Sin taxes rise — but are they hitting health goals?

As countries around the world grapple with the increasing burden of noncommunicable diseases, or NCDs — responsible for an estimated 41 million deaths every year — more governments are taxing tobacco, alcohol, and sugar-sweetened drinks. Since 2017, at least 133 countries have increased or introduced a new health tax: levies on products that have a negative public health impact.

However, according to the World Health Organization and other global institutions that provide guidance on this subject, these taxes are still underutilized — and are not always designed to meet public health goals.

Patrick Petit is a senior economist at the International Monetary Fund, providing technical assistance to authorities on tax design based on their respective health or revenue goals. In most countries, these two objectives can be obtained simultaneously, he said, but there’s an increasing tendency to recommend having excise taxes — those imposed on specific goods or services — geared toward a health tax model, and this impacts the way taxes are designed.

Devex spoke to a number of experts to learn what key design components can make health taxes, or sin taxes as they are also known, more effective in tackling the NCD burden.

Structuring health taxes more effectively

According to Danielle Bloom, a health finance consultant, governments should intentionally structure taxes on products to more directly reflect the specific harm caused by their consumption.

Experts, including Bloom, suggested that using what is referred to as a “specific tax” structure — set at a fixed rate per unit of the product, such as per cigarette or packet — is preferable to an “ad valorem” structure, which is based on a percentage of the product’s price.

Many countries still apply ad valorem taxes to tobacco, said Petit, but “shifting from ad valorem [structures] to a specific one for health reasons is very important.” This shift is already happening in numerous locations: Rwanda has transitioned to specific taxes on tobacco, and Cape Verde adopted a mixed tax system with the introduction of a specific tax on alcohol that allows for a strong increase in revenue, Petit suggested. He also noted that Brazil is in the process of adopting this approach to alcohol, while Vietnam and Mexico are considering a similar change.

Under an ad valorem structure, Petit explained, the amount of tax paid on two different bottles of alcohol could be the same, regardless of their respective alcohol content, while a specific tax dictates a higher price based on the alcoholic content by volume.

Jeremias Paul, Jr., coordinator of the tobacco control economics unit with WHO’s prevention of noncommunicable diseases department, suggested that a specific or mixed tax structure generally results in revenues that are higher, as well as more stable and predictable, than those from ad valorem taxes alone. This is, in part, because ad valorem taxes can be applied at different points in the supply chain — from the manufacturing cost to the retail price — which impacts the final sale price.

According to some studies, specific taxes also make it more difficult for industries to reduce or delay the price increase for consumers through techniques such as “undershifting,” where industries “absorb [part or all of] the tax increase,” said Paul.  

The use of earmarking

At least 80 countries earmark for health, that is, they take all or a portion of the total revenue from a tax or group of taxes and designate its expenditure purpose. But “health tax revenue does not need to be earmarked or directed towards NCD priorities in order to have an impact on NCD burden,” said Bloom, since the tax will already impact consumption, reducing the health consequences for the consuming individual, as well as anyone else impacted by their consumption (as is the case when bystanders inhale secondhand smoke).

There are two different types of earmarking, explained Petit. With hard earmarking, authorities tax a product and put the money in a fund outside the budget which is dedicated to a specific purpose, such as anti-tobacco programming. Soft earmarking, on the other hand, ensures that revenue collected passes through the budget and is assigned toward increasing funding for specific programs.

“We never recommend hard earmarking — ever,” said Petit, because “the budget is the core instrument of democratic control of public finance and resources.” Soft earmarking ensures the resources are channeled through the national budget and reviewed annually, he added.

Earmarking can help governments to “sell a tax increase” to the voting public, said Petit, but resources are fungible, meaning they can be reallocated across government budgets. Therefore, even soft earmarking isn’t ideal, as “there's no guarantee that it works to systematically and sustainably provide more resources to a specific program,” he added, recommending instead that governments focus on promoting regulation related to harmful products, such as tobacco, and pushing for relevant funding and programming.

The importance of significant and regular rate adjustments

A tax or tax increase needs to be significant in order to impact price and affordability, said Paul.  In 2020, only 40 countries imposed taxes on tobacco that were high enough to make an impact — due, in part, to interference from the tobacco industry, according to WHO.

The tax rate must consider the price elasticity of demand — a measurement of the change in the demand for a product as a result of a change in its price, said Paul. Tobacco and alcohol are examples of inelastic goods where the demand is highly resistant to price changes, in part due to the addictive nature of these substances. For example, the price elasticity of demand for tobacco is, on average, minus 0.5 in low- and middle-income countries, meaning that a 10% price increase would only reduce consumption by 5%. Meanwhile, the demand for sugar-sweetened beverages is more elastic, so higher taxes would more effectively lower consumption and the potential revenue from taxation would be lower, Paul said.

Additionally, factors such as the pass-through rate — how much of the tax is reflected in the final price — and the characteristics of the consumer group can affect price elasticity of demand, added Paul.

Adjusting rates in line with inflation and the income growth, or earning potential, of the population is another essential design component to maintain the impact and relevance of specific taxes, which are more vulnerable to inflation and can lead to diminishing revenues, even as people consume more of the product. Failure to index for inflation can result in products, such as cigarettes, remaining relatively cheap in the marketplace, cautioned Bloom.

The case of South Africa highlights the importance of accounting for inflation. Excise taxes have been rising regularly in the country since the early 1990s, with price increases correlating with fewer sales and a decline in smoking prevalence, as well as mortality and morbidity from conditions related to smoking. But, prior to this, specific taxes were significantly diminished by inflation due to stagnant or insufficient adjustments. This led to a decline in real prices, a rise in sales, and falling tax revenues — all of which required deliberate policy action to reverse.

Simplicity and realism as guiding principles

Before joining WHO, Paul worked for the department of finance in the Philippines, where he spearheaded the country’s “sin tax” reform law that came into effect in 2013 and contributed to a marked decrease in tobacco prevalence — from 30% in 2009 to 20% in 2021. Reflecting on this experience, Paul noted the importance of “political will at the highest level” and having a coalition of support in designing and introducing sin taxes.

“With the industries, there's a lot of pushback — in communicable diseases, mosquitoes, for example, don’t have lobbies, [but] for NCDs we [face] lobbies and strong political push[back],” he said.

Additionally, Paul recommended that communications and advocacy efforts should focus on framing taxes as a health issue, making it harder for politicians to voice opposition.

Designing effective sin taxes also involves coordination across different authorities and groups. According to Bloom, it’s important for the ministry of finance to be “in the driver's seat” in determining tax policy while working closely with the ministry of health. One group that is often not engaged, she suggested, are the tax and customs administration authorities. While policy is not under their mandate, these authorities implement taxes and monitor imported goods, she explained.

“Having a tax policy best practice is one thing,” said Bloom, “but having a tax policy that's in line with the administrative capabilities at the country level to actually monitor and implement those taxes is also important.”

For Petit, “a good tax system is a tax system that is simple.” His advice: Implement the smallest number of taxes on the widest base (applying it to a whole category of goods, such as all forms of tobacco), and avoid multiplication of excise taxes. But health taxes are not supposed to be sustainable, he added. Since the aim of these is to deter consumption, a successful sin tax will disappear.

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