Selective taxation can have unintended consequences
Discriminatory taxation can lead to product substitution and have a negative economic impact.
Product substitution has important implications for the total health effects of food and drink taxes
Soft drinks taxes often neglect to take into consideration possible unintended consequences of taxation such as substitution effects. A European Commission report says that “product substitution has important implications for the total health effects of food taxes because a food tax aimed at reducing consumption of one product or ingredient, may in fact increase consumption of other products”:
- In Berkeley, Californian researchers found the soft drinks tax led to an increase of 26 calories per day as consumers shifted towards more calorific beverages such as milkshakes and smoothies which were not taxed.
- A modelling study carried out in 2017 in the UK also showed the potential effect of increasing the price of sugar-sweetened beverages on alcoholic beverage purchases. The results suggested that an increase in the price of high-sugar drinks could lead to an increase in the purchase of lager, while an increase in the price of diet/low-sugar drinks could increase purchases of beer, cider and wines. Overall, the effects of price rises were greatest in the low-income group.
- A review of 47 studies on beverage taxes commissioned by the New Zealand Ministry of Health found that “studies using sound methods report reductions in (sugar) intake that are likely too small to generate health benefits and could easily be cancelled out by substitution of other sources of sugar or calories”.
There are documented negative economic effects to selective taxation
Discriminatory taxes can often have unintended negative economic consequences:
- Job losses are often a near-term effect of discriminatory taxes, resulting in not only lower consumer spending, but also in lower tax revenue from individuals that compound these losses. For example, since the introduction of a discriminatory beverage tax in Mexico in 2014, more than 10,000 jobs have been lost and 30,000 ‘mom-and-pop’ stores (small, family-owned, independent stores) closed down due in part to the tax.
- The effects of taxes on employment are also widely acknowledged. There are large numbers of local small and medium-sized enterprises that manufacturers work with, mostly active in bottling, packaging, advertising and retail. Therefore, food taxes may have a direct effect on local employment, and throughout the entire value chain.
- Discriminatory taxes can also create a ‘black market’ for the taxed products and drive consumers across borders to shop. Denmark provides a compelling example, where the trans-border trade was so great that the soft drink tax was repealed in 2014, citing more than kr290 million (some €39 million) in lost revenue, due to illegal soft drink sales and people crossing the border to buy cheaper soft drinks.
- Finally, discriminatory taxes disproportionately affect the poor, placing a greater burden on those with smaller incomes. It is well-established that taxation of foods and beverages hurt those who can least afford it the most. A 2019 British Medical Journal editorial acknowledged the regressive nature of such taxation, stating that “taxes on food and beverages are regressive because families on lower incomes who spend a higher percentage of their income on food will be disproportionately affected.”