Soda tax: What can Brazil study from the European expertise?

There are more than 25 countries that tax sugary drinks

In 2016, following the technical meeting on tax policy, the World Health Organization (WHO) recommended a tax on sugary drinks to improve diet and prevent NCDs.

Until then, only a few countries such as the Federated States of Micronesia, Latvia or Samoa taxed these products, but five years later there are more than 25 countries including several European countries such as the UK, Ireland, Belgium, France and Portugal taxing sugary drinks around the Discourage consumption and combat obesity.

Brazil goes against the grain

Chile, Peru, Mexico and other South American countries have also started taxing so-called sugary drinks, but Brazil was not one of them. Against the grain, Brazil actually cut taxes on these products in 2018. It was only last year that the Brazilian federal government resumed the debate over taxing sugary and alcoholic beverages, which could mean Brazil is finally ready to keep up with the international party trend.

If so, it will enjoy the unique benefit of all laggards: it can learn from the mistakes and successes of its predecessors.

Understanding why Brazil may not have been ready to tackle its “drinking sugar problem” and why other countries have chosen different options on the soda tax must first understand how these excise taxes work and how they should be optimally designed .

Excise taxes are selective taxes that can be used on virtually anything, but are typically levied on alcohol, alcoholic beverages, tobacco, oil, and energy products. However, these are not progressive taxes that are based on the principle of solvency and continue to spark the debate about their fairness (or lack thereof). The tax and social justice concerns they raised cannot be swept under the rug.

According to the latest data from the World Bank, Brazil has one of the highest income inequalities in the world: the top 20% of the population earn 33 times more than 20% of their poorest counterparts.

This means that a consumption tax like the soda tax disproportionately affects the poorer population, since the throughput of a tax for consumers depends on the price sensitivity of buyers and sellers. Indeed, striking the right balance between protecting the poor and ensuring sustainable public finances has been identified as one of Brazil’s top policy challenges in 2021.

In addition, an increase in the excise tax rate – as already recognized by the OECD and shown by European experience – has an impact on value added tax – or ICMS or IPI in Brazil – since excise duties are part of the taxable base of value added tax.

The success of the soda tax in other countries can be measured by its demand-side effects – such as changes in consumption patterns – or by its supply-side effects – such as changes in the manufacturing process.

In any case, the horizontal substitution effect depending on the product category and the geographical substitution effect should be taken into account.

Empirical data and the available literature show that soda taxes seem to have little demand-side effects. Conversely, if the tax has progressive brackets, they can have a strong impact on the supply side, which can even involve changes in production formulas.

Tax brackets in most countries penalize products with a higher sugar content. Instead of paying through the nose, economic operators choose to reformulate production processes and adapt the formulas of some products.

Portuguese experience

Portugal is a case in point. Originally there were only two tax brackets based on the sugar content, namely one bracket for drinks with a sugar content below 80 grams per liter and a second bracket for drinks with a sugar content of 80 grams per liter or more.

Publications on the consumption of sugary beverages during this period show that manufacturers favored the production and marketing of products with lower sugar content, which led to a gradual but steady increase in the consumption of products with lower sugar content, while products with higher sugar content were in the higher range lay brackets were anything but divided.

Encouraged by the reaction of the market, the Portuguese government introduced two new brackets in the 2019 State Budget Act, making the soda tax a more progressive tax.

Should Brazil decide to introduce the soda tax to address the potential health effects of sugar, it could potentially follow the Portuguese example and implement a progressive model with tax brackets to encourage sugar reductions. This will hit exactly the right note with manufacturers who are apparently faster than consumers when it comes to changing old habits.

Mariana Rapoula

Adviser, Lobo Vasques

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