Sugar levy: Why tax our pop?

published 27 March 2016

160325-sugar — Fizzy drinks account for a third of children's sugar intake

George Osborne is to slap a new levy on fizzy drinks. The idea is to discourage unhealthy habits that lead to obesity. Will it work? Simon Wilson reports.

What has George Osborne proposed?

The chancellor has proposed a levy on companies that produce or import certain kinds of high-sugar drinks, particularly fizzy drinks, but not pure fruit juices or milk-based drinks.

The levy widely billed as a "sugar tax", but in fact only affecting a small proportion of high-sugar products (see below) will have two bands: one for drinks with a total sugar content above 5g per 100ml and a second for the most sugary drinks containing more than 8g per 100ml.

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If approved by Parliament, the tax will come into effect in 2018, and analysis by the Office for Budget Responsibility suggests the two bands will be taxed at 18p per litre (that's 6p on a 330ml can of Coke) and 24p per litre (8p on a can) respectively. Examples of drinks facing the top whack include Coke and Pepsi, Lucozade Energy and Irn-Bru. Those on the lower rate include Fanta, Sprite, Dr Pepper and Schweppes Indian Tonic Water.

George Osborne reckons he will raise £520m a year from the tax, and says that money will be spent on extra sports funding in schools.

Why target fizzy drinks?

Lots of reasons. First, they are incredibly high in sugar: a typical can of Coke has enough sugar in it about nine teaspoons to take an adult over their daily recommended sugar intake in a few swigs. Second, they have no nutritional benefit other than the calories. Third, people who drink them tend to have them every day.

For teenagers, fizzy drinks are the number-one source of sugar intake, while overall they account for a third of children's sugar intake (25% for adults). Fourth, and importantly, recent advances in nutritional science have found that calories delivered into the bloodstream in liquid sugar form are especially unhealthy.

The consumption of liquid sugar stimulates overeating, and by putting undue stress on the liver, it affects the metabolism, directly encouraging weight gain as well as the onset of type-2 diabetes. All of this makes the Treasury think fizzy drinks should face special treatment.

Will it help cut obesity?

Possibly but an awful lot of things would have to fall into place for that to happen.

Crucially, this tax is a levy on producers and importers: it is not a tax on consumption (it's less politically risky that way). So for it to affect behaviour, you would have to assume that the tax will be passed on to consumers, rather than absorbed by narrow profit margins along the supply chain. There's no guarantee that will happen (although what might happen instead is that the levy encourages the companies to cut the sugar content in their recipes).

Second, you have to assume that consumers are price sensitive when it comes to sugary drinks and there's conflicting evidence on this.

What are the details?

One recent academic study cited by The Washington Post (from the RAND Journal of Economics, Summer 2015) found that small increases in the price of sugary drinks don't actually affect behaviour that much, especially among the poorest, who consume a lot of fizzy drinks. Thus "soda taxes" end up being highly regressive without meaningfully changing consumption levels among the population with the highest obesity levels.

Even a 2013 study that is widely cited by pro-sugar-tax campaigners (Briggs et al., British Medical Journal 347) concluded that a 20% tax on sugar-sweetened beverages ie, rather greater than the one being proposed would cut obesity rates in the UK by just 1.3%.

And even that tiny reduction is premised on the arguably questionable assumption that those people nudged into drinking less fizzy drinks wouldn't be tempted to buy other sweet things instead.

What's the international evidence?

Unhelpfully, it's mixed and the key country where a similar soda tax to the UK's has been tried, Mexico, is cited by both sides of the argument as backing up their positions, due to big fluctuations in the reported data.

For example, Alex Renton in The Observer reports that after Mexico introduced its 10% tax on sugary drinks in 2014, sales fell 12% (and by 17% among the poorest groups), while Dominic Lawson in The Sunday Times recently cited Mexican data showing a more modest 2.5% fall in sales, and an average daily cut in calorie intake of just six calories.

Closer to home, France has a tax on fizzy drinks, but it's a consumption tax, and it's tiny by comparison. As yet, there is nowhere we can point to where there have been sugar taxes in place long enough to assess their impact on public health so the eyes of policymakers in America and elsewhere will be eager to see how this UK plan works out.

But even if taxes were to halt all sugary drinks, nearly nine in ten of us would still get more than the recommended 5% of our calories from sugar, according to the Institute of Fiscal Studies. It looks like the battle of the bulge will be a long one.

What's the alternative?

The way "sin taxes" are levied is an "incoherent muddle", says Tim Harford in the Financial Times. Plenty of products that are bad for us (bacon, butter, sugar) get favourable tax treatment, attracting no value added tax, although the standard VAT rate is 20%.

The idea of taxing sugar, but only when it is consumed in a particular liquid form, looks like an unsophisticated relic of a bygone age. "Sugar can be measured and taxed by the gram, whether it comes dissolved in oft-demonised soft drinks or added to bread, cereal, ready-meals, chocolate bars, or anything else."

Done well, a sugar tax would make a lot of sense, agrees Martin Wolf in the same paper. A sensible sin tax would be related to the harm done and would tax all sugary foodstuffs, as well as alcohol, systematically. "This is not such a tax."

Simon Wilson’s first career was in book publishing, as an economics editor at Routledge, and as a publisher of non-fiction at Random House, specialising in popular business and management books. While there, he published Customers.com, a bestselling classic of the early days of e-commerce, and The Money or Your Life: Reuniting Work and Joy, an inspirational book that helped inspire its publisher towards a post-corporate, portfolio life.

Since 2001, he has been a writer for MoneyWeek, a financial copywriter, and a long-time contributing editor at The Week. Simon also works as an actor and corporate trainer; current and past clients include investment banks, the Bank of England, the UK government, several Magic Circle law firms and all of the Big Four accountancy firms. He has a degree in languages (German and Spanish) and social and political sciences from the University of Cambridge.