied to all categ ories of p roducts that a re typically tar geted b y health taxes. I n t he f ollo w ing sections, w e pr esent mo re specific consi dera t io ns tha t a pply t o specific pr oduct cat e g ories. While som e ind ustr y res ponses can hin der the effectivenes s of health taxes, other s c a n align with price incen t iv es. This ha ppens, f or instan ce, when health taxes lead to p rod uct ref orm ul a tion tha t ma y mitiga te the detrimen tal health im p acts of the p roducts concerned. A s p ecial foc us b y Whit e et a l. associated wi th this cha pter focuses on the use of taxa tion as an in cen t iv e to p roduct r efo rmula t io n, using the exa mp le o f the Soft Drinks I nd ustr y Le vy in the U ni ted King dom. H ea l th taxes can also crea te an incen tive fo r pr o d ucers to s hift adv er tising a nd p ro motion t o non-taxed (or lo wer taxed) pr o d ucts. This is an other exa mple o f alig nmen t bet ween ind ustr y respon s es and p rice incentiv es w hen taxe s ar e designed in a way tha t pena lise less health y prod ucts (e.g. taxes targ et ing alcoh ol or suga r le vel). 1 I n the final se ction o f this cha pter , w e dra w some g eneral conc lusio ns and r ecommenda tions f or g overnmen t polic y highlighting the similari t ies and diff erences between the mar kets f or the thr e e ma in pr o d uct cat ego r ies targ eted by health taxes. 4.2. F acto rs aff e c tin g supp ly-side responses to hea lth tax es While su ppl y-side respon s es lar gel y t ran slate in to diffe ren t degrees o f pass- thro ug h of h e alth taxes, firms ’ decision s on pass-thro ug h ar e driven b y a l a rge and co mp lex set of facto rs an d strategic co nsidera tions. W hoe ver des ign and H eal th T axes: P ol ic y a nd Pr actice 98 Alcohol m onopolies w ere ofte n establi shed to co ntro l t he socia l externalities o f a lcoh ol co nsum ptio n, s o their pricing policie s tend t o be con sisten t ly g e ar ed towa rds tha t o vera rc hing goal, independen t ly o f taxation. I n line with this, p rice pr omotio ns and discoun ts ar e uncommo n in s ales monopolies. 26 E vidence from Finlan d sho ws that tax pass-thro ug h ra tes ha ve been hig her in the o ff-t rade sector (co vered b y t he sta te mon opol y) than in the on-trade sector , b ut diff erences in pass-thr ough bet ween beverag es in t he off-trade sector ha ve been e ven la rger than diff erences between on-trade a nd off-trade ra tes, ran g ing fr om 0.77 (f or beer) to 1.44 (for s piri ts), on a verag e, between 2002 and 2011. 26 I n a larg er num b er o f coun tr ies, g overnmen ts exer cis e mo nopolistic powe rs b y reser ving the rig h t to license the pr oduction o r sale of tobacco a nd alcohol p roducts to independen t commer cial entities. Th ese arrang ements, ho wever , confer a m or e limited degr ee of co n t r ol to the s tat e c o mpar e d to the p rodu ction and sale mo nopolies discusse d earli er . Their im p act on bus iness r esponses to health taxes is m ainly thr ough t he in creased levels o f concen tratio n t hey pr oduce in the relevan t mar kets. 4.3. S upp ly-side responses to the in troduc tio n of t obacco taxes T obacco com panies, as o t her o ligopoly ind ustries, use a num ber of stra tegies to r esp o nd to tax increases and o t her t obacco con trol eff orts by go vernmen ts and in the US sm ok ers bear a ppr oxima tely 52% o f cigaret te excise taxes. 27 E vidence from coun tries with diffe ren t level o f incom e sho ws that, acro ss the tobacco ma rket as a whole , t axes ar e usual ly pas sed t hr ough to co nsum ers a nd can be o ver -shifted in high-inco me coun tries. 28 K eeler et al. 29 estima ted tha t a 1 cen t increase in cigar ette tax es wo uld increase reta il prices b y 1.1 cen ts, on a verag e, in the U nited Sta tes. H ow e ver , ind ustries ado pt diffe re n t ial pr icing stra teg ies a nd w h i l e taxes o n lo w-price b rand s ar e not alwa ys f ully passed on to con sumer s Su ppl y-Side Res ponses t o H eal th T axes 99 (under -shifting), taxes o n higher -price bra nds a re o ver -shifted (i.e., con sumer price incr e ase mor e than the tax). 4 , 28 , 30 – 32 The tobacco ma rket tend s to be concen trat ed in the low-p r ice an d the mid-price segmen ts. 4 , 33 As the dema nd is less inelastic in this segmen t of the mar ket, p r ice is us ually not incr eas ed aft er a tax increase, while i t is o ver - shifted in higher p r ice mar ket seg men t where dema nd is less price sensi t iv e. M an ufacturer s ado pt this s trat e g y to cr oss-subsidi se low-p r ice b rand s with excess p ro f it earned fro m hig h-p rice bra nds. By a ttracting mo re price- sensiti ve smo kers to b uy chea p er p rodu cts, the y k eep or even expan d overall mar ket, th us undermining the in tended publi c health im pact of the tax p oli c y . I n South Africa, for exa mpl e, ther e is evidence tha t taxes we re o ver - shifted befo re 2010 bu t s eem to ha ve been under -shifted since then. The high mar g ins cr eated b y t he o ver -shifting befor e 2010 at t racted new bus inesses to the ma rket which co mpeted lar gel y on price. The p resence o f lo wer p r ice cigar ettes in the m arket in mo re r e cen t years a nd the increased level o f com pet i tion made i t mor e diffic ult f or ind ustries to pass tax incr e ases on to the con sumer s. 30 A stu dy based on an ext ensive li tera tur e revie w a nd anal ysis o f sur vey and co mmercial da t a in the U nited Kin gdom f ound tha t ind ustries o ver - shifted taxes b y an a verage o f mor e than 4.00 pence per ann um on all bran d segments, b ut price incr e ases wer e higher for m or e exp en siv e bra nds. 4 Mor e recen t ev idence fro m the U nit e d Kin gdom sh o ws tha t desp ite r egular tax incr eases, prices fo r t he ch eapest t obacco pr o d ucts (like factor y-made a nd ro l l-yo ur-o wn) rema ined steady from 2013 while sales increased. 34 Con versely , da ta f ro m China show tha t after the 2015 tax incr e ase, the Sta te T obacco Mo nopoly A dministratio n a lso raised cigar ette p r ices o n a verag e by 11%, with the ch eapest p roducts incr easing b y 20% and the mo re expensiv e on es b y less than 10%. 24 Sometimes tobacco co mpanie s can decide to und er -shift tax increases as a tem p o rar y strategy to limit r e d uction in dema nd an d retain p rice-s ensi tive con sumers. F or exam ple, in U kraine p r ices o f cigar ettes f ell b y 11% between H eal th T axes: P ol ic y a nd Pr actice 100 2007 and 2008 while exci se taxes rose b y 6% in the same perio d o f time, while the y r ose by mo re than the tax aft er 2009. 35 Wh en con sider in g the prices effectively pa id by con sumers, after accoun ting fo r strategic co nsumer beha viours suc h as trading do wn (e.g. bra nd down-swi tchin g) or cros s-b or der shop ping, ther e is s om e e vidence tha t light a nd o ccasio na l smo kers end u p f acin g slightl y larg er price increases fo llowin g tax increases. 36 4.3.1. I mpac t of tax s tru ct ures on p ri ces Sim ple tax str uctur es like a unifo r m specific tax (i.e. , moneta r y value per qu an tity) r educe ind ustries stra tegic b eha viours co m p ar ed to mul t i-tiers or ad valo rem taxes (set as a per cen ta ge of th e val ue of t he pr oduct, e.g . as a per cen tage o f the p rice) 37 – 39 leading to higher tax pass-thr ough. 40 S pecific excise taxes a re ther efor e mor e effect iv e t ha n ad valor em t axe s in red ucing price va riabili ty and the pot en t ial switc hing between pr oducts and th us at red ucing o verall co nsum ptio n. 5 On the o t her ha nd, ad valo re m taxes can ha ve lit tle impact o n prices if the to bacco indus t r y low ers the ex-factor y price as in the case of V ietnam. 41 A st udy looking a t all Eur opean coun tr ies has fo und t ha t northern E uropean co un t ries a pply mo stly specific taxes, while s o uthern E uro p ean coun tr ies p refer a d valor em t axes fa vo uring the pr o d uction/selling of dom estic pr oducts. The stud y shows tha t spe cific taxes alwa ys ha ve a grea ter effect on p r ices than a d valor em t axes. 37 Wh en differ ential tax increases ar e introd uced (e.g. fo r premi um versu s econo my b rands) co m p ani es can a ppl y pricin g stra tegies to ma intain their mar ket sha re. F or exa m ple, they can red uce the price o f their pr o du cts to a vo id t he tax incr e ases, or , in the case of m ulti-pr o du ct firms, the y can u se portfolio p ricing stra tegies to op t imise reve n ues b y accoun ting fo r li k ely substi tutio ns across p roducts. The to b acco ind ustr y ca n also chang e t he tobacco a ttribu tes (e.g. w eig h t, length) or to bacco pr o cesses re labelling pr o d ucts to a void tax. 35 Wh ere m u lti-tier e d tax base d o n price level is in Su ppl y-Side Res ponses t o H eal th T axes 101 place, f or exam ple, in E g ypt a nd Pakistan, p rices of tobacco p rod ucts tend to cl uster near the t op o f e ach tier . 33 4.3.2. I ntroducing chea p pr o ducts or lowerin g prices T obacco man uf actur ers ha ve use d a va riety of price-r elated ma rketing stra tegies li k e m ulti-pack discoun ts, or co uponing, to co unte r the effects of tax increases. Similar p r icin g stra tegies became widely used in the U nited Sta tes in the 1980s and 1 990s in r esponse to co mpetiti ve p ress ures fo llowing a series of federal tax incr eases. 27 A large US t obacco man uf actur er offer ed cou p on s to some o f its mo st p rice-s en sitiv e consum ers (e.g. w omen, yo uth) allowing them t o bu y cigar ettes a t discoun ted prices just befo re a n excise tax increase in 2009. 35 E vidence has sho wn t ha t these practices hav e b een successful in incr e asin g tobacco use (e.g. Ref. 42 ). I n res p on s e to actual o r fo reseen t ax incr e ases, tobacco ma nufactur ers ha ve also intr o d uce d new lo w-price o r u l tra-lo w-price pr o d uc ts in the re levan t markets, o r reduced pack size f or some o f their pr o d ucts to ensur e the a vailab i li ty of ch e a p optio ns to co nsumer s. I n the U nited Kin gdom, ultra-lo w-price pr oducts wer e introd uced in 2006 and their ma rket s har e dou bled in 3 year s. 4 In the U nit ed Sta tes, the mark et shar e of ‘b randed generics ’ — cigar ettes co mbinin g va lu e a ttribu tes with an a ssoci a tion to a rep utable b rand — incr e ased threefo ld afte r a tax increase in 1983 27 and bra nded generics came to do mina te the discoun t cigar ette mar ket fro m the 1980s on war ds. 4.4. S upp ly-side responses to the in troduc tio n of alcohol taxes A s in the case of tobacco , t he alcoho l market is h ighly concen trated . The oligo p ol y stat us, which is ma in ly wi t hin a specific se cto r , i.e., beer and sp irits, allows in du stries mor e f r eedom to set their prices a nd a void high tax bur dens a nd al lo ws t hem t o spend con siderably in m ark et ing cr eating significan t barr iers t o entr y fo r new com panies. 43 H eal th T axes: P ol ic y a nd Pr actice 102 The alcoho l mar ket is m or e diverse an d s egmen ted t ha n tobacco with differ ent types of beverag es (e.g. beers, spiri ts and wine) as we ll as differ ent bra nds and co nsum ptio n lo ca tion (i.e . off pr emise versus o n pr emise). M or eov er , alcohol tax es accoun t fo r a smaller pr oportion of the alcoh ol p r ices (7% on a verag e in t he U nit e d S tat es) w hen co mpar e d wi th tobacco . H owever , this pr oportion varies su bstan tia lly between locatio n (from 3.65% t o 10.2% in differ ent US sta tes) an d acros s b everage types fro m 4.7% for scotc h to 10.2% fo r w hisk e y . 44 M an y stu dies sho w that alcoh ol taxes a re mo re than fully passed-t hr ough to co nsum er prices. 10 , 45 , 46 H o wever , ther e is hete rog eneity in tax pass-thro ug h acro ss types of beverages, p roduct size, packa ging, bra nds, sto re s, size of tax cha ng e and bo rder eff ec ts. 10 T ax pass-thro ug h varies also acros s products based on their price an d p oin t of sale, wi t h lo wer pass-thro ug h in the off- trade sec to r 44 and fo r cheaper alcoholi c be vera ges. 6 , 47 , 48 A recen t systema tic review and meta-analys is of alco hol tax pass- thro ug h con cl ude t ha t b eer taxes ar e ov er-sh ifted and wine-s pirits taxes ar e f ully shifted , ho wever , f ull-shifting o f taxes cann ot be rejected base d on b ias-corrected meta-regr essio ns fo r an y b everage and all alcoho l. 17 The stu dy also fo und tha t t he eff ect of tax chan ges on p r ice occurs within a few mo n ths an d can vary c o nsiderabl y at bor ders. 16 , 17 F or be er , there i s a stro ng bor der effect, with sto res far fr om the bor der o ver -shifting taxes t o con sumer prices an d sto res closer to bo rder s under - shifting them, 13 , 16 while this is no t the case for sp irits. 13 A modelling st udy usin g data fo r 27 OECD coun tr ies fro m 2003 to 2016 sho ws that taxes f or wine, cognac a nd the liqueur ‘ C o in t r eau ’ are o ver -shifted being res p ect iv ely 2.51, 1.71 and 1.14; while there i s mo re va r ia t io n in t he degree of pas s-thro ug h fo r other alcoholi c be vera ges, inc luding beer , gin and S cotch w hisky . 48 I n S ou t h Africa, t he ex cise tax on beer is ov er -shifted to co nsum ers. The pass-thr ough co efficien t is estima ted at 4.83 (95% CI: 4.02; 5.64) fo r l ag er , and a t 4.77 (95% CI: 4.04; 5.50) fo r a ll beer (w hich incl udes dark beer). 10 Su ppl y-Side Res ponses t o H eal th T axes 103 The lar ge differences in tax pass-thro ugh acros s differen t types of alcoholic beverag es and bra nds reflect differ ent dema nd elasticities f or differ ent p roducts. Ther e is evidence that pas s-thro ug h is higher fo r higher pr ic ed pro duc t s 6 , 48 , 49 an d higher incom e con sumers. 16 F or exa m ple, evidence from the U nited Kin gdo m shows tha t alcohol r et ailer s a ppe ar t o respond t o incr eases in alcohol tax by un der -shifting their chea p er p roducts and o ver - shifting their mo re expensi ve p roducts fo r a ll types of alcoho lic beverages. I n the off-trade sector , the under -shift fo r t he ch e a p est p roducts is larg er for beer (0.85) and sp irits (0.86) an d it is seen for the ch eapest 5% o f pr oducts fo r b eer and f or the chea p est 15% o f products f or s piri ts. 6 I n the on-trade sec to r , the under -shift is lar ger f or wine and s parkling wine (r espe ctivel y 0.55 and 0.75 a t the low est quin ti le) an d the ov er-s hift is e viden t only fo r the most expensi ve beverage s in the top q uintile. 49 I n terms o f s ales vo lum e, chea p alcohol r epresen ts the majo r i ty of the units in the ma rket, 67% an d 31% res p ect iv ely fo r b eer and sp irits in the U nit ed Ki ngd om 6 and i t is vastly con sumed by high-risk gro ups with lo w incom e. Theref ore , the under -shift of the tax fo r these products is like ly to pr o d uce smaller con sum ption r e d uc tion s and im plemen ting other policies like minim um price or r estric tion o n price pr omo tions m a y increase the effectivenes s of the tax p olicy . E v idence fr om the U nited S tat es shows tha t the bur den of beer taxation incr e ases acr oss the inco me distribu tion. H ig her i nco me co nsumers ar e mor e aff ected by incr e ase in beer t ax ra tes than lo wer incom e consume rs. W hile the prices paid b y low-in come h ouseholds do n ot c han ge after the tax incr e ase, the pass-thro ug h incr e ases with inco me, from 0.125 f or middle-incom e hou seholds t o 0.265 for high-inco me househo lds. The nega tive c han ges in prices paid b y low-in come co nsumer s can sometimes be expla ined by drinkers do wngrading to lo wer quality p roducts. 16 The level o f p ass-thr ough may also var y acco rding to the loca t io n of con sump t io n, but the evidence is qui te mixed. I n Alaska, av erage pass- thro ug h ra tes wer e found to be ar ound 2 f or off-p remises sp ir it sales an d H eal th T axes: P ol ic y a nd Pr actice 104 close to 4 fo r on-p rem ises sales w hile pass-thro ugh is aro und 2 for both on-p remises an d off-p remises sales of beers. 45 B eer excise du ties are un der -shifted in I re land (0.5 o ff-t rade, 0 o n-trade) and Finlan d (0.8 off-trade , 0.7 on-trade), a nd over -shifted in off-trade sales in Latvia (1.9) and S lo venia (2.5). 26 F or spiri ts, excise duties a re under -shifted in on-trade sales in Finland (0.8) a nd I reland (0.1), b ut o ver -shifted in off- trade sales in Finl an d (1.4) and La tvia (1.3), w hile they ar e under -shifted in off-trade sales in I re land (0.7) a nd Slov enia (0.7). 26 4.4.1. I mpac ts of tax s tru ct ures on p ri ces Excise tax structur e has a n impact on alcoho l tax pass-thr ough and a com bina t io n of specific and ad valor em taxes has mo re pr edic tive po wer fo r prices, than a single type of tax. Similarl y to tobacco , a mor e com plex tax str uctur e is asso cia ted with great er price variabili ty g iving m ore op p o r tuni ties to co m p an ies a nd co nsumer s fo r tax av oida nce. A r ecen t stu dy fo und that a m ixed beer excise tax str uctur e was asso cia ted with 38% grea ter be er p rice variabili t y , w her e as a mixed liq uor excise tax struc t ure was associat ed with 60–77% grea ter liq uor price variab ility . H ow ever , wine excise tax struc tur e was not significa ntly associat e d with p rice variabili ty . This ma y b e because the pricin g stra teg y for wine is diff eren t f r om tha t of other alcoh olic beverages; a s the origin of the wine , inst ead of the q uality , pla ys an im portan t ro le in pricing. 50 Specific taxes a pplied to all alcohol p roducts wo u ld make alco hol les s aff or dable an d would decrease the vol ume of alcoho lic b everage s con sumed, bu t not necessarily r e d uce t he vo lume o f alcohol co nsumed (as co nsum ers ma y switch t o stro nger alcoho l prod ucts). On the other han d, a tax based on alcohol co nt en t would be mor e effect iv e at r e d ucing alcohol co nsum ption. A dose-tax system can also incen t ivise p roducers t o ref ormula te their pr o d ucts redu cing the alcoho l con ten t and/or t o increase the advertising from h igher to lo wer alcohol p roducts. F or exa mp le in South Africa, b eer Su ppl y-Side Res ponses t o H eal th T axes 105 adv ertising has been movin g to wards lo wer alcoho l b eers coin ciding wi th the increased incen t iv e towa rds pr o d ucing low er a lcoh ol beer . 1 4.5. S upp ly-side responses to the in troduc tio n of f oo d and non-alcoholic b e verages taxes The no n-a lcoh olic beverages m ark et is als o highly con cen trat e d. U sually , food and beverage ma nufactur ers pass the full or near to full amo unt o f t axes onto c onsu me rs 19 , 21 o r t hey incr e ase the price b y an even bigger a moun t. 12 , 51 – 53 F or exam ple, ther e is e vidence o f over -shifting f or excise taxes o n s oft drinks in D enma rk w her e the t hr e e lar gest grocer y chain s accoun t fo r 85% of t otal s ales 13 , 14 and in Sa udi Arab ia w her e two com panies acco un t fo r 92% of the sales. 53 Similarl y , the p ass-thr ough fo r the SSB tax im plemen ted in M exico in 2014 was bet w een 0.96 and 1.20 f or ca rbona ted s o ft dr inks (where two firms a re r esponsi ble f or 85% o f t he sales) com par ed to a value between 0.53 and 0.74 f or no n-c arbo na ted s o ft drinks. The lat ter has a lo wer mark et sha re co mpar ed to soft drinks and higher price elastici ty of deman d which can expla in t he r e d uced level of pass-thr ough of the tax. 54 I n line with the theor y pr esented p reviousl y , the pass-thro ugh is lower fo r prod ucts sold in larg er con tainers 8 , 12 a s well as when the co mpetition i s higher and the m ar gins ar e low er . 21 F or exam ple, in sm aller jurisdict io ns like in B erk ele y , C alifornia, the estima ted pass-thro ug h of the tax va ried b y pr o d ucts and was o n ave rage between 43.1% an d 47% acro ss all SSBs, bra nds and sizes. 18 , 55 Th e p ass-thr ough increased by between 25.8% (fo r c ases of ca ns) a nd 33.3% (fo r 2-liter bot t les) f or each mile of dis tance fro m t he closest rival sto re selling un t ax ed SSBs. 18 The SS B t ax im plemen ted in S eat t le pr ovides a no ther exam ple of a tax a pplied in a small jurisdiction. After the first y e ar o f imp lemen tation, the pass-thr ough rat e was 59% ranging fro m 55% fo r family-size pr o d ucts to 66% fo r individual-size pr o d ucts. 11 N on-alcoh olic bevera ges ca n b e co nsid ered hi ghly differ en t ia ted pr o d ucts (i.e., diff eren tiating fr om each o ther in terms of tast e and quality) H eal th T axes: P ol ic y a nd Pr actice 106 and m u l ti-pr o d uc t firms u se portfolio p r icin g stra tegies to o ptimise reven ues b y accoun ting fo r li ke ly su bstit ution s acro ss p rodu cts. 56 , 57 A post hoc study a fter the intr o d uction of the F renc h so da tax in J an u ary 2012, estima ted that co nsumer p rices increased gradually . Six mo nths a fter its in troduction, the tax was fully shifted to soda prices (rep resen ting the vast ma j o r ity — 75% — o f t he t otal su permarket sales of n on-alcoholic beverag es) while about 94% a nd 62% of the tax was passed t hr ough to con sumer s fo r fr uit drinks an d flav oured wa ters, r espe ctivel y , b ut wi t h a high degree of heter ogenei ty acros s retailers an d bra nds. T axes on p rivat e l abels a nd small pr o d ucers ’ bra nds were g enerally ov er -shifted while t hey wer e under -shifted fo r l a rg e pr o d ucers ’ bra nds. 7 Pri va te label p roducts generally ha ve lo wer prices a nd com bining this wi t h the higher pass-thr ough, sugges t tha t the low- incom e households m ight be im p acted the most b y the s oda tax in Fran ce. 7 These res ults (no t over -shifting) can be explained b y t he elas t ici ty of deman d fo r non-alcoho lic be v erages whic h is estima ted to be significan tly larg er t ha n 1 (s ee Chap ter 3 fo r mo re evidence o n price elasticity o f demand). Pr o du cts with the large r price elastici ty and easier to sub stit ute (i.e ., wa ter), ha ve the low est level of pas s-thro ug h. W hile it is m ore difficult t o substit ute fr uit drinks as p ure fruit j uices ar e significantl y mor e expensive tha n t axed fr uit drinks an d no r eal substit ute exists f or sod as. The ra te of pass-thr ough can also var y acr oss differ ent types o f retailer s. I n Fra nce, there a re two ma in reta iling gro ups and ther e is fierce p r ice com pet i tion between them base d o n low price, whic h can expla in t he lo w pass-thro ug h ra te in big r et ailer s ver sus smaller o nes. 7 Differ ences in tax pass-through acr oss differ en t t ypes of r etailers ha ve also b een sho wn after the in t r oduction o f a fa t tax in Denmark 58 and the pass-thro ug h o f SSB taxe s was higher fo r pr oducts sold in sto res than those sold in res t a uran ts in B oulder , Colorado . 59 Ther e is not m uch evidence a vailable o n t he c hang es in marketin g st r ate g i es after the in troduction o r increase of SS B taxes, bu t it is like ly tha t firms use advertising s trat eg ies o r increase the f req uenc y of sale prices (cou p o ns, discoun ts) in or der to incr ease cons um ptio n or keep i t a t t he Su ppl y-Side Res ponses t o H eal th T axes 107 same level a fter chan ges in prices as sh o wn in the case of alcohol taxes. 1 O ne exam ple fro m Mexico s ho ws t ha t after the im plemen tation o f the s oda tax, ind ustries res p on ded with aggressi ve in-sto re pr omo tion s and ma rketing. 54 4.5.1. I mpac t of tax s tru ct ures on p ri ces T axes o n foo d and n on-alcoh olic beverage s can be struc tur ed as either specific, vol ume-based t axe s (e.g. per litre), o r con ten t-base d taxes (e .g. per gram o f suga r) or val ue-b ased taxes (i.e. a s a % of the p r ice). The level of pass-thro ug h varies based on the size a nd structure o f t he tax an d some tax designs can also incen tivise prod uct ref orm ul a tion. A d valorem tax es ma y incentivise co nsum ers to swi tch to ch e a p er alterna tives (b rand do wn-switc hing) as in the case of the Barbados SSB tax. E v idence s ho ws t ha t the M exico SSB tax (specific) was mo re fully passed on to p rice than the Barbados tax (ad valorem). 60 I n Fra nce, a modelling st udy pr e ceding the im plemen tation o f the s oda tax, pr e dicted an o ver -shift of 7% to 33% f or a specific du ty on soft drinks, while an equivalen t ad valor em tax would be under -shifted b y 10–40%. 57 The same was sh o wn fo r a possible tax o n sat urat ed fat in the U ni ted King dom, leading t o t he co ncl usio n t ha t a specific ra te excise tax wo u ld r educe sa tura ted fa t pur chases mor e, and genera te mo re subs tit utio n, t ha n an ad valo rem tax. 56 Specific taxes based on the ingr edients ra ther than whole p roducts incen t ivise p roducers to r efo rmula te their pr o ducts to r educe the concen tratio n of the taxed ingredien t. Theref ore , t he o verall impact of ingr edient-s p ecific taxes, like suga r-based taxes, is mo re difficult to p redict, as firms sim ultaneou sly m ust decide ho w to chan ge the pr o duct co n ten t as well as p r icing. Th e level o f tax pass-thro ugh may in cen t ivise con sumers to shift to l ow er sugar p roducts, bu t sugar in ta ke r eductions ma y also occ ur r e ga rdles s of co nsumers c hanging their beverage in take if indu stries ref ormula te their pr o du cts. A s reco mmended b y WHO , se ver al coun tries ha ve in troduced SS B taxes based on their sugar co nte n t. 61 H eal th T axes: P ol ic y a nd Pr actice 114 36. DeCicca P , K enkel D , L i u F . “Who pa ys cigaret te taxes? The impact o f cons umer price search. ” NBER W o rking Pa per , Mar ch; 2010. 37. Delipalla S, O ’ Donn ell D . Estimatin g tax incidence, ma rket po wer an d mark et cond uc t: The E uro pean cigaret te industry . 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Anderso n SP , de Palma A, K reider B. “T ax incidence in differ entiat ed pr oduct oligop oly . ” J ourna l of Pub lic Ec onom ics. 2001; 81(2): 173–192. © 2022 W orld Health Organization (WHO) https://doi.or g/10.1142/9781800612396_0005 This is an o p en access article p ublish ed by W o rld Scientific Pub lishing Com pany o n behalf of WHO and dis tribut ed under the terms o f the Crea t iv e Common s A ttribu t io n-N onCommer cia l-Sha reAlike 3.0 IGO (CC BY -NC-SA 3.0 IGO) License . Special F ocus 1 The UK Soft Drinks Industr y Levy as an Incentive for Be verage Refor mulation Marti n White * , J e an A d ams * , Cherr y L aw † , and P eter Scarb or oug h ‡ , On behal f of the SD IL E valua ti on t eam a S F 1.1. Background , d esign and imp l emen tat i o n of the S D IL A tax on suga r-sw e eten ed non-alcoh olic beverage s (soft drinks) was anno unced by the UK T reasur y on 16th M arc h 2016. The explicit a im of the S o ft Dr inks In du str y L evy (SDIL) is t o stim ulat e cha nges in ind ustr y beha viour a nd to r educe the suga r con ten t of soft drinks thro ug h inno vatio n and r eform ulation. Th e SD IL is a tax on man ufacturer s and im porters o f s oft a The evaluation of the SDIL repor ted in this chapter has been funded b y the UK National Institute of Health Research, Public Health Research Programme (Grant number s PHR 16/49/01 and 16/130/01). Mar tin White and Jean Adams were also suppor ted by the Medical Research Council (grant numbers grant Nos MC_UU_12015/6 and MC_UU_00006/7). The team comprises Mar tin White (chief investigator); Jean Adams, Adam Briggs, Steven Cummins, Richard Harrington, Oliver Mytton, Michael Rayner , Har r y Rutter , P eter Scarborough, Richard Smith (co-investigators); Linda Cobiac, Marcus Keogh-Brown, Cher r y Law , Da vid Pell, Catrin P enn-Jones, T ar ra P enney , Nina Rodgers, Henning T arp-Jensen, Dolly Theis (project staff). *  University of Cambridge, UK. †  London School of Hygiene & T ropical Medicine, UK. ‡  University of Oxford, UK. The UK Soft Drin ks I ndust r y Lev y 117 T able SF1.1. Str ucture of the UK Soft Drinks Industr y Levy . Sugar concentration (g/100 mL) Levy rate (£/L) Higher levy tier ≥8 0.24 Low er levy tier ≥5 and <8 0.18 No levy tier <5 0.00 (no levy) drinks in t iers a ccor ding to the suga r con cen tratio n of drinks (T able S F1.1 ). Com panies ma nufacturing o r importing <1 million li t r es of eligible drinks per year ar e exem pt from the levy , as ar e mil k-based dr inks, pur e f ruit j uices, drinks s old as po wders an d drinks con t ainin g >0.5% a lcoh ol b y vol ume. The S DIL wa s im plemen ted on 1s t A pril 2018. The 2-y ear dela y b etween anno uncemen t and im plemen t a t io n a llo wed time fo r busines s es to r espond. F ro m J une 2016, there was a period of pub lic consul t a t io n, after which the lev y design was finalised and then passed in to la w in t he Fina nce Bill of M a y 2017. 1 The in t r o duction o f the SDIL f ollow ed a length y p eriod of gro wing concern a mo ng g ov er nmen t, civil so ciety and p ro fessio nals abou t t he ext en t and co ntin uing rise of excess body weigh t and poor diet amo ng the British popula tion. The emer gence o f a natio nal ob esi t y ep idemic f r om the la te 1980s on war ds led to a ser ies o f gov er nmen t obesity stra tegies (13 in total from 1992 t o 2015), 2 t he esta blish men t of a N atio nal O besity Obser vat or y , which la ter became part of Pu blic H ealth England, a g o vernmen t agency estab lished in 2013 an d a n umber of go vernmen t enquiries. These actions w ere in creasin g ly en courag e d b y a g r owing a nd vocal adv ocac y coalition, which la tterl y found a cele bri ty cha m pio n in J amie Oliv er (televisio n chef a nd en trep reneur). O liver ’ s S epte mber 2015 te le visio n documenta r y ‘ S ugar R ush ’ called fo r a t ax o n sugar y drinks and Oli ver successfully in t r o duced a 10 pence lev y o n s oft drinks in 37 of hi s o wn res t a uran ts. 3 I n M a y 2015, the W orld H ea l th Organ iza t io n (WHO) r ec o mmended taxatio n of SSBs t o reduce suga r consum ptio n as an effective in ter ven tion to curt ail the modifiable risk facto rs f or no n-comm unicable diseases H eal th T axes: P ol ic y a nd Pr actice 118 (NCDs). 4 , 5 This r ecommen da tion was end or sed by the UK go vernmen t’ s Scientific A dvisor y Commit tee on N utrition (SA CN) ( J uly 2015), 6 t h e Ho u s e of Commo ns H ea l th S elect C o mmit tee (Oc tober 2015) 7 an d Public H e alth England ’ s Sugar Redu ction: the evidence for a ction (October 2015). 8 Excess co nsum ption o f calorie-dense foods and beverage s con taining high levels of fr ee sugar s con tribut es to the bur den of N CDs. Further , epidem iological evidence increasin gly sho ws that suga r in liquid fo r m is uniq uely da ng ero us for h e alth, given i ts asso cia t io n w i t h obesity a nd incidence o f typ e 2 diabetes. 9 , 10 Sim ulation st udies hav e strengthened ar gumen ts for r educing sug ar co nsum ptio n by modelling the im p acts of SS B taxes. 11 – 13 N evert heles s, t he a nno uncemen t of the S DIL in earl y 2016 came as a surprise to ma n y , given r ep eat e d indica tions b y s enio r repr esenta t iv es of the UK Go vernmen t that s uch a measur e would no t b e con sidered. F ollowing the a nnounce men t of the S DIL in 2016, ther e was an immedia te nega tive r e action fro m the UK s o ft dr inks indu str y in the pub lic media and trade p ress. This rh etoric pla yed out o ver the year a s the pub lic con sultatio n c o ntin ue d an d Gov ernmen t prepa red to legis lat e, with warnings of sever e e co nom ic im p acts fo recasted. On ce the SD IL b ecame la w , the ton e of the m edia discourse chan ged, a ppearing in stead to r eassure indu str y stakeho lders tha t an y damage o r repercussio ns fo r industr y re sulting fr om the SD IL c o u ld be mitiga ted and tha t industr y was su pportive of g overnmen t effo r ts to im pr ove health. 14 S F 1.2. P lanning a n e va lua tion An independen t evalua t io n of the SD IL was funded by the UK N atio nal I nsti tute f or H ea l th Rese ar ch (NIHR). The evalua tion co nsidered the S DIL as a series of even ts within a com plex ada ptive sys tem. I t sought to a ssess ho w t he S DIL might a ffec t a wide ran ge of pot en t ial econo mic, so cial and health-r elat ed ou tcome s an d to model po ten tial f u tur e impacts. I nitial theorisa t io n of the poten tia l im pacts across sector s drew on esta blis hed theor y in re latio n to econo mics, pop ulatio n inter ven tion s and sys tems thinking and b y review ing evidence fro m e valua tion an d modelling st udies of o t her SS B t axe s. This led to the develo pmen t of an ini tia l con cept u al ma p The UK Soft Drin ks I ndust r y Lev y 119 of the sys tem, inc ludin g p ot ential impacts and h yp othesi sed c a usa l pa t h ways. Consensus o n this was sought thr ough dia logue wi th key stakehold ers in in ter v iews and a n online Delp hi st udy , le ading t o a fina l co ncept ma p . 15 This ena bled the develo pm en t of h yp otheses co ncer nin g m ultip le p ot ential im p acts of the S DIL, both int ended and un in tended, and their pa t h wa ys of action. I den tificatio n of the data a vailable to t est these hypotheses then led to the design o f a pragma t ic set of evalua tive st udies, mostly usin g rou t inel y a vailab le da ta and na tural experimental designs. 16 S F 1.3. I mpacts on sugar co nt en t, price and pack age sizes of soft drinks A key initial anal ysis explo red the effects of the S DIL on suga r concen tration in drinks. The stud y analysed data on the full rang e of soft drinks on o ffer in UK su permarkets fro m 2015 to 2019, explo r ing c hange s in fo r m ul a tion, distingui shing in dependen t branded a nd su p ermark et branded drinks. A con trolled in terr up ted time s eries design assessed cha ng es in lev y-eligible (in ter ventio n) com p ar ed to ineligible (co ntro l) dr inks in a to tal of 209,637 obser vatio ns of soft drinks a vailab le on UK s upermark et shelv es o ver 85 weekly time poin ts b etween Septem b er 2015 an d F eb ruar y 2019. Obs er ved trend s in sugar co ncen tratio n were co mpar ed w i th the coun terfac tual o f pr edic ted p ro p o rt io n of drinks over the lo wer lev y thr esho ld, modelled from pr e-int er ven t io n t r ends. 17 F ro m t he a nnouncemen t in 2016 there was a grad ua l, b ut accelera ting trend in r eduction of the p ropo rtion of drinks on sale tha t wer e over the lo wer levy t hr eshold (5 g/100 mL suga r). There was then a su bstantial step cha ng e in this pr oportion a t t he time o f implem enta t io n, fo llow e d b y a con tinuin g down ward tr end, such tha t by 11 mo nths post-im plemen tatio n (F ebruar y 2019) t he p ropo rt io n of in ter ventio n dr inks o ver the lo wer lev y suga r thresh old had r educed from 51.7 (95% co nfidence in ter val: 50.9 to 52.6%) pr e-anno uncemen t to 15.4% (14.8 to 15.9%), a fall of 33.8 (33.3 to 34.4) percen tage poin ts. There was lit t le evidence of a ny im pact of the anno uncemen t or im plemen tatio n of the SD IL on the pr oportion of H eal th T axes: P ol ic y a nd Pr actice 120 1. 0 Intervention drinks - 99% CI Contr ol dr inks - 99% CI Count erfactual Announcement Implementation 0.8 0.6 0.4 P roportion over 5g sug ar per 1 00ml 0.2 0.0 Sep-1 5 Oct-1 6 Dec-1 7 Feb-1 9 F ig. SF1.1. Changes in propor tion of soft drinks over the low er levy sugar thresh- old, September 2015–Februar y 2019. con trol ca tego r y (no n-eligible) drinks with sugar co ncentra tions o ver the lo wer levy t hr eshold (Figur e SF1.1 ). 17 Figure SF1.2 sho ws ho w the distribu t io n of the suga r concen tratio n of soft drinks on su p ermark et shelv es cha nged from befo re the ann oun cemen t of the S DIL to after im plemen tatio n. Dr inks ar e colour -code d b y le vy tier . Pre-a nnounceme n t, there w ere pea ks in the distribu tion a t 0 and 11 g/100 mL, rep resen t ing s ugar -free and ma rket leading higher levy t ier drinks, respect iv ely . After im plemen tatio n, t he zer o sugar ca tegor y grew b y abou t 20%, new p eaks ap p ear ed just belo w the 5 g/100 mL and 8 g/100 mL lev y thres holds and the p ropo rtion of drinks in the higher lev y tier decreased substa n t ially , albeit wi th a p eak rema ining a t 11 g/100 mL. 17 The S DIL was no t primarily designed to be a tax on co nsumers, wi t h man ufacturer s and im p orters e xpec ted either t o p a y t he levy or pr oduce The UK Soft Drin ks I ndust r y Lev y 121 0.6 0.4 Density Sugar (g per 1 00ml) Sugar (g per 1 00ml) 0.2 0.0 0 5 8 14 0.8 Pr e-announcement sugar levels P ost-implementation sugar levels 0.6 0.4 Density 0.2 0.0 0 5 8 14 0.8 Zero le vy rate 1 8p/L levy rat e 24p/L le vy rat e F ig. SF1.2. Distribution of SDIL-eligible soft drinks available in UK supermar - k ets b y sugar concentration, pre-announcement and post-implementation of the SDIL. drinks with a low er suga r con ten t to av oid payin g t he levy . H o wever , i t was h yp othes ised t ha t some man ufactur ers wo uld not r efo r m ul a te or in troduce new low er sugar alt erna tives, b ut seek other wa ys to mitiga te the cost of the tax to their busin ess. W e h yp othesised they may do this b y , fo r exam ple, passing o n s o me or all of the cost o f t he levy to cons umers, inn o va ting an d dive rsifying their mark et offer t o incr e ase pr ofits, o r by c han g ing pac kage sizes and p rices of their existing o fferings, o r b y additio nal marketing o r a com bina t io n of this diver s e ran ge o f t actics. H igher lev y tier drinks had an a verage p re-im plemen tatio n price of £2.51/L (2.403 to 2.622), which incr eas ed by £0.075/L post-im plemen tatio n, rep resen t ing a +31 (+15 to +48) % pass-thr ough rat e fo r t he tax in this ca tego r y o f dr inks. I n c o ntrast, lo wer lev y tier drinks had an a verage p re- im plemen t a t io n price of £3.193/L (3.058 to 3.334) a nd t his r educed by £0.107 (0.06 to 0.153) post-im plemen t a tion, rep resen ting a pass-thr ough ra te of −50 (−85 to −33) %. H igher lev y tier drinks increased in package v olume b y an a verage of o nly 1 (−15 to 17) mL from befo re to a fter imp lementa tion of the tax. Lowe r lev y tier drinks, how ever , increased in vol ume by a n avera ge of 13 (3 to 23) mL. H eal th T axes: P ol ic y a nd Pr actice 122 U nderlying these av erage cha ng es in suga r concen t ra tion, price a nd packag e sizes of so ft drin ks la y s om e dif fer ences in individual b rands, and in dependen t ver sus su p ermar ket p roducts, which suggest s trat eg ies specific to differ ent ma rket niches w ere ado pt ed that r equire further detailed in vestiga t io n. 17 S F 1.4. I mpacts on the soft drinks industr y Analysis o f early ind ustr y medi a discour se concerning the S DIL suggest ed tha t it migh t hav e a negati ve im pac t o n ind ustr y and th us the natio nal econo my . Our studies o f the SD IL to date h a ve look ed at b usiness im pac ts in two wa ys. First, a st udy exa mined the effects of the a nno uncemen t of the SD IL, and subsequen t even ts, on the sh ar e prices of the soft drink com panies listed o n t he Lon don S tock Excha ng e using even t stud y metho dology . 18 This fo und that, al though there w ere some sm all, daily ab normal stock mar ket r eturns b o n t he da y of the ann oun cemen t (16th Mar ch 2018) and the fo llowin g day — le ss than a 4% los s of val ue a l tog ether — shar e prices quic k ly ret ur ned to n ormal such tha t ov era ll, sha re p rices con tinued to rise ov er t he fo llowin g year . Th us, whi le the S DIL a nnouncemen t was initially perceiv e d as detrimen tal news by the mar ket, nega tive st o ck r eturns wer e short-lived, indica t ing a lac k of ma j o r concern b y shar eholders. The re was n o e vidence of a n ega t iv e stock mark et react io n to the two subsequen t anno uncements: re lease of draft legisla tion o n 5th De cember 2016 a nd con firmatio n of the tax rat es on 8th Ma rch 2017. 18 The second st udy looked a t the value o f s oft drinks man ufactured in the U nited Kin gdom tha t is fo r domestic sales. U sing in terrupt e d time series metho ds, the a na lys is examin e d whether and ho w domestic t urnov er of UK so ft drinks man uf actur ers cha ng ed after the a nno uncemen t and the im plemen tatio n of the SD IL, using data fro m 2010 to 2019. 19 O v erall, b P ercentage change in daily share price — the difference between actual % changes in daily share price minus the predicted % change in share price under normal fluctuation. The UK Soft Drin ks I ndust r y Lev y 123 there wa s a sta tistically significan t impact on bo th the level (−5.6%) and trend (−0.5%) o f domes tic turno ver in the 2-year perio d between the SD IL anno uncemen t and im plemen t a t io n (2016–2018). The resul ts thu s sho wed evidence of a sh ort-term, nega tive im p act of the S DIL anno uncemen t, but this effect did not co ntin ue p ost-im plemen tatio n. The findin gs suggest tha t man ufacturer s were, t o a l a rge e xten t, able to mi tigat e the effects of the lev y befo re i t came in to effect. Thus, do wnt ur ns in so ft drink man ufac tur ers ’ dom estic sales likely r eflec ted in war d in vestmen t in refo r m ulation a nd other activities in r espon se to the lev y . 19 S F 1.5. C oncl usions and im pli c a tions The S DIL was des igned as a fis cal polic y aimin g to chan ge indus t r y beha viour b y bringing a bout r eduction in the suga r con ten t of soft drinks to im pr o ve pop u la t io n health. Altho ugh eva lua tion o f health im p acts is fo r thcomin g (f urther studies o f impacts on p urcha sing a nd dietar y con sump t io n of soft drinks, dental caries an d obesity , as well as modelling lon ger term im pacts on mo rbidi ty and mo rt ality , quality of lif e and costs- effectivenes s are in p rogres s), 16 findings to da te sugges t tha t the lev y is achieving the in tended aim. Despi te bleak fo recasts b y the s o ft dr inks indu str y at the time o f t he anno uncemen t of the SD IL, t he an noun c emen t and im plemen tatio n of the SD IL do not a ppear to ha ve had subs tan t ial or lastin g nega tive im p acts on bus inesses, albeit co m p an ies a ppe ar t o hav e had to in ves t to cha nge their off ers to con sumers in or der to success ful ly m itiga te the effects of the tax. This sugges ts t he S DIL is beneficial for pop u la t io n he alth a nd neu t ral fo r i n d u s t r y. Considera tion o f the SD IL as a series of even ts in a com plex system (o r set of in terrela ted com plex system s) has enabled evalua tors t o hypothesi se a wide ran ge o f p ot en t ial impacts o f the lev y acr oss sectors. F ro m this, an evaluatio n t ha t cap tures these div erse impacts has been designed in order t o gain a balanced under standin g of the health and econ omic effects associated H eal th T axes: P ol ic y a nd Pr actice 130 reven ue and direct job loss. I ndirec t em ployme n t w ill als o decr ease (k no wn as the m u l tiplie r effect, se e Box 5.1). H ow ever , individ uals wil l subs t i tu te their spending to o ther pr oducts and hen ce genera te incr e ased demand a nd a new reven ue stream f or those pr oducts. S o metimes this ma y b e within the same ind ustr y s uch as in the beverage a nd alcohol ind ustries t hr ough substi tutio n to non-taxed beverages (i .e. wa ter or lo w alcohol p roducts) oft en pr o d uce d b y t he same co mpan ies pr oducing the taxed be v erages a nd/ or thr ough pr oduct ref ormula t io n efforts to wards n on-taxed lo wer suga r or lo wer alcoho l b everag es, there b y minimisin g o verall red uce d dema nd. Also , the go vernmen t will genera te tax reven ue, intr o ducin g new sp endin g in other sec to rs which will add to the in cr eased consum er spending o n other pr oducts and ser vices. T ogether , t his new spendin g crea tes extra demand a nd new em ploymen t in other sectors. A s ov era ll con sump t io n of the taxed p roducts decreases, reven ue genera ted ma y a lso decrease; ho wever , as Chaloup ka et al. 11 highlig h t, t his, f or most co un t ries, this rem ain s a lon g way o ff. In summa r y , instead of em plo yment los s es and eco nomic decline a s indu str y Health tax Increase in price of taxed good Decreased consumption of taxed good Increased health gains Improved productivity Health care savings Increased income to spend in other sectors Decreased demand of taxed good Reduced gross industry revenue Reduced direct industry employment Reduced indirect employment (multiplier effect) Reformulation Increase in government revenue Increased spending in other sectors No job loss/ job gain? Increased employment in other sectors ('sector shifts') Source: Author’ s own (2020). F ig. 5.1. Assumed interactions of health taxes on overall employment and productivity . The La bour M ark et I mpa c t o f H eal th T axes 131 suggests, the balance o f spending and em plo yment ul tima tel y – albeit with transie n t re struc t uring costs – will shift acros s s ectors. I n additio n, and separa tel y to the em plo ymen t impacts, within this framewor k we can also exp ect health taxes to im pro ve pr oductivity acro ss sec to rs, larg ely thr ough imp ro ved health, red uce d absen teeism (i.e. da ys absen t f ro m the wor kp l ace), r e d uced pr es en teeism (un productiv e time a t t he wo rkp lace), red uce d disab i li ty , incr ease d lif e expec tancy and mo re year s of w orking lif e. W ith sufficien tly high t ax levels tha t induce beha viour cha ng e, these indir ect b enefi ts can offset the nega tive inco me losses caused b y the taxes, partic ularl y for lo w-income ho useholds, an d ha ve a larg ely pr og res sive im p act. 12 F ur thermor e, the practice of ‘ earmarking ’ or ‘h ypothecatio n ’ a pr oportion o f the reven ue gene ra ted in several coun t ries (e.g. Ecuador , Eg yp t, Esto ni a, Finland , I celand, I ndia, K orea, N epal and Thailan d) is a popular co mp lemen tar y int er ven t io n to address a ny pot ential taxatio n- re la ted im p acts and t obacco hea lth-r elated is sues. The poten tia l to fund com plemen tar y polic y mecha nism s targ et ing al ternativ e livelihoods for farmers, p ublic a warene ss an d comm unity ed uca tion p rogrammes un der such scena rios is pr omisin g and aligns wi t h WH O reco mmenda tions o f a com pr ehensiv e p ack age o f p olicy instrumen ts to achieve maxim um im p act. In the P hilip pines, the 2013 r efo r m o f the tobacco tax struc tur e saw a significa nt incr e ase in the tobacco tax and con sequen t ly , t he r e ven ue genera ted. I ncluded in this r eform, an d a ligning wi t h WHO ’ s FCTC a r ticles 17 and 18 (p ro motin g alterna tive liv eliho ods fo r tobacco farmers), 15% of the g enera ted reven ue was ‘ earmark ed’ t o ‘ assist t obacco farmers in plan ting alte rnati ve cr ops or im plemen ting other li velihood pr ojec ts. ’ 13 W ith nearly 40,000 t obacco farmers in the P hilip pines this is im p o rt a n t, partic ular as nea rly 20% o f t hese farmer s believe it is the o n ly viab le crop fo r t heir la nd. 13 Similarl y , tax reven ue f ro m SSB taxes co uld be us ed to hel p transi t io n suga r farmers dependen t on s ugar cane farming t o alte rnati ve cr ops or H eal th T axes: P ol ic y a nd Pr actice 132 activities fo r income g eneratio n. W e refer the r e ader t o Cha pt er 9 on ‘ H ow to maximise r es our ces fo r health and bols ter su pport ’ for mo re inf orma tion on earma rking of health taxes. W e w ill no w dra w on em pirical evidence to illustra te the labour im p act ou tcomes o f thes e in teractions acr oss the affected sec to rs. Bo x 5.1. U nderstandin g the e v i dence Em plo yment a nd pr oductivity im pac ts o f health taxes re ly large ly on stu dies using eco nometric modelling methodologies which can be – and o ften ar e – s epara te com ponen ts of a b igger an alysis. F or exa mple , when determining p roductivity im pac ts, i t may be necessar y to firs t estima te the impact o f m ultip le morb idities o n morta li t y a verted (MSL T) befo re a cost-effectivenes s analys is (CEA) can be don e; similarl y , i t ma y b e necessar y to a nalyse an in pu t-ou tpu t matrix (IO A) befor e extending the a na ly sis to inc lude m u l tiplier e ffects (ME) or to extend the a na lys is with models like CGE o r REMI which use IO A as their basis fo r their analysis. Below , we pr ovide a b r ief o ver vie w of em plo y men t- and pr o d uctivity-rela ted met hodologies. Employment-r ela ted metho dolog y • I nput-o utp ut analysis (I O A) IO A is a we ll-establis hed econo mic tool com prising all p rod uction, con sump t io n and mon etar y flow s to (in puts) a nd f r om (ou tpu ts) discrete eco nomic sectors f or all t radi t io nal econo mic ac tivi ty in a na t io n ’ s e con om y . In o ther wo rds, as a r esult o f inp ut of m a teri als from o ther s ector s, t he (beverage) ind ustr y can sell its ou tpu t, as an in termediat e in put p roduct to an other ind ustr y , or as a final pr o d uct to families, to the g overnmen t or t o the external se cto r . 14 N ote: I OS metho dology is limited f or m odelling the impact o f a The La bour M ark et I mpa c t o f H eal th T axes 133 pricing policy as it does no t incorp o rate co nsumer r esp o nse (i.e. substi tutio n to other goods and ser vices). • M u ltip li er eff e cts (ME) A benefit o f IO A is t he a bili t y to calculate e m plo yment m ultip lier effects (ME) or in o t her w or ds, to qua n t ify t he em plo ymen t impact of a p r icin g polic y (e.g. fro m a hea l th tax) on the taxed indus t r y (e.g. tobacco) a nd acr oss al l ind ustries in an econo my (e.g. trade , ser v ices, agricultur e). 14 Fo r exam ple, if an incr eas ed tobacco tax of 10% decr e ases em ploymen t b y 2 jobs fo r e ver y $150,000 lost directly thro ug h decreased tobacco p rodu ction, the indirect im p act on o t her in dus t ries re la ted to the p rodu ction of the t obacco ma y also decrease by sa y , 1 job p er $150,000 los t. This makes the ME fo r a 10% tobacco tax 3 j obs. • Comp utable gene ral e quilibri um (CGE) CGE comb ines econo mic t heo r y wi th real econo mic da t a to qua n tif y the econo mic impact of a policy chan ge scenario (in this review , an incr eas ed price o f SSBs). I t can take in to accoun t a red uc tion in d eman d or a s ubstitu tion between pr oducts. H ere, com parison between no tax (bas eline) a nd the increased tax (p olicy sim u la t io n) estimat ed what the eff ect of this deman d cha ng e wo u ld be on the main m acroecono mic variables a nd its su b-com ponen ts as well as those o n the indu str y level com ponen ts of the econo my . 15 • R egi o nal E conomic M o dels, I nc . (REMI) REMI modelling inco rp o ra tes IO A as a com p o nen t of its m o delling a ppr o ach. REMI i s useful for addr essing wha t effects p olicies ha ve o n an eco nom y or which p ro je ct ma y warran t tax incen t iv es. Im p acts assessed ar e econo mic (i.e. em ployme n t, general a nd GDP). 15 • I nte rrupted time series analysis (ITSA) ITSA is a statis tical metho d useful for det er minin g the initial effects of an in ter ven tion or policy when rando m con trolled H eal th T axes: P ol ic y a nd Pr actice 134 tria ls (RCT s) ar e imp rac tical or p rem a tur e. The pr o cess in vo lve s taking mul t i ple, r ep ea ted obs er va t io ns a t regular in ter vals b ef or e and a fter an in ter ven t io n (fo r t his ch a pter , health taxes). Chan ges in trend s after the in ter ven t io n are then determined thr ough sta tis tical a naly sis. 16 Pr o ductiv it y-rela ted metho dolo g y • M u lti-sta te lif etables (MSL T) Life tables a re we ll establis hed and widel y us ed in Publi c H e alth to p ro vide info r ma tion on lif e exp ect an c y at diff eren t ages fo r differ en t disease pr o cesses a nd ther efor e depicts a pop ulatio n ’ s health sta tus. H ow ever , to estima te to t al im pact of m ultiple mo rbidi t ies (like N CDs) ‘ mul ti-stat e ’ lifetable s be co me a sim ple and a pp rop ri a te methodological ap pr oach to inco rp o ra te several diseas es in a lif etable while factoring in co morb idity affects. W ith this in mind, p ublic health resear chers can look in to the effects of a p reven tative in ter ven tion (like heal th taxes) on a n entir e popula tion ov er time. 17 • Cost of il lness a pproach (COI) This modelling a pp roac h has been use d exten sivel y to estima te the econo mic costs of smo k ing. S im ply , the gros s econo mic cost o f an illness is di v ided in to ‘ dir ec t costs ’ incurred in a given year (e .g. health costs or n on-h ealth costs) and in direct costs (e.g. pr oductivity losses in the curren t and futur e years d ue to disab ility an d mo rt ality). The s um of the direct and indir ec t is oft en expr essed as a p er centage o f gross do mestic pr oduct (GDP). 18 • H uman capi tal ap proach (HCA) Rela ted to the estima tion o f indir ect costs in the C OI a pp roach (abov e), t he h uman ca pital a ppr oach (HCA) calculates the p resen t value o f lab o ur produ ctivity loss d ue to morb idity and m ort ality . The La bour M ark et I mpa c t o f H eal th T axes 135 The H CA is con sidered best fo r reflect in g the im pacts of a health tax f r om a so cietal perspe ctive. 7 , 19 • Cost-effective analysis (CEA) Cost-ef fective a nalysis can be summarised as an a na lys is com paring the cost o f alterna tive p roce d ures or in ter ven tions (in this case, health taxes) with the actual or expected hea l t h gain s in units o f life yea r sav e d, dea ths av er ted, cost per case cured or cost per symp tom-free da y . I n t his c ha pter , CEA has been comb ined with H CA (abov e) to determine incr e ased cost-effectiven ess o f health taxes with p rod uctivity gain s. 19 , 20 5.2. Employment im p acts of health taxes The health an d econo mic b enefi ts of well-designed health taxes a re well estab lished. Desp ite the gro wing n umber of coun tries adop ting this administra tivel y feasib le polic y tool ther e are s till p olicymakers who hesi t a te, prima rily due t o uncertainty a roun d claim s of job loss an d econo mic do wn turn. I n t his sect io n, we discuss the evidence fo r emplo ymen t im p acts of taxe s on t obacco , alcohol a nd SS Bs. 5.2.1. Eff e cts f r om t obacc o taxes F or decades, the tobacco ind ustr y has claim ed that they pla y a vital role in a na t io n ’ s e con om y . L osses to em plo y men t and inco me genera tion as w ell as to the significan t go vernmen t reven ue con tributio ns ar e us ed as leverag e to influe nce policy maker s and genera te co ncern ar ound the poten ti al nega tive econo mic con s equen ces of im plemen ting o r incr e asin g tobacco taxes. H ow ever , fo r most coun tries, the evidence re la ting to t obacco con t r ol policies does not su pport these claims. Exten sive st udies da t ing bac k to the 1990s ha ve refu ted such claim s and ser ved as e vidence t o sho w t he los s to p roductivity and in creased health care cos ts of pr emat ure mo rbidity a nd mo r tality due H eal th T axes: P ol ic y a nd Pr actice 136 to to bacco cons ump tion far o utweigh the econo mic con t rib utio ns made; and , t hr eats t o j ob los ses are gr e a tly ov ersta ted. 21 I n other w or ds, as the econo m y transi tion s to a no n-tobacco econo m y , this transi tion will, in reality , take place o ver a significan t per iod of time a nd theref ore the im pact of em ploymen t loss in the tobacco sector is r educed. Also , as our con cept u al framewo rk sho ws (Figure 5.1 ), em ploymen t would gro w in other sec to rs of the econo m y , ther eb y offset ting tobacco-r elated job losses. I ndeed, econo metr ic st udies aro und the wor ld ver y clear ly sho w tha t an y jobs lost a re o ffs et wi th jobs gained b ut mo re co un tr y-spe cific evalua t io ns wo u ld co n tribu te to this evidence base. 12 N o e vidence bett er exem plifies this im pact of tobacco co n t r ol policies on drivin g sec to ra l shifts tha n if tobacco co nsum ptio n was either red uce d or t otally elimina ted. F or ins tance, in p r ima r y US tobacco-gro wing regio ns, ov er t ime, job s lost thro ugh such scenarios of r e d uce d or t otal ly elimina ted tobacco con sump t io n would be rega ined in all eig h t of the no n- tobacco r e gio ns f or both scenarios (Figur es 5.2 an d 5.3 , res pec tive ly). 22 Similar findin gs of net em plo ymen t gains acr oss se ctor s were seen in S o uth Africa. In terestin gly , this an alysis made the dis t inction between the types of co nsumer s pending tha t would occur with to tally elimina ting tobacco con sump t io n t hr ough tobacco co ntro l p olicies: if co nsumers s p en t t heir mo ney as a verag e consum ers (i.e . expendit ure on da y-to-day li ving), b etween 9,000 and 34,000 jobs w ould be creat e d; if ins tead, co nsumers spen t in a wa y tha t re sembled ex-smo ker’ s expenditur e (i.e. inc luding o n luxur y goo ds and ser vices with the extra income), u p to 50,000 jobs wo u ld be crea ted. Finally , the a uthor s indica ted if tobacco cons ump tion was no t elimina ted bu t reduced, 3,500 jobs w ould b e cr e a ted. 23 Figure 5.4 sho ws p ot ential net chan ges to em plo ymen t in s everal other coun tr ies fro m reduced o r com plete ly elimin a ted tobacco co nsum ptio n. 21 This wo rk is partic ularl y in terestin g be ca us e i t shows the diff ere nces between ho w a tobacco econom y may o p era te and indica tes the effect tobacco con tro l policies ma y hav e on em plo yment based on t obacco ’ s lab o ur in tensi ty . The The La bour M ark et I mpa c t o f H eal th T axes 137 –60000 –40000 –20000 0 20000 40000 60000 80000 Job change Gross impact on employment change (1993) Net impact on employment change (1993) Net impact on employment change (2000) United States Southeast Tobacco Nontobacco regions New England Mideast Great Lakes Plains Rocky Mountain Far West Southwest Southeast Nontobacco Source: Adapted from W arner et al. (1996). F ig. 5.2. Potential impact from reduced tobacco consumption in the US. –2000000 –1500000 –1000000 –500000 0 500000 Job change Gross impact on employment change (1993) Net impact on employment change (1993) Net impact on employment change (2000) United States Southeast Tobacco Nontobacco regions New England Mideast Great Lakes Plains Rocky Mountain Far West Southwest Southeast Nontobacco Source: Adapted from W arner et al. (1996). F ig. 5.3. Potential impact from eliminated tobacco consumption in the US. H eal th T axes: P ol ic y a nd Pr actice 138 two mos t striking exam ples in Figur e 5.4 are Zimbab we a nd Bangladesh. I f the fo r mer , a net exporter (i .e. pr oduces mo re ra w tobacco fo r export than they cons ume), s a w mark edly red uced or even elimin a ted g lobal tobacco co nsum ptio n, cha nges in do mestic ciga ret te con sum ption w ould not h a ve larg e net im pac ts o n o verall em ploymen t; ho wever , a significan t red uc tion t o exports and r elated p roduction could pot entially resul t in an a ppr oxima te 12% dro p in tobacco-rela ted em plo yment. I n con trast, in a net im p orting coun tr y li k e Bangladesh, wher e almost all cigar ettes ar e imported, elimina ting dome stic cigar ette co nsum ptio n could hav e an 18% net incr e ase in em ploymen t, thro ugh income tha t be com es availab le for s pending on poten tia l subs t i tu t io n to goo ds fro m s ector s tha t ar e prod uced domes t ically . 21 Lab o ur in tensi ty of the to bacco indus t r y (and o t her ind ustries rela ting to health taxes) depends o n a coun tr y’ s labour mark et shar e. N othing illustra tes this clear er than tobacco farmin g: nearl y 90% of global tobacco farmin g occurs in just 20 coun tries (pr edomina n t ly lo w- and m iddle-inco me 0.1 0 0.5 –12.4 0.4 0.3 0.1 18.7 –15 –10 –5 0 5 10 15 20 Canada (1992) US (1993) UK (1990) Zimbabwe (1980) South Africa (1995) Scotland (1989) Michigan State (1992) Bangladesh (1994) % net change to employment in base year Source: Adapted from W or ld Bank (1999). F ig. 5.4. Potential emplo yment impact from reduced tobacco consumption. The La bour M ark et I mpa c t o f H eal th T axes 139 coun tr ies (LMI Cs)). 9 , 24 Theref or e, to bacco pr o duction i s a ver y small part of most o t her eco nom ies. F or exam ple, co ntribu t io n f ro m tobacco indu stries to o verall na t io na l em plo ymen t in other LMICs s uch as Bangladesh, P akistan and the P hilip pines is <0.5%. 25 – 27 E ven coun tries heavily r elian t on t obacco pr oduction (see B o x 5.2 for a ca se stud y on the wo rld ’ s larg est tobacco man ufacturer), gr oss job loss estima tes fro m taxatio n impacts ar e again, modera te, negligible o r sho w net gain s. F ur thermor e, and similar to SS Bs, the China case stud y (B o x 5.2) and exa mp les of em plo yment leve ls in to p tobacco gro wing co un tries in Figure 5.5 illus t ra te how un derlying tren ds of m ultina tional merg ers a nd techno log ical adva nces aff ec t the tobacco ind ustr y , ir r esp ective o f taxes, yet ar e not inco r pora ted into es t ima tes. 24 , 25 Bo x 5.2. C as e st udy : T obacco tax imp act on labour in the wo rl d ’ s l arges t producer and cons umer o f to bac co 25 China gro ws one-thir d (2.435 million to ns of t obacco) of the w or ld ’ s tobacco an d c o nsumes o ne-third (1.7 trillion ciga ret tes) of the wo rld ’ s cigar ettes. I n a p o pulation o f 1.325 billion (2008), ther e were 300 –800 –600 –400 –200 0 200 400 600 800 1000 1200 1400 India Brazil Indonesia Malawi United States Zimbabwe Country Employment levels (000's) Employment levels (000's) (2013) Change in employment levels since 2000 (000's) Turkey Source: Adapted from International Labour Office (2014). F ig. 5.5. Employment trends for major tobacco growing countries. H eal th T axes: P ol ic y a nd Pr actice 242 the gro und- an d surface-wa ter q uality , affecting both urban an d rural comm unities, while syn t hetic fertilisers redu ce soil health and a re m or eover pr o d uced thro ugh int ensi ve use o f foss il fuels, making agricu lt ure o ne o f the main co ntribu tors t o amb ien t air pollutio n. 129 The use of pesticides a nd other chemicals, suc h as lead, mercur y , chr omium, a rsenic and vo l a ti le o rga nic com p ound s, also resul ts in mo rt ality , mo rbidi ty , disabili ties and im pairmen t to the cogniti ve develo pmen t of individ u als, especially children. S tudies sho wed that c hi ldr en exp osed to lead developed lifetime in tellectual disabilities, wi t h o ne in three ch ildren wo rldwide p resen t ing eleva ted blo od lead le vels. 130 The r outine use o f an tibio t ics in an imals con tribut es to an tibio tic res istance , reducin g the effectivenes s of the drugs for h uman use. 131 B esides, the gro wing num b er o f farm animals a nd the asso cia ted reduction in genetic di vers ity ha ve been linked with the emergen ce of diseases that pose a significan t threat t o b oth an imal and h uman health. 131 , 132 T o break the vicious cir cle of en v ir onm ental degradatio n and cos ts to h uman health, i t is necessar y to pr omo te activities tha t encoura ge individ uals to shift beha viour s to heal th y e a ting, thro ug h educa tion a nd pub lic hea l th cam p aign s. Fr om the su pply s ide, a r epurp osing o f public in vestmen ts and subs idies fo r foo d an d farming s hould be devise d to incen t ivise the p rod uction of a ra nge o f health y and susta inab le foods, ra t her than f o cusing o n foo ds suc h as cereals. V ariatio n in prod uction is an expensi ve underta king b ut redir e cting mo ney f r om subsidies f or suga r and o t her cr ops to p rom ot e resear ch on a nd develo pmen t of clean techno log ies, f or exam ple, co nco mita n tly with a b usiness m o del tha t prio r itises en viro nmental an d so cial ou tcomes, ca n b e a starting poin t for im pro ved food sec urity a nd sustai nab le farming p rac tices. A taxa tion syst em tha t encoura ges farmers t o in vest in mo re div ersified foo d p rod uction is also desirable . 133 , 134 T ax struc t ure s that encoura ge a mor e diver sified prod uction an d con sump t io n of fr uits a nd vegetab les, red uce t he cr e a tion of a nimals for mea t con sump t io n and ar e envir onmen ta lly friendly can fo rm a founda tion Expand ing H eal th T ax a tion 243 fo r hea l thier econo mies. The Organ isa tion f or Eco no mic Co-operatio n and Develop ment (O ECD) has studied the effectiven ess o f a range o f t axe s in agricu l tur e – f r om the taxa tion of pesticides a nd ferti lisers to en v ir onmen t al taxes, suc h as carbon a nd p oll utio n t axes a nd resour ce t axe s (wa ter pollu tion) a nd ha ve conc luded that evidence has de mon strated the limi ted effectivenes s of these t ax es in pr omo t ing s ustaina ble agric ult ure. 135 Thi s limit e d effectiven ess co uld be rela ted to the fact t ha t t he cos ts of taxa tion ar e com pensat ed by the widesp read use of su bsidies a nd incen tives. The f o cus on p ublic health sho u ld be the explici t aim o f fis cal polic y in agricu l ture, and r obus t evidence f r om health taxes fro m other sectors, s uch as the lev y on s ugar y drinks, hav e pro ved tha t it is possi ble to p ro mo te sus tainab le cha ng es in pr o d uc tion a nd consum ptio n b eha viours. 136 , 137 I nno vativ e pr ojects in lo cal go vernmen ts can rip ple a nd sp read, benefiting n ot o n ly in divid uals ’ he alth a nd we ll-b ein g bu t a lso con tributin g to r elie ve o ther s ocietal pres sur es such as food cris es a nd pov er ty . U rban and peri-urb an fa r ms a re re levan t exam ples. I n H a vana, a b ou t 30% of the urban land is dedica ted to gro wing food t ha t is cons ume d b y t he local popula t io n. I n other C uban regio ns, up to 80% o f al l food pr o duced is co nsumed in the corr espondin g city or r eg io nal p erimeter . 138 I n Sao P aulo , larg e munici pa l allotmen ts prod uce or ganic fr uits a nd vegetab les tha t are su pplied to the schools of the r egion. 139 Other urban farms, suc h as t hose in Dall as, T exas, pr o d uce fr uit a nd vegetab les in abando ned ar e as tha t are do nat e d to the com mun ity . 140 Ma ny o t her exa mple s of ci ty farms exist, fro m New Y ork t o The H ague and S hanghai , includin g hou sehold urban a gric ult ure pr ojects in P aris, L usaka, Ka m pala and Y aounde. 141 – 145 Ci ty farms, either dir ec tly o r indir ect ly , help t o sec ur e the pr ovisio n of pu blic g oo ds: suc h as clean air (b y red ucing the need for f oo d tran sportatio n), to re-usin g and decr e asin g the waste o f wat er and , in s om e cases, using h ydr opon ic technologies, permitting the gr owing o f plan ts in a wa ter y s ol ution o f mineral nu t rien ts inst e ad o f using so il. M or e importan t ly , such pr ojects help cut the p ressur e on rural lands f or defo resta t io n, pr otect biodiv ersi t y a nd wildness a nd r educe green ho use gas emissions. 146 H eal th T axes: P ol ic y a nd Pr actice 244 G am bling Gam bling i s defined as betting mo ney on an o utco me of un c ertain re sults to win mo ne y an d incl udes act ivi t ies o f casinos, lot teries, as we l l as ho rse and dog ra ces, amo ng other s. F or most indi v id uals, gam bling i s a fo r m o f en ter tainm en t , as ma ny peop le can ga mb le witho ut exper iencin g an y harm. H ow ever , a minori t y o f gam blers pr esent ga mbling illnesses, suc h as dr ug and alcoh ol addict io n and men ta l health con ditio ns leading to crime an d bankru pt c y . 147 Ga mbling i s a popular activi t y in both urban an d rural areas, bu t it is in rural s ettin gs where i ts most harmful effects ha ve been obser ved. 148 Gam bling h as been increasingly r ecog nised as a pu blic health is sue, leadin g to sub stan ti al costs to the h ealth system, indi v id uals and societies. In the U nited S t a tes, fo r exam ple, 2.6% of the pop u la t io n (or 10 million people) a re estima ted to ha ve an addiction p roblem beca use of ga mb ling, with the ag e gro up of 16-24 y ears o ld being the most su sceptible. Ga mbling cos ts USD 6 billion a nnually in p ublic ser vices to the US econo my , includin g costs of health, welfa re , emplo ymen t , ho using and criminal j ustice s er vices. 149 The gradual liberalisatio n of gam bling an d the adven t of the in ternet ha ve hel p ed the widespr ead exp an sion o f the gam bling ind ustr y , with exponen tial gro wt h in the n umber of electro nic gaming mac hines, larg e casinos, lo tteries and o nline gamb ling site s in the last 15 year s. Ad ver tising p lays a key r ole. I n the U nited Kin gdom, the n umber of ga mb ling ad vertisements a ired on T V has risen substan tia lly : in 2006, a pp ro ximate ly 152,000 advertisements wer e placed again st 1.39 million in 2012; o n ly i n 2017, the gam bling ind ustr y spen t almost US D 2 billion o n advertising a nd ma rketin g in the coun tr y . 150 Lapt ops and de sk to p com pu ters ar e t he mos t commo nly used dev ices f or online ga mbling, being em plo yed by 50% o f online gam blers in the U nited King dom an d 55% in the U nited S t a tes, although mob ile phon es ar e g r owing in use, with 39% an d 29% of ga mblers u sing them in the U nit e d Kin gdom and U nited S tat es, respect iv ely . 149 , 151 Gam bling i s an influen tia l ind ustr y world w ide, wi th an estima ted USD 56 5 billio n global mark et, exp ected to incr ease at a n ann ual rat e of 5.9% thro ug h 2022. 152 The U nit e d S t a tes, J apan a nd I taly ar e t he to p three Expand ing H eal th T ax a tion 245 reven ue genera to rs in the legalis ed gam bling ind ustr y , corr esponding to abou t 32% of the global gamb ling r e ven ues genera ted wo rldwide. 153 Eve n in coun tr ies wher e gamb ling is legally r estric ted, suc h as in Brazil, the ind ustr y is estima ted to genera te USD 13 b il lio n, w i th abou t 60% comin g from illegal gam bling, mainl y from the so-called ‘ anim al game ’ ( jogo do bicho ). 154 Gam bling is also an i m p ortan t sour ce of reve n ue for co untries. I n the U nited Kin gdom alo ne, the betting a nd gaming tax r e ceip ts reached USD 3.8 b il lio n in the fisca l yea r of 2018/2019. 155 On the other ha nd, the costs a ttributab le to gam bling a re also substan tia l. A ustralians ar e estima ted to spend the most o n gamb ling per head p er year wo rldwide (USD 1,288 per ca pi ta), follow e d b y residen ts in Singa pore a nd I re land, who spend, o n a verage, US D 1,174 and US D 588, in 2017 figures. 156 Citizens in the U nited S tat es collectively s p en t USD 117 billion, while in China and J apan, the los s es wer e, res pec tive ly , US D 62 billion an d USD 24 billion in 2016 p rices, with 1–4% of this pop ulatio n left w i t h pr oblem s of debt a nd bankr up tc y , di vo rce, lost p roductivity , cr ime (suc h as t heft a nd fraud) a nd depr essio n or suicide. 147 , 157 P oli t ical, r eligious an d comm unity gro ups ha ve been advoca ting fo r tighter r egulation o f the gamb ling sector , pr essuring f or policies t o pro tec t the most vulnera ble, in cl uding the r estr iction o f advertisements in diff eren t media, res tric tion s on the use of cr edit a nd deb it car ds fo r online gam es and incr eases in the price of health ins urance fo r gamble rs. 158 The re is also a mo vemen t to tr y a nd shift the f oc us o n individual r espon sib ility o nly and t o look a t the respo nsib ility o f t he in dustr y in sha pin g addiction b y influenci ng policies, re search a nd f ra ming o f public deba te. 159 , 160 S tronger leg isl ations an d policies, incl uding tax increases, ar e b ein g adv ocated in ma ny co untries, as stu dies ha ve demo nstra ted that costs o f gamb ling ar e li ke ly to co nsiderab ly ou tweigh t he benefi ts in terms of tax reven ues an d that the h arms o f gamb ling to society should be mor e systema tic ally addr esse d. 161 – 163 The gam ing ind ustr y is one o f t he sectors tha t cause the most ha r m to individ u als, an d yet pub lic sec to r sp endin g to help indi viduals and their families a ffected by the dir ec t con s equences o f addict io n, includin g a gro wing H eal th T axes: P ol ic y a nd Pr actice 246 n umber of childr en, has be en minim al. 164 The curren t reven ue genera ted b y the se cto r , even if en tirel y sp en t on health pr omo t io n and h ealthcar e, wo u ld no t matc h t he costs o f gamb ling-rela ted to addiction. I n t he U ni ted Sta tes, fo r exam ple, the so cietal costs o f gam bling ar e estima ted to be abou t USD 129 b il lio n, i nam ely 1.6 times m or e t ha n t he r e ven ue of US D 79 billion genera ted b y gam bling in 2018, wi th the pub lic sec to r p a ying the bulk of costs r ela ted to this harmful act ivi t y . 156 , 157 , 165 A gam bling-lev y f or heal th, in additio n to the existing l evels o f taxatio n, and c le arly e ar marke d for h ea lth care, rese arch an d e ducat ion app ears not only de sirab le bu t p o ten ti ally necessar y to tackle the health issu es of ga mbling from a societal p erspective. H o wever , this a ppr oach alone is no t enough to pr omo te the public h ealth int erest. Existing taxa tion on ga mbling i s hig hly regr essive , and ga mblin g tax ref orm sho uld a lso be t aken in to con sideratio n within the framewo rk o f a com pr ehensiv e respon s e tha t con siders all forms of ga mbling p roducts in the con text o f re levan t c ult ura l diffe ren ces. 166 – 168 7.3. C ha ll en ges and op p ort unities with the imp lemen ta tion o f hea lth tax es Reven ue genera ted fro m the taxatio n of sources o f air pollu t io n, land use, farming p rac tices an d gam bling an d influe nced by unhealth y behavio urs and activi t ies ha ve pr ovided subs t an tia l financial r esour c es f or man y go vernmen ts. Ho wever , the reven ues genera ted from these activities a re no t earmar ked f or im pr ovin g health as a p r ima r y o utco me, even thou gh the health benefi ts of p ricing a nd taxing the se harmful practices a re well do cu mented. 127 On the other ha nd, when taking in to accoun t t he eco nom ic bur den asso cia ted with healthcar e and the loss o f produ ctivity , we lfar e and live s from N CDs associ a ted with unhea l th y beha viours a nd en v ir onm ental risk facto rs, the un b alanced acco unting o f benefits a nd costs h as left ci t izen s i It includes the annual USD 6 billion to the US econom y , including costs of health, welfare, employment, housing and criminal justice ser vices, 151 and the USD 117 billion to US citizens with losses related to gambling , 158 , 159 in 2018 prices. Expand ing H eal th T ax a tion 247 to p ick u p t he nega tive p ublic health and eco nom ic costs o f ind ustrial and comm ercial activities. I ncreasin g t axa t io n and re-calib rating fiscal policies to em bed he alth as the ma in object iv e of the pr o duction a nd pr omotio n of p ublic goods can re sult in heal thier urban (and rural) popula t io ns, gain pub lic sup port and make tax es mo re s ustaina ble in the lon g term. The no n-exclu sion a nd non-rival na tur e of pub lic hea lth as a p ublic good pro vides a stro ng case for co llec tiv e action a t a ll levels o f gov er nmen t, with the partic ular a nd gro wing im p ortance o f lo cal go vernmen ts in pr oviding p ublic goods a t the poin t of use, paid fo r out o f taxation tha t can be genera ted and adminis tered a t t his level , as dis cussed in S ection 7.2. The local gov er nmen t ’ s pr o vision o f publi c goods may h el p to p reven t the under -pr ovisio n and under -con sum ption o f public g oo ds. Loca l go vernmen t pr ovisio n of pu blic g oo ds can also be mor e efficient d ue to agglomera tion effects. Go od go vernance is also highly corr elated t o the success o f t he in t r oduction o f new taxes, with coun tries exhibi t ing h igh le ve ls of trust in politician s, p ercei ved low level s of co r rup t io n, extens ive p ublic dialogue and mecha nisms f or soci al delibera t io n ha ving stro nger fiscal p olicies a nd better he a lt h outc ome s. 169 I n con t rast, wher e le v els o f corr u ptio n ar e p er c ei ved to be high or ther e ar e pro blem s with lack o f p oli t ical credib i li ty or poor quality o f public de bat e and enga gemen t, taxes tend t o b e both unpo pular and unsucc essfu l. 169 M or eover , in co un t ries, and in pa rtic ular , cities wi th larg e informal sec to rs and w e ak tax systems, a s is the case in man y urban cen t r es in LMICs, the im plemen tatio n of h ealth taxes ma y b e difficult. 170 7.3.1. Sc ope of a tax a nd cities ’ taxing a utho rity I n the en viro nmen tal t axa tion li terat ure, i t is frequen tly sta ted that the a ppr opria te au thority fo r lev ying a tax depends on the scope of the dam age being addr essed, with the im plicatio n being tha t the level of poli tic al jurisdiction defines the scope of the tax (e.g. ci t y , s tat e or n a tional). 171 For exam ple, f or some iss ues li ke wa ste dis p osal linked to soil con tamina t io n, as the im p acts ar e generally realised at the level o f the munici pa li ty , a loca l H eal th T axes: P ol ic y a nd Pr actice 248 tax might be mor e efficien tly man aged. On the o t her h and , greenhou se emissio ns might in volv e sub-na tional an d na t io na l j urisdic tion s as well as other co untries, and th us this issue sho uld normally be de alt wi t h thr ough a na t io na l o r e ven in terna t io na l ins t rumen t. 171 , 172 In line with this as sessmen t, we a rgue tha t in the con text of health taxes, taxa t io n at the local le ve l could be intr oduced or expa nded when con sidering the iss ues addr ess ed in this cha pter . I n additio n, loca l go vernmen ts might ha ve a gr eat er ro le in mul ti- jurisdictional decision s on fiscal exp endi ture, a s a wa y to maximise public health benefits a nd go vernmen t al collabora tion a t al l levels. Lo cal go vernmen ts pr ovide ma ny o f our most basic p ublic goods and ser vices and also deal with externalities ca us ed b y harmful lifestyles and activi t ies, suc h as air pollu tion, lan d use, gam bling an d farming practices. T radition ally , though, local gov er nmen ts ha ve limited po wer to tax or borr ow funds to s up p o rt t heir activi ties as law s fo r t axa t io n are typically defined a t t he leve l of s tat e and federal go vernmen ts. 173 C once r ns abou t fisca l mi sma nag emen t and the m ulti plicatio n of the adm inistra tive costs o f taxatio n are j ustificatio ns fo r this highly vertica lised system in most co untries. In m an y coun tr ies, ho wever , a vertical system pr omo tes imbalances a t the sub na t io na l level in t erms of the lac k of s ubsidiari t y in legal and r egu la tor y re spon sib ilities an d the uneven a vailabili ty of the fiscal reso urces r equired, m aking it difficult f or loca l go vernmen ts to act on some of their mo st challengin g pub lic hea l th issues. 170 Allowin g local gov er nmen ts to participa te in the definition o f the scope of health taxes, r egul a tor y policies f or h ealth and p ublic health in ter ventio ns, and even the cr e a tion and a pp lica tion o f t axes a t loca l levels, can cr e a te the oppo rtunity f or ma tching local needs with loc al ins tit utio na l framewo rks a nd r even ue genera tion. The sugge stion h ere is no t to make local go vernmen ts indep enden t of sta te or f e deral la ws and policies, bu t for them to be given p r esu m pt ive t axin g au tho rity sub je ct to sta te/federal go vernmen t pr e-emp t io n. Such a n a ppr o ach w ould open the door to mo re local reven ue inno vatio n, im pr ov e the efficiency of reve n ue collection and s pending, ca pi t alise on local and r e gion al econo mies o f sca le while ensurin g that the sta te a nd the federal go vernmen t can main tain their policies an d inter ests. 173 Expand ing H eal th T ax a tion 249 Pr esump tive taxing a uthori t y is particul ar ly importan t for ci ties in LMICs tha t frequen tly suffer fro m the lack of infrastructure a nd technical capaci t y , with pr edomina n t ly inf ormal-s ector eco no mies. Loc al go vernmen ts should be able to g enerat e t ax an d non-tax r e ven ues in the fo r m of u ser char ges and fees tha t pro mote urba n health. Th us, once the sour ce of health harms ha s been identified and i t has been establis hed that al tering mark et prices thro ugh taxation ca n cha ng e con sump t io n b eha viours an d genera te b eneficial health ou tcome s, the scope of the health tax, using a mix o f direct t axe s (e.g. con gestion cha rg es) and in direct t axes (e .g . exci se taxes), can be defined. I n this sense, loca l g ov er nmen ts ha ve the op p ortuni ty to br o aden the scope o f ar e as traditio nally con sidered fo r t axa tion by policymakers, b ut not un derstood as health-enhancin g, as for exa mple ‘ taxatio n for bette r cities ’ . 127 Ho we ver , it is im p o rt an t to en sur e tha t such h e alth taxes a re pr ogressi ve, r edistributiv e and benefi t hea l th and equi ty . 7.3.2. P ro motin g p oli tic al acceptab ility and comm unity trust P oli t ical an d public accepta bility a re im portan t dimensio ns fo r the adop t io n and im plemen tatio n of a health tax. W e hav e pr eviously di scusse d tha t grea ter pu blic distrust o f p oli ticians a nd perce iv ed corrup t io n would undermine go vernmen t per fo rmance acr oss a va riety of policy domain s, incl uding taxa tion. H ow e ve r , the sensi tivity o f reven ue policies t o le ve ls of co r rup t io n and di strust var y accor ding to whether the mooted policy is based on mark et-b ased or no n-mark et-base d ins t rumen ts. No n-market- based instr umen ts in volv e no n-mon et ar y incen tives to c han ge behavio ur . M ark et-b ased instrumen ts are indir ec t regula tor y ins truments, which influe nce individ ua ls ’ behavio ur by cha nging their econo mic incen tives. 174 While no n-mark et-based climat e p olicies, f or exam ple, a re w e akened b y perceptio ns of in stit utional co r ruptio n; market-based policies ar e notabl y mo re sensi tive than no n-mark et on es to the infl uence of sizeable do mestic energy-inte nsi ve a nd trade-expose d ind ustr ies. 169 H eal th T axes: P ol ic y a nd Pr actice 250 The distrib utio n of costs an d benefits o f a fis cal polic y is also likely t o influe nce pu blic a nd poli tical suppo rt to a tax. Ot her things being eq u al, a tax polic y is expec ted to be mo re successful if its cos ts ar e diff used bu t its benefits a re con cen t ra ted. F or insta nce, the r eduction of air poll utio n is costly to ind ustr y b ecause i t m ust pay f or the in stallation o f equip ment t o com b a t pollu tion a nd these costs ar e diffic ult t o p ass o n to con sumers. H owever , the benefits a re diffused in both space and time, givin g the indu str y stro ng incen t iv es to lobb y in op position t o such a tax. On the other ha nd, if the pub lic has a stro ng perceptio n of the positive im pacts of en vironm ental im pro vemen ts, then the industr y ma y b ear these costs in o rder t o gain publ ic supp or t . 169 , 171 P olicy-f ramin g strategies ca n ha ve impo rtant im plica t io ns fo r the pub lic acceptabili ty of a health tax. A systema tic litera tur e review on the political and p ublic acceptab ility of a sug ar -sweetened beverage s (SSBs) tax sho wed that the degr ee of p ublic accep t ab ility of a n SSB tax in the U nit ed Sta tes, A ustralia, t he U nit e d Kin gdom a nd F rance tended to depend o n t he wo rding o f the ques t io n. Public su pport fo r an SS Bs t ax was h ighest (66%) if the reven ue was labelled as int ended for health ini t ia t iv es. 175 In Sw it z er l and and in Alberta, C an ada, re-la belling a carbon tax as a ‘ C O 2 lev y’ hel p ed to o ver come pu blic dis tr us t. 69 , 176 7.4. C o nclusion Lo cal go vernmen ts pla y a key role in tackling is sues of clima te ch an ge, NCDs, po vert y an d e ven ep idemics. L ocal gov er nmen ts pr ovide the con ditio ns to leverag e local s ol ution s fo r lo cal pr oblems. B ui lding ci ties tha t ar e inclusi ve, health y , resilien t and su staina ble requir es int ensive policy coordin a t io n a t t he local le ve l. H ealth taxes ar e a cost-effective op p ortun ity to su pport pub lic health and ga in public s up p o rt. L oca l go vernmen ts als o off er t he o pportuni ty to derive p ublic reve n ues fro m s our ces other than the traditio nal tobacco , alcohol a nd be verag e t axe s, b y taxing ha rmfu l lif estyles and activi t ies to p ro mot e s ocia l we l l-being. I n this cha pter w e offer e d an Expand ing H eal th T ax a tion 251 o ver view of some o f t he p ressin g he alth is sues tha t can be addressed by pub lic-hea l th int er v en t io ns su pported by h ealth taxes, incl uding those at the loca l go vernmen t level, an d thro ug h the r e-calibra tion of fi sca l policies tha t embed hea l t h as i ts main ob je ctive . Globally , when we think abo ut tax es, direct or in direct, health can be a powerful means f or transf orming the wa y pub lic hea l th is pr omo ted thro ug h fiscal p olicies. 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P oli tical and pub lic acceptability o f a sugar -sweetened be verag es tax: a mixed-method systema tic revie w an d meta-analysis. I nt er na tion al J ou r na l of Beh a v ior al N utri tio n and Ph ysica l Act ivity . 2019; 16(1): 78. 176. Cara ttini S, Car valho M, Fa n kha user S. O ver coming p ublic r esistance to carbon taxes. WIREs Cli mat e Chan ge . 2018; 9(5): e531. This page int entionally left blank © 2022 W orld Health Organization (WHO) https://doi.or g/10.1142/ 9781800612396_0009 This is an o p en access article p ublish ed by W o rld Scientific Pub lishing Com pany o n behalf of WHO and dis tribut ed under the terms o f the Crea t iv e Common s A ttribu t io n-N onCommer cia l-Sha reAlike 3.0 IGO (CC BY -NC-SA 3.0 IGO) License . Chapter 8 The Design of Effective Health T axes T o maximise the effectiveness o f hea l th taxes in redu cing co nsum ption o f tobacco , alcoholic beverag es, and s ugar -sweetened beverages (SS Bs), the tax design mu st be cons idered. W e study tax as pec ts incl uding determining tax typ e (i.e ., ad valor em, spe cific excise, sales, an d im port taxes), what pr o du cts are g oing to be taxed (i.e., the tax base), tax str uctur e, tax ra te to be ap plied, and im plica tions r elat ed to tax reven ue and earmar king. W e find that ex cis e taxes, o ften used as ‘Pig ouvian ’ taxes, ar e pref erabl e to corr ect for externali t ies fro m harmfu l co nsum ption. W e note n umero us adva n tages o f sp ecific (a pplied per unit o f product) v ersus ad valor em (a pp lied as percen t ag e of price) excise taxes. W e find that the na r r o wer the pr o du ct tax b ase, the grea ter the oppo rtunities f or cons umers to substi tute a wa y from taxed to un taxed pr o ducts, r educin g the effectiveness o f a tax in pr omotin g health, while als o gen era ting lo wer reven ues. Regardin g t he tax level, eco nomi c theor y suggests tha t the tax should be s et so that i t genera tes reven ues that a re sufficien t to cov er t he external costs as s ociated wi th the harmful cons umptio n of the taxed pr oduct. Regardin g t ax structure , tiered tax struc tur es with higher rat es based on higher levels o f harm associat e d with pr o d ucts (i.e., ethano l or sugar) ca n help to r e d uce con sum ption of the mo st harmful pr o d ucts to a grea ter exten t and hel p to encourag e *    University of Illinois Chicago, USA. L isa M P owel l * and F r ank J C haloupka * H eal th T axes: P ol ic y a nd Pr actice ref ormula t io n. A dditionally , earma rking the r even ues of in creased taxes can be used to offset poten ti al unin tended consequence s, and t o a ugmen t the health impact thro ug h o ther initia t iv es t ha t discourage use – i.e ., fo r educa tion cam paigns o r preve n tion p rogramm es. Finally , the type an d magni tude o f t ax em ploy e d, a nd exten t of earmar king sho u ld be based on coun tr y-s pecific situa tional analyses o f pub lic hea l th challenges a nd in the con text of r elated p ublic health goals, reven ue needs and tax administra tion capaci ty of the coun t r y . The goals o f health taxes ha ve generally been twof old: to r educe the dema nd fo r un health y pr o ducts suc h as tobacco , a lcoh ol a nd unhealth y foo ds and beverag es such a s suga r -sweetened be ve rages (SS Bs) with the aim of im pro ving health ou tcomes a nd to raise reven ue. H isto rical ly , and still the case in man y coun t ries, go vernmen ts may p ursue m u l tiple o bjec tive s when designing health taxes, in cl uding r e ven ue genera tion, p rot ect io n of dome stic ind ustries, equi ty concerns and o t her s. The foc us o f t his c hap ter , how ever , is on the u se and design o f these taxes to pr omo te health. The ratio nale for im plemen ting a tax to pr omo te health is to co r r e ct individ ua ls ’ harmful con sump t io n of pr o d ucts such as t obacco , alcohol a nd suga r y beverage s, given tha t these products ’ prices do no t accoun t for their external costs (e .g. medical costs, pr o du ctivity losses and o ther consum ptio n-rela ted harmfu l ou tcomes), n or migh t individuals fully con sider t he cos ts their cho ices im p ose on their o w n fut ure selves. Th us, if con sump tion of certain p rodu cts crea tes externalities o r inte rnalities, a tax set to the marginal cost o f t hese external costs, kno w n as a P igouvia n tax, can encoura ge p eop le to reduce con sump t io n (i.e. correct fo r an y le ve l of h armful cons um ption). I n this cha pter , w e examin e a n umber of im p ortan t tax design con sideratio ns f or m aximising the eff e ctivene ss o f health taxes in meeting the goal of r e d ucing co nsum ption o f targ eted produ cts. These considera tion s incl ude determining the type of tax to be a pplied, wha t pr oducts ar e goin g to be taxed (i.e. the tax base), determining the structure o f how they ar e taxed, determining the tax ra te to be ap plied and as sessing im plica tion s re la ted to tax reven ue and earma rking. 266 The Des ign of E ffecti ve H eal th T ax es 8.1. Dete rmining the t yp e of tax T axes tha t are a pp lied to a defined set of p roducts such as t obacco , alcohol a nd suga r y b everag es, may be used as a polic y instrumen t to increase the re lati ve prices o f such pr o d ucts and, ther eby , influence indi v id ual-level con sum ption. I n additio n to impacting beha viour by in creasing p rices, excise taxes ma y als o signal that co nsum ption o f t he taxed pr oducts should be red uced. T axes tha t ar e t ied to a level ’ s harmful consti tuen ts (e.g. ethano l or sugar) m a y pr ovide stro nger signals than taxe s tied to units sold in varian t of their co n tent. Th ese signals ma y b e im plicit giv en tha t the pr o ducts/co nstit uen ts are being tar geted fo r t axa tion or they ma y b e made exp licitly thr ough mark et ing ca m p aign s b y the go vernmen t or o t her s takeholde rs. This la tter activity o ften occ urs as part o f an im plem en t a tion pla n or a dv ocac y ar ound the tax wher ein a mar keting/ed uca tional cam paign is used to educa te the p o pula t io n on the harms a ssociated with co nsum ptio n. V arious as pec ts of a dvoca t ing f or health taxes ar e addres sed in g r eat er det ail in Cha pter 11 o f t his book. T axes o n consum ption a re con sidered indir e ct taxes which ar e passe d on t o t he co nsumer an d include ex cis e taxes, val ue-added taxes (V A T) or general sales taxes (GST) a nd impo rt t a riffs. Of these, excise taxes ar e most im p ortan t w hen us ing fiscal p oli c y to p rom ote health, given tha t they are unique ly a pplied t o specified prod ucts and, th us, wil l ha ve a grea ter im p act on the r elativ e price of the taxed pr o d uct than will t axes o n a br oader ran ge of g o ods and ser vices. In addi tion, excise tax ra tes can be set at m uch higher ra tes than is likel y to be feasib le fo r broader based taxes. V A T and GS T t axe s gene rally a pp ly br o adly t o all pr o ducts a nd, theref ore , are no t consider ed as p olicy tools tha t would cha nge r ela t iv e prices o f sp ecific pr o d uc ts and r elat e d co nsum ptio n beha viour . Wh ereas a V A T tax is typically incorpora ted into the s helf p r ice which is im p o r tan t fo r impacting beha viour decisio ns, a GST is o ften ap plied only a t the p o int of p urchase a nd, th us, is less salient a nd the least fav oura ble tax instrument fo r impacting beha viour . Some g ov ernmen ts do use differ ential V A T or G ST ra tes on vario us pr oducts that, a t times, reflect health ob jec tive s. F or exa mp le, 267 H eal th T axes: P ol ic y a nd Pr actice (e.g. pr oduct categ ories within, e.g. to bacco , a lcoh ol a nd suga r y beverages) will b e incl uded as p a rt of the tax bas e an d hence taxed; and, whether certain cha racteristics of s uch p roducts (i.e. level o f nicotine, etha nol , suga r) will fur ther define the base and the r elat ed str uctur e of the tax. The a ppr op riat e tax bas e depends o n t he o bjective o f the tax. A pub lic health objective w ould sugges t t he inc lu sion o f categ ories of a giv en prod uct ar e a f or which evidence dem on strates co nsum ption-r elat ed health risks. If the tax bas e does not co mp rehen sively in cl ude a ll pr o d uct cat ego r ies tha t ar e harmful t hen su bstit ution t o an y harmful untaxed p roducts will o ccur and will undermine the health im p act of the tax. The na r r o wer the p roduct base, the grea ter the o pportun ities f or con sumers to su bstitu te awa y from taxed to un t axed p roducts, red ucing the eff ect iv eness of a tax in p ro moting health, while als o gen era t ing lo wer r even ues. W ith tobacco , fo r exam ple, nea rly all coun tries le vy excise taxes on man ufactured ciga rett es, bu t t axa tion of o t her t obacco products is mo re variabl e, with som e taxing cigar s, bidi s, ro l l-yo ur-o wn tobacco and sm okeless tobacco p rod ucts, alb ei t at diffe ren t ra tes tha t are o ften lo wer than a pp lied to man ufactured ciga rett es. 4 Relativ ely few go vernmen ts t ax emer ging nico tine pr o d ucts, incl uding electro nic nicotine an d no n-nicotine de livery systems (ENNDS) and h eat e d tobacco p roducts (HTP). Ther e is similar va riabili ty in the taxa t io n of emer g ing nico tine pr oducts. W ith res p ect to ENNDS, some g ov er nmen ts tax only the liq uids used in vap ing, while others also tax the dev ice; some tax o n ly liq uids con t ain ing nico t ine while other s tax all liquids used in vap ing; still others tax liquid s base d o n nicotine con ten t. F ro m a public h ealth perspe ctive , taxing all tobacco and no n-pharmaceu t ical nicotine p roducts is most a pp rop ri a te, with co m p ara ble taxes on sim ilar pr o d ucts to minimise subs tit utio n across p roducts. M ost go vernmen ts t ax alcoholi c be vera ges, bu t s om e a pp ly taxes to on e or tw o beverage ca tego ries (e.g. beer and sp irits) b ut not t o others (e.g. wine; see Figure 8.1 ). 11 U sing alcoholic be vera ge taxa t io n to pr omot e public health suggests tha t taxes sho u ld be ap plied to all alcoholic beverages a nd tha t taxes on the etha nol con tained in differ ent beverages s hould be similar acro ss beverages. 12 274 The Des ign of E ffecti ve H eal th T ax es Alcohol ex cise taxation No data Not applicable The boundaries and names shown and the designations used on this map do not imply the e xpression of any opinion whatsoe ver on the par t of the World Health Organization concerning the legal st atus of any country territory cit y or area or of its authorities or concerning the delimitation of its frontiers or boundaries. Dott ed and dashed lines on maps repr esent appro ximate border lines for which ther e may not yet be full ag reement. Alcohol consumption and production banned Alcohol ex cise tax applied to beer wine and spirits Alcohol ex cise tax applied to beer and wine Alcohol ex cise tax applied to wine and spirits Alcohol ex cise tax applied to beer and spirits Alcohol ex cise tax applied to beer No alcohol ex cise taxation F ig. 8.1. Alcoholic beverage excise taxes by be verage type. 275 H eal th T axes: P ol ic y a nd Pr actice W ith rega rd t o t he base fo r suga r y b everag e t axa t io n, t he p ublic health ob jec tive t o reduce suga rs in take suggests a tax o n all SSBs incl uding so da, fr uit drinks, sports drinks, energ y drinks, sweetened teas/co ffees and sweetened/fla vour ed mi lk. T o t he ext en t t ha t an y ‘ f ree suga rs ’ are co nsidered a health risk, it w ould be recommen de d tha t t he tax base also include 100% fr uit j uice, which con tains co mpara ble (a nd sometimes higher) a moun ts of fr ee suga rs as soda. H owever , ma ny coun tries ap ply their SS B taxes to a limi ted set of beverag es, excl uding fo r exam ple p rod uc ts wher e t he first in g r edien t is milk, 100% f ruit j uices or fruit drinks with a minim um pr oportion o f fr uit j uice. A dditionally , s om e gov ernmen ts hav e focuse d o n taxing sod a (carbon a ted be ve rages) b ut no t other typ es o f sugar y be vera ges. One challeng e for a co mp rehen siv e SSB tax is tha t coun t ries oft en us e the HS system (see Figure 8.2 ) t o identify t he p roducts to be taxed, typically focusing o n pr o d uc t ca tego r y 22.02: ‘W a ters, incl uding mineral wa ters a nd aera ted wate rs, co n taining a dded sugar a nd other sweetenin g mat ter or flav oured ’ . H owever , SS Bs c an be fo und acros s a n umber of other HS codes. B everag es under ca tego r y 20.09: ‘F r ui t juices (in cluding gra pe must) a nd 276 vegeta ble j uices, unfermen ted and n ot co ntainin g added spirit, whether or n ot co ntainin g added sugar or o ther sweetening ma tt er’ alwa ys con tain free sugar s (released f ro m the f ruit cells d ur ing the mech anical juicin g pr o cess), while milk pr o ducts under 04.02: ‘ Mil k an d cream; con cen t ra ted or co ntain ing added su gar o r other sweeten ing ma tte r’ m a y con tain free suga rs fro m added sugar , hon ey , syrup or fruit juice co ncentra tes. Similar ly , SSBs m a y be foun d in other ca tego r ies as w ell, includin g 04.03: ‘Bu ttermilk, curdled milk and crea m, yogurt, kefir , fe rmen ted or aci dified milk or crea m ’ , 04.04: ‘W he y a nd pr oducts consi sting o f nat ural milk consti tuen ts ’ , 18.06: ‘ C hocola te and o ther food prepa ration s con taining cocoa ’ , 21.01: ‘Extracts, essences an d con cen trat es, of coff e e, t e a or m a té and p repa ra t io ns wi th a basis of these p roducts or wi th a basis of co ffee, tea or ma té; r oasted chico r y and o t her r oasted coff ee substi tu tes, and extracts, essences an d con cen trat es thereo f ’ and 21.06: ‘F oo d p repa ra tion s not e ls ewhere specified or inc luded ’ . The Des ign of E ffecti ve H eal th T ax es Sugar-s weetened bev erages Bev erages with non- sugar sw eeteners Bev erages that are not sw eetened 22.02 W ater s, including mineral w ater s and aerated wat ers, cont aining added sugar and other s weet ening mat ter or fla vor ed 22.0 1 W ater s, including natural or ar tificial miner al wat ers and aerat ed water s, not containing added sug ar or other s weetening mat ter nor fla vour ed; ice and snow 04.0 1 Milk and cream; not concentrat ed, not containing added sugar or other s weetening mat ter 04.04 Whey and products consisting of natural milk constituents 21 .0 1 Extracts, essences, concentrat es of cof fee , tea or mate; preparations with a basis of these products ...; roast ed chicor y 21 .06 Food prepar ations not elsewher e specified or included 20.09 F ruit juices (including grape must) and v egetable juices, unf er mented and not containing added spirit, whether or not containing added sugar or other s weetening mat ter 04.02 Milk and cream; concentrat ed or containing added sugar or other s weetening mat ter 04.03 But termilk, curdled milk and cream, y oghur t, kephir , fermented or acidified milk or cream 1 8.06 Chocolate and other f ood prepar ations containing cocoa F ig. 8.2. Categories of beverages in the HS system according to content of free sugars and non-sugar sweeteners. 277 Source: Figure prepared by Kaia Engesveeen (WHO) based on the global training course presentation titled ‘Healthy Diets and Ph ysical Activity . Legal Issues in Policy Design and Implementation’ 17–21 June 2019, Geneva, Switzer land; and based on the Harmonized Commodity Description and Coding Systems (HS). https://unstats.un.org/unsd/tradekb/ Knowledgebase/50018/Harmonized-Commodity-Description-and-Coding-Systems-HS . H eal th T axes: P ol ic y a nd Pr actice 8.3. Dete rmining the tax s tru ct ure Ano ther con sideratio n is whether to structure the tax so that i t le vies differ ent tax ra tes base d o n the level o f harmfulness o f t he taxed pr oducts within the tax base. A pp lying this to tobacco co u ld be challenging since there is co nsiderab le debate o ver the r ela t iv e harms o f differ en t produ cts. 13 W ith respect to alcohol , a tax bas ed on etha nol wo uld induce co nsumers t o swit ch to lo wer taxed pr o d uc ts con taining les s et han ol. A t t he sam e time, it w ould encourag e prod ucers to r efo rmula te their pr o ducts b y reducin g ethano l con ten t in ord er to face a lo wer tax, as well as enco urage them to mar ket their lo wer taxed, lo wer ethanol p roducts mo re a g gres siv ely tha n U nder the pub lic he alth ob je ctive to decr e ase free sugar s intake, artificial ly sw e eten ed be verag es (ASBs) tha t are zer o ca lo ries wo uld not be incl uded in t he tax base. S weetened beverage tax es ha ve not been con sisten t in their a pp lic a tion to SS B versus AS Bs b everag es. Wh ile most r e cen t sweetened be vera ge pr o duct ex cise taxes ha ve generally a pplied t o SSBs, so me taxes suc h as those, fo r exam ple, in Chile and tw o jurisdictions in the U ni ted S tat es (Co ok Coun t y , IL and Philadel phia, P A) ha ve a pplied their beverage taxe s to both SSBs a nd ASBs. I n rela tion to the HS coding syste m, coun tr ies tha t a pply their taxes in discriminat ely to p rodu cts under HS C ode 22.02 wo uld tax a larg e sha re o f sugar -sweetened beverage s, bu t a lso man y b everage s con taining no n-sugar sw e etene rs fo r which there is curre n tly no p ublic health goal. F rom a p ublic health goal of r educing in ta ke o f f r ee sugar s, on e wo u ld excl ude a num b er o f products fro m t he base incl uding fo r examp le, in the HS coding system, 22.01: ‘ W at ers, inc ludin g nat ura l o r artificial mineral water s and ae ra ted wa ters, no t con taining added s ugar o r other sweetenin g mat ter no r flav oured; ice a nd sno w’ and 04.01: ‘ Milk and cr e am; n ot co ncentra ted, not co ntain ing added suga r or other sw e etenin g mat ter’ , and so me bu ttermilks and y ogur t-based b everage s (04.03), whey prod ucts (04.04), co coa, coff e e, t ea, ma té or chi cko r y-b ased pr ep ara tions (18.06 a nd 21.01) or o ther be vera ges (21.06) tha t con tain nei ther free sugar s no r no n-sugar s weetener s. 278 The Des ign of E ffecti ve H eal th T ax es their higher taxed, higher ethano l products. These su pply-s ide re spon ses wer e obser ved in South Africa fo llowin g t he co untr y’ s shift to a s pecific be er excise tax base d o n ethano l con ten t rather than j ust vol ume. 12 W ith respect to foods and beverag es, n utrient-based tiers ma y b e used to determine ra tes. A s noted p reviously , SSB taxes to da te ha ve mostly used a unifo r m tax a ppr o ach wher e al l taxed beverage p roducts ar e sub j ect to the same tax irres p ective o f their suga r con tent. Al though the vol ume-base d unifo r m tax has the im p o rt an t adva ntage o f simp licity in im plemen tatio n, it does no t pr ovide incen tives f or co nsu mers t o switch t o less calorically sweetened beverage s or f or the be vera ge ind ustr y to ref orm ul a te pr o d ucts to r e d uce sugar co nt en t p er ser ving. An ap proac h where beverag es ar e t ax ed a t differen t amo unts depending o n t heir s ugar co nten t (i.e. gra ms (g) o f suga r per unit o f vol ume or ser ving) has been pr opos ed and im plemen ted in a limit e d n umber of coun tries. Fo r exam ple, in A pril 2018, the U nit e d King dom im plemen ted a t hr e e-tier ed soft drink industr y lev y (SD IL) with no tax on beverages wi t h <5 g o f suga r/100 mL, and 18 pence/L a nd 24 pence/L on beverag es with 5–8 g an d >8 g of s ugar/100 mL, r espe ctivel y . W ithin two year s fo llowin g the SD IL ann ouncem en t, t her e was an 11% red uc tion in s ugar con ten t of drinks subject to the lev y , an d t he caloric co n tent o f such drinks fell b y 6%. 14 And, r ecent evidence sh o ws tha t between 2015 and 2018 sales vol ume sold of high-suga r (>8 g/100 mL) b everag es fell 40% which s temmed from a co mbin a t io n of r eform ulation a nd reduced dema nd f r om the tax. 15 Sug ar co nten t-base d SS B taxes can be designed with discret e tiers based on thresh olds acros s which tax ra tes va r y (i.e. Chile and the U nit e d Kin gdom) or ca n b e based on a con tinu um (rather tha n discrete tiers) of sugar con ten t in SSBs (i .e. Sou th Afr ican H ealth Pr omotio n L ev y). I n t he case of SS B t axe s, a recen t stud y sho wed that evidence o n the actual distribu t io n of the mos t comm only co nsumed SS Bs b y suga r con ten t can hel p inform the cho ice of meanin gfu l thr esho lds fo r a tiered-tax str uctur e. 16 Fo r exam ple, Figure 8.3 dra wn from tha t stud y reveale d m ultiple c luster s of SSB v olume b y sugar con ten t and sugges ted thres hold tiers f or differ ential tax rat es a t <20 g and <5 g of s ugar/8-o z (corr espondin g to cut poin ts at a dis tance o f 5 g below 279 H eal th T axes: P ol ic y a nd Pr actice the low er b o unds o f the cl uster s; t his dis tance sho uld b e determined based on a giv en jurisdic tion ’ s goa ls f or sugar co nt en t reduction). The Danis h fa t tax is an exa m ple of a tax tha t t ar gets a specific nu trient fo und across m ultip le produ ct categ ories as com pared to the taxe s base d on s ugar co nten t within the single p roduct cat e go r y of SSBs. Th e Danish fa t tax intr o duced in October 2011 (though subsequen tly repealed effec tiv e J an uar y 2013) was ap plied to meat, da ir y , animal fat, o ils, marga r ine a nd bu tter ble nds inc ludin g foo ds con taining these p rod ucts at the ra te of D KK 16 per ki logram o f satura ted fa t (if t he co n tent o f s a tura ted fat ex ceede d 2.3 g per 100 g). 17 I t should be no ted, ho wever , tha t while taxes based on leve ls or in tensi ty of s ugar , sa turat e d fa t, nicotine or alcoh ol co nten t ma y offer added incen tives fo r prod uct ref orm ul a tion and gr e a ter incen t iv es for beha viour cha nge fo r 4000 3000 2000 1000 Annual Volume (Millions of Gallons) 0 0 5 10 15 Grams of Sugar per 8-ounce 20 25 30 35 F ig. 8.3. Distribution of annual sugar-sweetened beverage (SSB) sales volume b y sugar content, all SSBs and by SSB categor y , US total, 2018. 280 Source: Pow ell LM, Andreyeva T , Isgor Z. Distribution of sugar-sweetened be verage sales volume by sugar content in the United States: Implications for tiered taxation and tax revenue . J ournal of Public Health Policy . 2020; 41(2): 125–138. The Des ign of E ffecti ve H eal th T ax es the most ha r mful pr o ducts, they ma y not be a ppr op riat e in jurisdictions tha t do no t ha ve stro ng tax administra tion. 18 Th us, when deciding on tax designs with differ entially determined tax ra tes based on discret e or con tinuo us levels o f t he ha r mfulness o n t he p roducts ’ con ten t, com p a red wi th unifo rm ra tes, it is im port an t to do so in the con text of tax adminis t ra tion capaci ty . 8.4. Dete rmining the tax ra te I t is challenging to det ermine an o ptimal recomm ended level o f tax or magni tude o f t ax incr eas es. H ow o ne defines op timal dep ends o n the ob jec tive s of the tax. One a pp roac h could be to set the excise tax s o tha t it genera tes r e ven ues tha t ar e sufficien t to cov er the external costs as so cia ted with con sump tion of the taxed p rod uct. Another a pp roach wo u ld be to set the tax high enou gh to minimise the p ublic health ha r m s fro m consum ptio n. Y et ano t her wo uld b e to set the tax at the level tha t maximises tax reven ues. Still ano t her w ould b e to in crease taxes b y enough to ma in tain o r red uce the aff or dability o f t he tax p rod uct ov er time. W ith tobacco , the W orld Bank has r ecommended tha t total cigar ette taxes in LMI Cs should be set to accoun t fo r two-thirds t o four -fifths o f reta i l prices, based on tax levels in HI Cs that inc luded significan t t ax incr e ases as part of a co mp re hens ive s t ra teg y for r educing t obacco use. 19 WHO h as recommended t ha t excise taxes sho u ld acco unt f or 70% of reta il prices, a targ et t ha t would r e quir e significan t t ax incr e ases in nearl y all coun t ries. 20 Suc h t ar gets, ho wever , do no t c a ptur e pr oblem s with tax str uctur es or m a y not lead to high reta il prices if ind ustr y p rices are v er y lo w . The WH O ’ s G uidelines f or the I m plemen tatio n of Article 6 of the F ramewo rk C on ven tion on T obacco Con tro l reco mmend sim ple tax str uctur es t ha t em phasi se unifo r m specific taxes o r mixed syst ems r elying o n specific taxes with regular adj ustmen ts to acco un t for infla tion and in com e gro wt h. I t has been recom mended b y WHO tha t suga r y be ver age tax ra tes be s et high eno ugh to raise prices b y at leas t 20%, in or der to res u lt in n et red uct io ns in caloric in ta k e tha t are po ten tial ly la rge eno ugh to im pr ov e 281 H eal th T axes: P ol ic y a nd Pr actice weigh t out com es a t t he pop ul a tion level. 21 Lo wer sug ar y beverage tax ra tes Giv en t ha t the goal of a p ublic heal th-orien ted t ax policy is to red uce con sump t io n of a partic ular good, such as t obacco , alcohol o r SSBs o r other foods high in nu t rien ts recommen ded to limi t, the tax mus t be passe d on to co nsum ers in the fo rm of higher prices. The tax incide nce, tha t is, the exten t to which co nsum ers ve rsus p roducer s/sellers be a r the bur den of the tax depends on the r espon siv eness (p rice elasticity) of dem and a nd sup ply . I f deman d is price-in sensiti ve (i.e . inelastic) then the entir e amoun t of the tax is passed on to co nsum ers b ut i t would no t impact quan tity dema nded and sold . A l though such a set ting ma y b e ideal fo r raisin g t ax r even ue, it is not co nduci ve f or r educing co nsum ptio n. In settings wi th elastic deman d and s upp ly , ex cis e taxes g eneral ly lead t o some (b ut not necessarily 100%) pass thro ug h (i.e . a sha ring of the tax b urden b y con sumer s and p roducers) and lo wer co nsum ptio n – where the level o f tax p ass thr ough increases with grea ter cons umer price sensitivi ty . In som e settings (i.e . less than perfectly com pet i tive ma rkets) taxes ma y als o lead to o ver -shifting. E v idence o n t he exten t of tax pass thro ug h an d various factor s impacting tax pass thro ugh ar e dis cussed in detail in Chap ter 4 of this book. F or a given tax pass-thro ugh rate , modest tax and p r ice incr e ases will ha ve rela tivel y small effects on co nsum ption a nd health, while larg e incr e ases wo u ld ha ve a larg er impact. L ar ge tax increases ma y a lso signal to con sumers tha t these pr oducts ar e dang erou s and w ould lead to larg e reduction s in their use. This is ca ptur ed in t he W orld Bank ’ s recen t recomm enda t io n tha t go vernmen ts ‘ go b ig, go fast ’ w hen incr easing their tobacco taxes, sta ting tha t a mor e gradual ap pr oach ‘ mean s cond emning la rg e n umbers of people to a voida ble illness a nd p rem a ture dea t h ’ . 22 N early all go vernmen ts lev y excise taxes o n man uf actur ed cigaret tes; as not e d p reviou sly , only 15 o f the 185 coun tr ies who r ep orted tax and p r ice such as the 1 peso per litre (a pp roxim a te 10%) rat e in M exico ha ve had a significan t exp ected impact (in the ran ge of 6–9% r e d uctions) o n purc hases/ con sump t io n but the exten t to which these cha ng es in in t ake will ha ve a n im p act on heal th ou tco mes suc h as diabetes o r weight is no t yet known. Th ere ar e no similar reco mmenda tions f or the level of taxe s on alcoh olic beverage s. 282 The Des ign of E ffecti ve H eal th T ax es da ta for 2018 t o t he W orld H e alth Orga nizatio n (WHO) reported tha t t hey did no t lev y an ex cis e tax. 23 T obacco t axes h a ve incr eas ed in man y coun tries since the en tr y in to fo rce o f the WHO ’ s Fra mework Con ven tion on T obacco Con trol in 2005, gi ven Article 6 o f the trea ty’ s recogni tion o f t he eff ect iv eness of tax an d price increases in red ucing tobacco use, particu lar ly a mon g youn g people. I n 2018, cigar ett e excise taxes va ried widely from co untr y to co un tr y , with taxes ra nging fr om les s t ha n $0.03 per pack in B enin an d Pa ragua y to o ver $11 per pack in N ew Z ea lan d, an d ran ging fro m less than 3% of p r ice in Cabo V erde to o ver 77% o f price in Egypt. 23 8.4.1. T obacco taxes M ost coun tr ies also im p ose a value-added tax or gen eral sales t ax o n cigar ettes, while se ve ral impose other special le vies. On a verage , cigaret te excise taxes acco unt f or le ss than o ne-quarter o f price (22.0%) in LICs, a nd abou t two-fifths (41.3%) of p r ice in MI Cs and o ver half of p rice (54.5%) in HICs (see Figure 8.4 ). 23 A s not e d pr ev io usly wi t h r espe ct to types of taxes, abou t 35% of coun tries le vy spe cific ex cise taxes only , w hile almost 23% levy ad valor em excises only ; the rem ainde r use a comb ina tion o f sp ecific and ad valor em t axe s. The base on which the ad valo rem taxes a re l evie d va ries acros s coun tr ies, wi t h some levied base d o n pr o d ucer or im port prices, other s on distribu tor p r ices a nd still others o n retail prices. LMI Cs tend t o re ly mo re on ad valo rem excises, while HICs a re mo re lik ely t o em ploy a s pe cific o r mixed tax. Of 170 coun tr ies r ep o rt ing d etailed tax informa tion in 2018, 139 a pplied the same tax to all cigar ettes, while 31 emp loyed a tier e d tax struc t ure wher e t he tax varied based on price a nd/or p roduct cha rac teristics (e.g. length, p roduction type, pr esence/absence of a fil ter). LMICs a re m or e likely t o hav e com plex tax struc t ures. F or exa mpl e, I ndonesia ’ s tax str uctur e incl udes 10 tiers, with taxes var ying f or krete ks (clo ve cigar ettes) a nd whit e cigar ettes, ha nd-rolled ver sus mac hine pr oduced and so o n. Tha t s aid , I ndo nesia r ecognises t he co mplica tions this cr eates a nd it is in the p rocess o f sim plif ying i ts tobacco tax struc t ure . B an gladesh levies differe n t ad valor em taxes o n bra nds bas ed on r etail prices, with ra tes increasin g as prices increase. 283 H eal th T axes: P ol ic y a nd Pr actice 290 of r e ve n ue sho u ld be allo ca ted to wha tever use is most effective r egardles s of which tax the dollar i s raised from. I t is argued tha t if t he use is wo r th y , it makes no sense to tie expendi tur e on it t o w ha tever reven ue a partic ular tax raises. A co un tera rgumen t (not e d p reviou sly) is tha t there ma y be p oli t ical reason s for h ypothecatio n asso ciat e d with i t increasing the tax’ s acceptan ce amon g the public. Earmarking a portion o f t ax r e ven ue fo r specif ic go vernmen t pr ogrammes is a n aspect of fiscal p olicy that can h el p to maximise p ublic health benefits a nd garner p ublic su pport for the tax an d, i t c an also hel p to alle via te opposi t io n ar ound poten tial uninten ded con sequences. F or exam ple, to addr ess concerns a b ou t job losses in the t axed sector , go vernmen ts can dedicat e s om e of the n ew reven ues to p rogra mmes to facilita te work er transi tions to o ther livelihoods, as T urkey did b y e arma rking some o f its tobacco tax reven ues to he lp t obacco farmers s hift to o t her cr ops. 34 To addr ess co ncerns abo ut the r eg r essivity o f b everage tax es, earmarkin g can be targ eted towa rd lo w-incom e popula tions. F or exam ple, ea rmarking o f sugar y be vera ge tax reven ue for s ubsidies f or fr uits a nd vegetab les fo r low-inco me families co uld ha ve d ua l benefi ts of p ro viding inco me assi stan ce to o ffs et regr essive as p ects of the con sum ption tax an d im pr oving a ccess to health y foods w hich w ould pr ovide a com plemen t ar y health benefit. F or a mo re deta iled disc ussi on r elat e d to the use o f earmarkin g as a means o f maximising r esources f or health and t o bolster p ublic su pport for health taxes, please see C ha pter 10 o f t his book. A ddition ally , a discussion re la ted to tax reven ue and s ustainabl e develo pme n t and the dis t ribu tional im p acts of heal th taxes is pr ovided in Cha pter 6. 8.6. C o nclusion Se veral diffe ren t types of health taxes a re e m plo yed wo rldwide . T axes o n tobacco an d a lcoho l prod ucts hav e a long his tor y and taxe s on unhealth y foods and bevera ges s uch as SS Bs ar e increas ingly bein g im plemen ted. These taxes ha ve incl uded b oth ad valor em and specific excise taxes a nd ha ve been The Des ign of E ffecti ve H eal th T ax es a pplied a t uniform o r differ ential ra tes based on the level o f the harmfulness on the p roducts ’ con tent (i .e. le ve l of sugar , sa tura ted fa t , nico t ine o r et ha nol). M an y coun tr ies use co mb inatio ns o f various tax types. The defined bas e o f pr o d ucts to which the taxes ar e ap plied should g enerally be com pre hensiv e as exc lu sion s can lead to substi tutio n to the exc luded non-taxed p roducts which will undermine both the hea l th and r e ven ue the goals of the tax. The partic ular type and ma gnit ude of tax em plo yed and exten t of earma rking sho u ld be base d on co untr y-specific sit uatio nal analyses of p ublic health challeng es and in the co nt ext of r elat ed pub lic health goals, reve n ue needs and tax admini stra tion ca pacity of the co un t r y . K e y messages • Excise t axe s ar e often used as “P igou vian ” t axe s and a re im plemen ted with the in tent o f inducin g a beha viour c han ge to corr e ct fo r an externality o f over cons um ption. The a mo un t of the tax is ideally set to equal the full c ost o f the externality . • • H ow ever , one m ain disadva ntage o f a specific excise t ax is tha t it n e eds to be incr ease d r egu lar ly or i ts value will be eroded by infla tion. • The base to w hic h the tax ap plies sho uld be com pr ehensi ve to in clude all prod uct typ es, o t her wise substit ution t o un t axed ha rmful products will o ccur reducin g t he eff e ctivenes s of the tax in pro moting heal th and lo wering pot en t ial tax reven ue. 291 Specific excise taxes ha ve ma n y advan tages o ver ad valor em excise taxes, in tha t t hey r educe p r ice ga ps amo ng differ en t brand s of the taxed pr o d uct, which can red uce opportun ities f or co nsumers t o t rade do wn to ch eaper b rand s when taxes ar e increased. S pecific excise taxes ar e also advan tageous in tha t the y tax pr o d ucts at the sam e ra te rega rdless of q uanti t y discoun ts, encoura ge p roduction o f higher priced pr oducts, genera te mo re stab le reven ues as they ar e no t as sub j ect to ind ustr y price ma nip ul a tion and a re r ela t iv ely easy to administ er and ar e not as susceptib le to indus tr y t ax a voida nce an d evasion. H eal th T axes: P ol ic y a nd Pr actice • Tier e d tax struc t ure s with higher ra tes base d on h igher levels o f harm associated wi th pr o ducts (i.e . ethano l or s ugar) ca n hel p to reduce con sump t io n of the most ha rmful products to a gr e a ter exten t and can also hel p to enco urage ref ormula tion. • E arma rking o f t ax r even ue c an h elp to ga r ner su pport fo r health taxes, a ug men t the health impacts o f health taxes an d offset poten tial unin tended consequen ces of h ealth taxes. References 1. W o rld Health Or ganiza tion. 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Geneva: W orld H e alth Org aniza tion; 2015. © 2022 W orld Health Organization (WHO) https://doi.or g/10.1142/9781800612396_0010 This is an o p en access article p ublish ed by W o rld Scientific Pub lishing Com pany o n behalf of WHO and dis tribut ed under the terms o f the Crea t iv e Common s A ttribu t io n-N onCommer cia l-Sha reAlike 3.0 IGO (CC BY -NC-SA 3.0 IGO) License . Special F ocus 2 Health T axes and Illicit T rade: Evidence and Cour ses of Action N orman Maldonado-V argas * W ell-designed he alth taxes in crease the price o f t he taxed g oo d, leadin g to im p ortan t price differ entials with other co untries, and pot en t ially crea ting incen t iv es to explo it arb itrag e of price differ ences thro ug h illicit trade. a This sec tion r e views the disc ussi on o n hea l th taxes and illicit trade , in or der to give t echnician s and polic ymaker s guidance o n t he a vailable evidence o n magni tude , effects, cau ses and possib le cour ses of action t o deal with the pr oblem while sim ultaneo usly mo ving forward o n he alth taxes. Th e sec tion does not in tend to be a syst ema t ic li terat ure review abou t he alth taxes a nd illicit trade; inst e ad, i t foc uses on the m ost r obust evidence o n this ar e a, and the r efere nces ci ted pr ovide a rich set of addi tional info r ma tion fo r t he reader t o deepen t he discussio n in much further detail. The sec tion f o cuses on illicit trade o f tobacco and alcoh ol, becau se there is no evidence o n i llicit trade on suga r -sweetened beverag es (SSBs). 2 Finally , as a w ord o f cav e a t, a Illicit trade is defined by The F ramewor k Con vention on T obacco Control – FCTC as ‘an y practice or conduct prohibited by la w and which relates to production, shipment, receipt, possession, distribution, sale or purchase, including any practice or conduct intended to facilitate such activity . ’ 1 *    PROESA, Univer sidad Icesi, Colombia. [Document text truncated for crawler view.]