They say the only certainties in life are death and taxes. However, a worthy addition to this list is the Australian Medical Association (AMA) calling for the introduction of a sugar tax in the run up to an election. Such proposals consistently seek the introduction of a tax on sugar sweetened beverages (SSBs), which are defined as non-diet soft drinks, flavoured fruit drinks (not juice), sports drinks, sweetened tea, energy drinks, and coffee drinks. There is debate around whether flavoured milk products should be considered SSBs.
Advocates for such taxes cite the need to address rampant rates of obesity in Australia; they do so with good cause. Myriad studies suggest that added sugar in beverages is linked with obesity and many cardiometabolic problems. There is a common consensus from non-industry funded studies including controlled trials, longitudinal cohort studies, and clinical studies; humans do not reduce food intake when consuming caloric beverages like SSBs. The lack of dietary compensation is hypothesized to be due to SSBs’ liquid form, the nutrient mix of the beverage, and resultant release of hormones such as ghrelin and insulin. As such, mechanisms are needed to reduce SSB consumption to benefit public health.
The 2017-18 National Health Survey observed 67% of Australian adults to be overweight or obese – an increase of 3.6% since 2015 and 13.8% since 1995. Most concerningly, these changes were driven by growth in the percentage of obese persons, whilst the percentage of overweight persons has remained stable over this period. The proportion of overweight and obese persons generally increases with age and relative disadvantage: adults 55-64 years of age are the most likely to be overweight, and 71% of adults in the lowest socio-economic quintile were overweight or obese compared to 62% in the highest quintile. The financial burden of obesity is estimated at $11.8bn (2019), of which $5.4bn are direct health costs and $6.4bn are indirect costs, without accounting for foregone earnings and reduced wellbeing. PwC estimates suggest total obesity costs will reach $87.8bn over the decade 2015-2025.
The same survey found 36% of Australian adults consume SSBs at least once weekly, with 9% consuming SSB products daily. Men are more likely to be frequent SSB consumers than women, with 44% of men consuming SSBs at least once per week compared with 28% of women. Those living in the most disadvantaged areas are three times more likely to consume SSBs daily than those in the least disadvantaged areas (13.8% compared to 4.2%). Interestingly, only 24 percent of adults in the 55-64 age bracket consume SSBs at least weekly, despite this bracket having the highest proportion of overweight people. The highest consumption of SSBs is in fact in the 18-24 bracket, with 61.8% consuming these beverages at least weekly.
41 countries currently impose federal level taxes on SSBs. Mexico was the first OECD nation to impose a sugar tax and has the most complete data on its effects. Studies show taxed beverage consumption falling 6.1% in the first year and continuing to fall thereafter. Impacts were particularly noticeable in lower income demographics, with consumption falling 9.1% in the first year. Consumption of untaxed beverages initially rose 7.5% but fell to pre-tax levels by the end of the first year.
Due to the recent emergence of sugar taxes around the world, longitudinal studies on their impacts are unavailable. However, the initial impacts are in line with tobacco excises and economic modelling of addiction spending. If tobacco is an adequate proxy, the effects of a permanent price increase on SSB consumption will grow over time, despite relatively small initial changes.
Two main models of taxing SSBs have emerged across the globe: a lump sum value added per litre of beverage sold, and an ad valorem tax of some percentage of the value of the product. The Mexican tax is designed as a lump sum, which was approximately equal to 10% of pre-tax prices at initiation. However, the value of the lump sum is set in legislation and not indexed, so future legislation will be needed to increase the value to ensure the tax maintains its effectiveness.
Another prominent example of lump sum tax is in the UK, where a progressive tax system levies 24p per litre if the drink contains over 8g sugar per 100mL, and 18p per litre if the drink contains 5-8g sugar per 100mL. Interesting dynamics have emerged in response to the UK tax, as consumers have reduced their consumption due to price increases, and over 50% of producers have altered the composition of their products to move them into a lower tax bracket. The actions of producers in altering their recipes resulted in the equivalent of 45 million kilograms less sugar being sold in the UK in the first year. Furthermore, the vast majority of drinks were reformulated before the tax came into effect, reducing expected first year revenues from £520m to £240m. Whilst a hit to government revenues, the reduction in sugar offered in SSBs is a clearly positive public health outcome.
A number of market features determine the effectiveness of any tax, with the most important being market structure, demand elasticity, and participant firms’ cost structures. Under an oligopoly market, price changes can be expected to be more or less than the value of tax depending on the above factors. For soft drinks in Mexico, where demand elasticities are moderate and 85% of sales are concentrated between two firms, overshifting (price increasing by more than the tax added) was expected and occurred. In contrast, undershifting occurred for products other than soft drinks, which has been attributed to producers having lower market shares, higher pre-tax product prices, and higher demand elasticities of these drinks. An overshift represents the most desirable public health outcome due to consequent larger reductions in consumption.
The Australian market for soft drinks, energy drinks, and sports drinks is substantially less concentrated than Mexico’s, with the largest two firms sharing only 55% of the market. The market for flavoured fruit drinks is more concentrated with a CR4 of 90% and CR2 of 69%. These drinks, however, represent a very small portion of SSBs sold. No Australian data exists for demand elasticity, however, data from other OECD nations is an adequate proxy for evaluating a potential consumer response. Soft drinks have moderately high elasticities of 1.06-1.37 (a 10% price increase leads to a 10.6%-13.7% demand decrease), and other SSBs have higher elasticities of 1.16-1.4+. Given the market structure for soft drinks in Australia, it is difficult to see an overshift occurring after the introduction of a tax, especially if elasticities are high within the observed range. It is more probable yet still unlikely that an overshift will occur for flavoured fruit drinks, as the effects of higher market concentration are offset by greater price elasticities.
Additional concerns arise with the manner producers would distribute their total tax bill across their products. Mexico saw uneven changes in prices by package size, with larger price increases applied to smaller packages for all types of SSB. Such a strategy avoids discouraging consumption of quantities that would otherwise be most heavily penalised by the tax. A differential pass-through is at odds with the intention of the tax, so close monitoring of industry response and prevention of similar actions is essential.
The soft drink and juice manufacturing industries affected by any sugar tax earn combined revenues of $4.875bn (2019) with $2.890bn (59%) derived from products potentially subject to excise. Approximately 6000 employees are engaged in these industries. Both industries do not realise particularly high margins, with ongoing cost pressures from state-based container deposit schemes further crimping profits. However, both are experiencing strong growth in new product lines which are low in sugar and of more health benefit than SSBs, driven by health and wellness focused consumers. These changing dynamics do provide an additional incentive for manufacturers to reduce their sugar content, in addition to that of a progressive style tax if implemented.
Alternative methods of reducing consumption are also worth considering. South Australian data shows knowledge of the nutritional value and health effects of SSB consumption are lacking in the population. 45% of respondents underestimated or did not know the amount of sugar in typical SSBs, 58% did not know the relationship between SSBs and weight gain, 39% did not know the relationship between SSBs and diabetes, 71% did not know the relationship between SSBs and tooth decay, and 85% did not know the relationship between SSBs and heart disease. Importantly, the proportion of frequent SSB consumers unaware of these relationships was greater than the proportion of those who were infrequent or not consumers. Nevertheless, the effectiveness of education programs remains debated. A landmark study trialled both price and educational interventions on SSB consumption at major American hospital canteens. It found significant decreases in consumption under the price model, but no significant change under the education model, despite the high proportion of medically trained personnel purchasing from the canteens.
The ultimate objective of sugar taxation is not revenue raising. Sugar taxes are a component of the public health system, designed deliberately to improve population health and relieve pressures on medical facilities and budgets. With such goals in mind, the twin reductions in SSB consumption and sugar content within beverages seen under the UK’s progressive lump sum model suggest any Australian tax should be formed in this manner. Improvement could be made by indexing tax values to inflation or initially legislating tax increases in future periods, so the real impact of the tax does not diminish over time. Although overshifting is unlikely to occur, the impact on sales of current SSB products will still be notable and will undoubtedly impact producers. However, this can be mitigated by adapting products and responding to other changes in consumer preferences. With the next federal election still two years away, and the economic response to COVID-19 dominating political news cycles, don’t expect to hear any discussion on the topic soon. But as the election draws near, keep your eyes and ears peeled. For without fail the AMA will be back – with good cause.