If a tax is being considered
If a tax is being considered it should be differentiated and broad-based
- While there is an absence of evidence to support the effectiveness of any taxation on health outcomes, differentiated taxes (i.e. lower rates based on added sugars thresholds, or exemptions for low and no calorie beverages) have a greater chance (compared to flat taxes) of encouraging consumers to make alternative choices by nudging them towards lower sugar beverages through pricing. If consumers pay less for a lower sugar drink than for a higher sugar one, they have a financial incentive to make an alternative choice.
- Differentiated taxes based on sugar content may also encourage manufacturers, distributors, and retailers to redesign their existing product portfolio and marketing plans to favour drinks with less sugar, in order to avoid the higher tax rate. They may also encourage a greater focus on lower sugar innovation, creating a pipeline of alternative products and choices for the future.
- Differentiated taxes have a greater chance of incentivizing consumer switching and product reformulation, thus making them a relatively better tax model for governments aiming to improve public health. However, as healthy consumer behaviour and product reformulation shifts occur, the taxable base of products shrinks – decreasing and eventually eliminating the potential for tax revenue.
- From a public health perspective, a narrow tax that targets only sugar sweetened soft drinks runs the risk of discouraging consumers from purchasing those products without necessarily encouraging them to purchase low calorie beverages instead; they may simply purchase untaxed products with equal or even higher levels of sugar.
- This ‘substitution effect’ and its accompanying decline in tax revenue can be avoided by broadening the base of the tax