Can Taxes

David Barnum

ramanan laxminarayan and amit summan are director and senior research analyst, respectively, at the Washington- and New Delhi-based Center for Disease Dynamics, Economics & Policy. This article draws heavily from the analysis of the Task Force on Fiscal Policy for Health underwritten by the Bloomberg Philanthropies.

Published July 29, 2019


It has been widely recognized for quite some time that people’s health is determined to a greater extent by their behavior and social environment than their access to medical care. The consumption of tobacco, alcohol, excessive salt and sugar-sweetened beverages looms in this regard, as does lack of exercise. And, of course, everything from air and water quality to community engagement to the availability of fruits and vegetables counts, too. While the social and environmental factors can be modified through public policy, getting people to drop bad habits is much more difficult.

As large segments of the global population embrace so-called “Western lifestyles,” noncommunicable diseases – notably, hypertension, type 2 diabetes and cardiovascular ailments – make up an ever-larger portion of diseases that are preventable. Indeed, it is no exaggeration that we are on the cusp of a nutritional and epidemiological transition.

The Global Burden of Disease study concluded that the top-5 risk factors for premature deaths worldwide are dietary risks, high systolic blood pressure, tobacco, high fasting-plasma glucose (poorly controlled diabetes) and air pollution. The table below shows how these risk factors rank in the United States and in its developed-country peers. Note that dietary risks make up a larger component of the disease burden in the United States than in France and Spain, where tobacco is a greater cause of premature death.

The high rate of obesity in the United States, which is associated with super-sized servings; cheap, accessible junk food; and insufficient exercise, is well established. The rate of obesity in the U.S. is currently a daunting 39.8 percent. The rates are even higher among Hispanics, blacks and low-income households. Meanwhile, smoking remains a leading preventable cause of premature death.

All told, these modifiable risk factors add to the burden on health care systems that are already challenged by high operating costs, systemic inefficiencies and aging populations. Although a variety of “soft” policy options for tackling bad behavior – everything from bans on advertising to labeling guidelines – have been deployed, excise taxes and targeted subsidies designed to reduce or (in the case of positive substitutes) raise consumption are underutilized.

Where Taxation Worked and Where it is Needed

According to the World Health Organization (WHO), most countries fail to levy taxes on tobacco to the WHO’s recommended level of 75 percent of the total retail price. Not surprisingly, then, there are large disparities in levels of, and trends in, tobacco consumption across regions. Africa and the Middle East are projected to increase tobacco use, while the downward trend in smoking elsewhere is expected to continue.

Taxes have not been used aggressively in many parts of the world in spite of the evidence that they can do the job. In the United States, an increase in cigarette prices of 22 percent from 2008 to 2009 after the implementation of a federal excise tax hike was followed by a decrease of 6.3 percent in adult smoking. Although smoking rates nationally have decreased, substantial disparities remain in rates across states due in part to significant variations in taxes. For example, smoking rates in the Midwest and South remain above 15 percent, while they are around 11 percent in the more heavily taxed West and Northeast.

By the standards of most countries, the 15 percent rate is modest. Even so, cigarette smoking causes 480,000 deaths annually in the U.S., a figure that reflects high rates of smoking in past decades and the long lags between initial consumption and morbidity.

Like tobacco taxes, alcohol taxation is a widely accepted tool to limit the harmful effects of alcohol consumption. The WHO reports that while some regions are experiencing dropping levels of use, many low- and middle-income countries are projecting increases – particularly in younger populations.

Taxation has a good track record in reducing alcohol consumption. However, in the U.S., state alcohol taxes as a percentage of the retail price have eroded by 30 percent (1991 to 2015) because of inflation of prices. The impact of diluted state taxes will soon be compounded by recent federal tax changes that will reduce levies on alcohol producers. This is unfortunate in light of the high toll of property damage, injury and domestic violence linked to alcohol misuse – not to mention the fact that some 88,000 people die from alcohol-related causes in the U.S. annually.

While tobacco and alcohol levies were some of the earliest “sin taxes,” taxes on junk food have recently gained public support – though only in a few places. But that is beginning to change.

In Mexico, researchers found the 8% tax on non-essential foods, which included sugary drinks and other junk foods, led to a 6% decline in sales two years down the road.

Researchers estimate that the number of overweight and obese individuals will nearly double from 2005 (1.12 billion globally) to 2030 (2.16 billion). And in response to the prospect of the household catastrophes and the health care burdens that will ensue, several countries have recently implemented or proposed taxes designed to reduce sugar-sweetened beverage intake — among them Mexico, Chile, South Africa, Hungary, England and France.

Data on the impact for new adopters are lacking. But other countries have had a few years to evaluate the effects of the taxes, and the results are promising. In Mexico, researchers found that an 8 percent tax that was levied in 2014 on “nonessential” food items, which included sugary drinks and other junk foods, resulted in a 6 percent decline in sales two years down the road. In Hungary, a similar tax on foods high in sugar and salt that was implemented in 2011 significantly decreased consumption of the targeted products and increased the supply of healthier reformulations of the offending foods.

The experiences of Mexico and Hungary illustrate the power of sugary drink and junk food taxes to nudge consumers toward healthier food consumption. Although broad-based taxes on processed foods high in sugar, salt and fat may seem an overreach these days in most countries, sugar-sweetened beverage taxation has gained traction in several. Even a handful of cities in the land of the free and home of the brave — among them Philadelphia and Berkeley, Calif. — have imposed sugary drink taxes.

Redirecting Subsidies

It’s important to consider that financial incentives to limit consumption of “bads” can be framed in terms that don’t create the pushback of excise taxes. Redirecting existing subsidies, for example, could also have a tremendous benefit.

In the United States, Supplemental Nutrition Assistance Program (SNAP, or just plain “food stamp”) benefits are widely used to buy junk food. In fact, advertising for sugar-rich products is often timed to increase when benefits are made available. Sugary drinks alone account for about 10 percent of all food-stamp dollars spent. In response, Texas is considering legislation that would ban the use of food stamps to pay for energy drinks, candy and other junk food.

Meanwhile, in India, large government subsidies on farm loans, electricity and water promote the production of sugar. The consumption of sugar is also subsidized through the government’s system of distributing food to the poor and near-poor. These subsidies have helped make India the diabetes capital of the world: one in eight Indians is diabetic, and another eighth are prediabetic.

Oliver Bolch/Anzenberger/Redux

This catastrophe in the making could be thought of as an opportunity. Redirecting agricultural subsidies toward healthy foods could have a tremendous impact on health, and health care bills footed by the government, without raising taxes.

A parallel argument applies to subsidies of other products that undermine health — notably subsidies for coal and liquid transportation fuels. The particulate matter produced by these fuels is instrumental in causing chronic obstructive pulmonary disease, heart disease, cancer and infections of the lower-respiratory tract, including tuberculosis. Yet energy subsidies exceed public spending on health and education in many populous countries, including Bangladesh, Indonesia and Pakistan.

Indeed, in 2015, governments around the world spent an astonishing $5.3 trillion on energy subsidies. Eliminating subsidies for the dirtiest fuels and reallocating them to nonpolluting energy sources could improve health substantially — and again, without increasing the overall tax burden.

Why Fiscal Tools?

Public health policy is, and will probably remain, anchored in policies that discourage the consumption of harmful products through direct regulation as well as through the provision of information and social pressure. But fiscal tools surely have a large — and to date, underutilized — role to play in discouraging consumption of “bads” and decreasing exposure to harmful substances.

Charly Triballeau/Getty

As the burden of noncommunicable diseases increases globally, a focus on prevention will be critical. The medical establishment in the United States is rightly proud of the tremendous reduction in mortality from cardiovascular disease linked to better drugs, better medical devices and better surgical techniques. Yet researchers estimate that prevention accomplished by modifying risk factors has contributed the bulk of the decline (44 to 76 percent) while improved treatment has explained just 23 to 47 percent.

Prevention is particularly important in countries that already have badly stretched, underfunded health systems. But priorities are moving only slowly in that direction.

A recent report by the WHO concluded that, although countries have increased public health spending since 2000 in tandem with economic growth, low-income countries have lagged behind. Furthermore, the report found that making universal health coverage a reality will require not only tremendous increases in spending, but also structural changes in delivery systems that won’t come easily.

Compounding the problem, slowing economic growth due to a mix of trade tensions, lagging economic reform in China and the Brexit train wreck will lead to a concomitant squeeze on funding for medical care. Fiscal tools can decrease the burden on health systems without additional budgetary outlays, and simultaneously raise tax receipts. These receipts could be used to further fund health systems or other important initiatives.

For example, Hungary raised $291 million in the first four years of its junk food tax, with the receipts earmarked for health spending — not a fortune, perhaps, but enough to modestly ease the growing burden on the health care system. Alternatively, increased tax receipts on junk food or gasoline could be used to offset taxes that distort efficient resource allocation and undermine growth, such as taxes on labor that decrease labor supply.

Taxes may be preferable to regulatory measures where enforcement is unpopular or ineffective. For example, subsidizing coal-cleaning technology such as scrubbers may be more effective than mandating compulsory installation of such technologies when the government doesn’t have the resources to monitor power plants or the will to punish noncompliance. Similarly, nutrition subsidies for adding micronutrients to processed foods may be more effective in incentivizing use by large number of producers than simply mandating supplementation.

This does not mean taxes and subsidies are a stand-alone solution or a substitute for related regulation, but they could be a vital part of a portfolio of approaches to public health problems. Regulation, such as restricting smoking in public areas, can curb tobacco use, while setting fuel efficiency standards for vehicles can reduce ambient air pollution. By the same token, restricting the sale of soft drinks in schools can curb consumption and perhaps make a dent in obesity rates. Ideally, one would use a combination of regulation and sin taxes to accelerate change.

Implementation Blues

Excise taxes — or, for that matter, any taxes — are likely to provoke public ire. Common arguments against the taxes we’ve been discussing, which are frequently asserted by industry interest groups — include: (a) the tax will increase the size of the black market, (b) the tax will generate a disproportionate burden on the poor and (c) the tax will undermine personal freedom. But there are answers to each.

Countries have successfully implemented these taxes without seeing leakage into the black market or a decrease in tax revenues. In the case of tobacco, the WHO argues that strong governance, low tolerance for corruption, competent tax administration and the policing of formal distribution channels will deter illicit trade.

The issue of harm to the poor is more difficult to address, as evidence is mixed on whether these taxes are actually regressive. In any event, any evaluation of the tax should include an analysis of how the tax revenues are used. The government could offset the regressive nature of the tax by earmarking revenues for spending on programs benefiting those most affected by the tax, which may also help facilitate the goals of the tax.

Restricting the sale of soft drinks in schools can curb childhood and, subsequently, adult obesity rates. Regulation in conjunction with sin taxes will be the most effective in reducing consumption.

For example, tobacco tax revenues could be used to fund smoking cessation programs. U.S. cities that have implemented sugary drink taxes have proposed allocating the revenues to public education or public health programs, which would primarily benefit the poor. One should also consider the fact that a well-targeted sin tax improves the health of taxpayers, cutting their outlays for medical care and raising their productivity at work. Indeed, studies have found that when lower income groups’ consumption is affected disproportionately by the tax, they also disproportionately reap the gains.

The final challenge is philosophical, fighting back against the view that less government is always better government. Even the least attentive students of Econ 101 should understand that intervention raises overall welfare if it offsets costs not borne by the consumer. For example, tobacco use can lead to others’ illness from second-hand smoke, while alcohol can lead to collateral injuries in traffic accidents. Similarly, obesity increases public health costs and undermines economic productivity. The table below offers estimates of the global societal economic costs of excess poundage, tobacco use, alcohol abuse and air pollution. And though some of these costs are borne by consumers, a good portion is not.

The Way Forward

Our recent analysis conducted for the Task Force on Fiscal Policies chaired by Michael Bloomberg and Larry Summers quantified the global health and economic gains from increasing tobacco, alcohol and sugary drink taxes. It confirms there are substantial health and economic gains to be had over the next half-century — and low- income and lower middle-income countries are not exceptions to the generalization.

As noted earlier, taxes often have unintended consequences, and there are typically both winners and losers from specific forms of taxation. By compensating the losers through programs funded by the increased tax revenues, welfare for all groups can be increased as long as the external costs of consuming the product are at least as high as the tax. In our proposed interventions, consumers who bear added costs (by consuming the taxed good) are often compensated through decreased out-of-pocket expenditures for health care down the road.

None of this will work, of course, if the tax is easy to evade or if it proves to be extremely difficult to deter evasion. This is particularly important for goods where informal markets already exist — say, for moonshine and bootleg cigarettes. As discussed earlier, strong tax administration coupled with strong governance has to be part of a fiscally based approach to deterring socially costly sales.

Taxation alone is rarely sufficient to ensure reduced consumption of “bads” and increased consumption of positive substitutes. These include everything from improving education about the risks of tobacco to addiction services for alcohol to subsidizing healthier food choices. In the best of possible worlds, these initiatives could be paid for out of the increased tax revenues.

Spencer Platt/Getty

Government agencies should work as one in attempting to modify risk factors. This point may seem obvious. But, in practice, it is not easy to achieve. For example, agriculture ministries may balk at reducing subsidies on sugar or tobacco because their primary constituents are farmers and distributors.

Indeed, it would be foolish to leave the impression that this whole approach to changing bad habits that have costly societal consequences is easy, just because it may be done without net public expenditures. There will almost always be losers, even in a regime that includes compensatory spending. And even consumers who come out ahead — say, by saving their health and outlays for medical care — may prove too myopic to see that.

But the fiscal approach is surely worth the effort. It minimizes the interference of government in individuals’ lives, even as it promises to add trillions to GDP (appropriately measured) in the form of economic productivity — not to mention the quality of life.

main topic: Public Health
related topics: Tax Policy