A specific excise tax is the type of tax most commonly used in other jurisdictions
The higher the rate of tax, the greater the public health benefits
Public health groups recommend that revenue is designated for obesity prevention
A number of major reports have recommended a tax on SSBs in Australia. These include Tipping the Scales1 (a public health consensus on key components of an obesity prevention strategy); the Australian Food Policy Index2 (scorecard and priority recommendations for Australian governments to tackle obesity); and the Assessing Cost-effectiveness of Obesity Prevention Policies in Australia study.3
In a dedicated report, the Grattan Institute called for a tax on SSBs as part of a broader suite of interventions to address obesity in Australia. It concluded that taxing SSBs was simple, and could be implemented quickly and incorporated into the existing tax system, thereby minimising administrative costs.4 The Grattan report found that an SSB tax would effectively target products contributing to the obesity problem without capturing products that contain beneficial nutrients; and encourage consumers to switch to close, untaxed substitutes such as water.
The key design features recommended for a tax on SSBs in Australia are listed below, with further detail throughout this page.
- Type of tax – Specific excise tax
- Design of tax – Based on sugar content per 100mL
- Target for tax – Manufacturers
- Tax rate – the higher the rate, the greater the public health impact is likely to be. One recommended design is: 33 cents per litre for beverages containing 5 to 8 grams of sugar/100mL; 43 cents per litre for beverages containing > 8 grams of sugar/100mL. This should be indexed twice a year to account for inflation.
- Use of funds – Earmarked for public health initiatives
Type of tax
The type of tax most commonly used by countries and jurisdictions that have implemented a tax on SSBs is a specific excise tax (a tax levied on a particular product at point of manufacture).5 An alternative to excise taxes are taxes calculated on a percentage of the wholesale or retail price (ad valorem taxes) however these do not encourage reformulation and may simply encourage the purchase of lower-priced brands or larger size products that are cheaper on a per-litre basis.
There are precedents for imposing specific excise taxes in Australia, including on alcohol and tobacco, at the federal level. Section 90 of the Constitution gives the Commonwealth exclusive power to impose duties of excise and customs, while the states reserve powers to impose other taxes such as stamp duty. In Australia there are currently two systems for taxing alcohol - one based on volumes and alcohol content for beer and spirits (excise and excise-equivalent customs duty); and the other based on wholesale value for wine (wine equalisation tax).6 An excise tax on tobacco is calculated ‘per stick’ for cigarettes and per kilogram for all other tobacco products, and is indexed twice a year in line with average earnings to keep pace with inflation.7
Design of tax
An excise tax could apply to the sugar in the drink (nutrient/content-based) and/or the volume of the drink (volumetric). In countries with strong tax administration the World Health Organization (WHO) recommends nutrient-based taxes, which can have the greatest impact because they both incentivise consumers to have fewer SSBs, and simultaneously encourage producers to reformulate their products to reduce sugar content.8
An example of a tax designed to meet multiple objectives is the Soft Drinks Industry Levy (SDIL) in the United Kingdom (UK). The SDIL is a two-tiered excise tax with different rates for drinks containing more than 8 grams of sugar per 100 millilitres, and those containing 5 to 8 grams of sugar per 100 millilitres. Therefore, the tax is both nutrient-based and volumetric. This tiered approach was the tax design adopted by five out of seven national jurisdictions that implemented SSB taxes in 2018: the UK, Estonia, South Africa, Republic of Ireland and Peru.9
Target for tax
Excise taxes are imposed on the manufacturer of a product which can respond by passing on costs to consumers, absorbing the costs or reformulating. For a tax to change consumer behaviour, it should alter the price paid by the consumer at the point of sale. Evidence from Mexico, which imposed a volumetric tax of 1 peso per litre on SSBs in 2014, shows the tax was generally passed onto consumers (the pass-through rate was higher in urban areas compared to rural)10 and led to reduced sales of taxed beverages.11 In the US, an SSB tax in Berkeley, California was mostly but not uniformly passed onto customers, and sales of SSBs declined significantly in the first year.12
In the UK, the SDIL led to reductions in sugar content even before it came into effect in April 2018, with the UK Treasury announcing that it had prompted manufacturers to reformulate more than half of all soft drinks to remove the equivalent of 45 million kilograms of sugar each year.13 Evidence of the SDIL’s impact on purchasing behaviour and consumption will take time to build.
Rate of tax
An important consideration in designing an SSB tax is setting the rate of tax, which must be high enough to impact purchasing behaviour. A systematic review of research on health taxes found that higher-level taxes are likely to achieve greater health gains through behavioural change,14 compared to lower-level taxes. According to a recent paper by Melbourne University economists, an Australian equivalent of the UK SDIL would tax SSBs containing 5 to 8 grams of sugar per 100 millilitres at 33 cents per litre, and SSBs containing more than 8 grams of sugar per 100 millilitres at 43 cents per litre.15 The authors say these are very moderate rates compared to current excise tax rates on alcohol and tobacco in Australia, and could be adjusted later if desired.15
Use of funds
A feature of the UK’s SDIL is that the funds raised have been earmarked for health initiatives including children’s sport and breakfast clubs in schools. Initial estimates that the tax would raise £500 million in 2019-20 have since been downgraded to £240 million due to widespread reformulation by manufacturers to reduce sugar content; however the UK Government has committed to maintaining funding for health initiatives at the initial £500 million estimate.13 Public health groups in Australia have recommended that funds raised through an SSB tax in Australia are used for other initiatives to prevent obesity.1 A survey of Australian grocery buyers found 69% supported a levy if the revenue was used to reduce the cost of healthy foods.16
Developing a framework for monitoring and evaluating an SSB tax is a key element of designing a robust intervention. This includes monitoring the tax to assess how it is performing, and evaluating its design, implementation and outcomes in light of observed effects, including between different socioeconomic groups. Monitoring and evaluation can help an SSB tax withstand challenges, and allows for refinement of the tax where necessary. The World Cancer Research Fund International (WCRFI) advises that it is important to identify appropriate outcomes as part of any assessment. “For an SSB tax, it is not appropriate to solely evaluate the effectiveness of a tax based on obesity rates, as this is a long-term outcome in the pathways of effects,” according to the WCRFI.5More appropriate, short-term endpoints to evaluate a particular SSB tax may include changes in sales and consumption of SSBs and untaxed substitutes such as bottled water.17