The sweet hereafter: implications of the UK’s sugar tax

The proposal for a Soft Drinks Industry Levy to start in 2018 was an eye-catching announcement in the midst of an otherwise disappointing Budget last month – the sugar-free icing on a particularly grim cake. But it didn’t take long before the fizzy drinks industry was up and fighting the ‘sugar tax’, threatening legal action against the government for damaging their corner of the market.

In itself, this is a gruesome prospect – companies suing elected governments is an increasingly apparent threat to democracy. But it also makes everything that came before seem absurd: for months we have listened to industry arguing that sugar tax is unnecessary and regressive, and claiming that the market will adapt without legal regulation. The media responded by giving over its pages to industry views, reported both as news and opinion. By the end of February, the tax was reported dead and buried. Job done.

Or not, as it turned out. So what happened? Let’s assume that the introduction of this narrowly-focused levy was not just a cynical attempt by Osborne to sugar the pill as he imposed further service cuts on the vulnerable, but a genuine attempt to tackle the public health issues of obesity and diabetes. And let’s assume that he listened to the voice of industry and the liberal right as they put forward arguments against the tax, thought long and hard about it and decided that they were, after all, talking rubbish. What might his thoughts have been?

A tax of the cones?

Unilever, the processed foods giant, counts Ben and Jerry’s, Lipton Ice Tea and Wall’s ice cream among the brands it owns. They don’t want the tax: CEO Paul Polman stated loud and clear in January that the tax is ‘not the holy grail’ and that it was unlikely to solve Britain’s obesity crisis. But through his opposition, Polman inadvertently managed to convey exactly why the tax would work so well.

For a start, if the main point of a sugar tax is to reduce the amount of sugar consumed in a country of ballooning obesity rates, ruffled feathers in the ice cream industry might be a good sign. If they’re worried enough to start going to the press with their opinions, then the chances are they believe that taxes of this kind could have negative impacts on their sales as consumers either consume less, or switch to options with reduced sugar content. To me, this looks like a sign of the tax already working – maybe ‘not the holy grail’, but not bad either.

More important than what companies like Unilever say is what they do. In reaction to the sugar tax debate – or at least comfortably coinciding with it – the company said it was reworking its products to reduce the amount of sugar they contain, scaling down its ice creams to 250 calories per serving. If competing products contain more sugar, then a sugar tax should, other things being equal, give the less sugary product a price advantage in the market – although the simple two tier system proposed for the Soft Drinks Industry Levy will make it a bit of a blunt instrument.

A fat lot of good?

Unilever are not alone in their paradoxical position – libertarians of many shades have claimed in recent months that a sugar tax would be both ineffective and bad for business. It’s difficult to see how this could really be the case. If the tax is detrimental to business, presumably, it is because it is effective at turning customers away from the most sugary products. If it’s ineffective, on the other hand, presumably that’s because it’s having no impact on behaviour (and therefore on business) – or more subtly, perhaps, because the changed behaviours have no impact on health outcomes.

Yet even if it didn’t succeed in turning consumers away from sugary products, and even if it didn’t improve health outcomes, it might still be an excellent idea. Although one purpose of the tax might be to reduce, at the margin, the incidence of obesity, diabetes and other sugar related illnesses, the additional revenue raised by the tax is far from an incidental benefit.

The tax is expected to raise £520m per year, much of which has been earmarked for increasing access to PE and sport at schools. However, with healthcare costs from obesity estimated at £47bn a year, society still has to confront the question of how best to fund this bloated bill.

Top dollar: the cost of fizzy drinks in the UK is set to rise under the Soft Drinks Industry Levy. Photo: La Viña Liverpool (CC BY-NC-ND 2.0), via Flickr.

The word tax has a tendency to kill productive conversations. Almost everyone has something to say on the obesity crisis and the dire straits of the NHS, and many believe more should be spent on healthcare. But introduce the idea of taxing the things that cause the NHS’s bill to rise and businesses with obvious vested interests are primed to object, usually with arguments that are at best contradictory, and at worst, simply wrong. Amongst the public at large, tax is also a word that triggers knee-jerk responses, invoking the idea that a tax is something intrinsically bad.

Yet if services – the health service, social care, street lighting, defence – are to be provided by the public sector, then a source of revenue is needed. Tax revenues can also support progressive ideals, such as reducing hardship, investing in technological progress or addressing environmental problems. The key question, then, is where the revenue should come from: what things do we really want to see taxed? But such discussions rarely take place within the press. More likely, any tax designed to shift consumption in a sustainable direction will be painted as the tyrannical impulse of the nanny state – a ‘sin tax’, to keep us in line, or a ‘stealth tax’ that reduces our freedom to spend as we please.

Poor argument

Where the market fails – as it frequently does –well-placed taxes can direct it to the benefit of consumers and the environment. The arguments advanced against the sugar tax seemed very similar to the arguments advanced against most environmental taxes. On the one hand, the tax won’t work: on the other, the tax will affect businesses. As with the sugar tax, the likelihood of both claims being true at the same time is small.

Another objection that is advanced is that some of these taxes are regressive, hitting the poor disproportionally harder than the rich. There is indeed potential for concern here, but the argument has to be looked at from a broader perspective: the tax system influences income distribution directly (though taxes on income) as well as through the welfare budget, which is designed, in part, to address distributional issues. The system of welfare has to account for the distribution of income under the prevailing tax regime. The welfare budget, it should be stated, dwarfs the level of revenue raised by environmental taxes, and we’ve discussed elsewhere the why it can be problematic of separating ‘fuel poverty’ from the issue of ‘poverty’ in its more generalised form.

As with the sugar tax, even if the shift in behaviours was small, environmental tax would raise revenue to be used for other purposes. And if revenue is raised through environmental taxes, then in funding the services provided by the public sector, arguably, we need less tax revenue from other sources.

The green stuff

We’re back to the key question: what should we be taxing in order to generate the revenue to do what the public sector does? Surely, it’s better to tax things that cause problems – pollution, waste, sugar, alcohol, cigarettes – than things that we want to see more of, such as labour, or income? On the environmental side, students of environmental policy are routinely told that the way to address market failures by ensuring that the cost of environmental damage is reflected in market prices – the so-called ‘optimal tax’. Yet we’ve made limited progress in that direction thus far, with environmental taxes accounting for 7.5% of all tax revenues in the UK in 2014. Despite this, and although we have pressing problems of air pollution, greenhouse gas emissions, loss of biodiversity, littering and noise, to name a few, some would have us believe that such taxes are already excessive and need to be reined in.

It’s important – especially now, when the economy is still stuttering, and with the state still spending more each year than the revenue it receives – to have a sensible discussion about the tax system. Zero tax is not an option, so how ought we to raise revenue in the future? If this debate is hijacked by vested interests and the reflex response of the media, we will make the wrong decisions.

So whilst the decision to go ahead with the sugar tax might be considered a one-time budget sweetener, it might also signal a willingness to tax things that cause harm in preference to raising taxes on income and such like. But the other message that should be taken from the Budget is that we also need a welfare system, albeit one that’s modern and well-targeted. In that context, a well-designed tax system should be a force for good.