Health taxes

Overview

Health taxes are levied on products that have a negative public health impact, for example tobacco, alcohol and sugar-sweetened beverages (SSBs) . The overall aim of health tax policy is to reduce the consumption of unhealthy products by increasing prices and making them less affordable over time. This is achieved with regular tax increases large enough to result in real price increases greater than increases in real incomes.

Health taxes are win-win-win policies that save lives by preventing disease and injury while advancing health equity and mobilizing revenue for the general budget and development ^{(1, 2)}. This revenue can also be used for specific priorities such as financing universal health coverage (UHC) or highly cost-effective yet underutilized population based preventive health measures ⁽¹⁾.  

Health tax policy

From an economic perspective, health taxes (also known as Pigouvian taxes) are justified as they correct for the negative externalities and internalities associated with the consumption of unhealthy products ⁽³⁾

In general, consumption is usually reduced best with excise taxes based on the quantity (known as specific taxes) of an unhealthy product (such as packs of cigarettes) or its unhealthy ingredient (such as pure alcohol or sugar) rather than ad valorem taxes based on the product’s value ⁽³⁾.

The impact of health taxes

Saving lives: Tobacco, alcohol and SSB taxes are cost-effective ways of preventing diseases, injuries and premature mortality. For example, tobacco use kills 8 million people annually while alcohol use accounts for 3 million. Taxes on these products which lead to an increase in prices have been empirically shown to reduce the consumption of these products ⁽³⁾. In lower- and middle-income countries (LMICs), increasing prices 20% would decrease use of tobacco by 4–16%, alcohol by around 13% and SSBs by around 24% ⁽⁴⁾.

Mobilizing pro-growth revenue: Health taxes can be a revenue booster over the short and medium term. Modelling suggests that a one-time global tobacco tax, alcohol tax and SSB tax increase that raised prices 20% would increase revenues by US$ 1.987 trillion ^(5). The prospective annual yield of new revenue from health taxes in LMICs amounts to around 0.64% of GDP ^{(6, 7).}

Importantly, health taxation is also more inclusive and pro-growth than alternative sources of revenue ^{(6, 8)}.  Health taxes hit the sweet spot in LMICs due to having relatively high revenue potential, being easier to administer (with a specific excise tax structure) and causing smaller macroeconomic and political economy costs than other taxes, such as income or sales taxes. Because their primary purpose is to improve health, they are also often more popular and politically acceptable than other taxes ⁽⁷⁾. Health taxes can become more popular yet when revenue raised is used for public health purposes such as UHC expansion or cost-effective preventive health interventions ^{(7, 2)}.

Addressing health inequalities: Health taxes are one of the most powerful tools for correcting the inequity of lower socioeconomic status being associated with higher risk of noncommunicable diseases (NCDs) as well as higher rates of tobacco use and alcohol consumption ^{(9, 10)}. This is because poorer people benefit the most from health taxes since they are typically more price sensitive and tend to respond with larger decreases in consumption than other groups.

The net distributional impact of health taxes is overall pro-poor once health benefits, income losses averted and reductions in catastrophic healthcare costs are fully accounted for ^(7). Health taxes can also become even more pro-poor if some of the revenue raised results in larger spending on social and health programmes or is even expressly earmarked for such purposes ^(7).

Reducing health system burdens: An ounce of prevention is worth a pound of cure: health taxes are also a high-return investment in averted healthcare expenditure and increased workforce participation. The cost of noncommunicable diseases (NCDs) is high, and tobacco alone amounts to US$ 1.4 trillion annually in healthcare and lost labour productivity.

Lost output to global economy from 5 conditions (cancer, cardiovascular disease, chronic respiratory diseases, diabetes and mental health) over the period 2011–2030 is estimated at nearly US$ 47 trillion. This loss represents 75% of global GDP in 2010 (US$ 63 trillion).

Targeting NCD risk factors for Sustainable Development Goals (SDG) achievement: By targeting NCD risk factors with health taxes, countries can progress their achievement of SDG 3.4, which calls for a one-third reduction of premature mortality from NCDs by 2030, as well as SDGs 1, 5, 10 and 8 through their protection for vulnerable populations and pro-economic growth effect.

Challenges

Health taxes are underutilized. While at least 170 countries utilize tobacco tax, in 2020 only 50 mostly high-income countries (HICs) were at the WHO highest level of accomplishment, which means total tax is at least 75% of retail prices. Similarly, although at least 155 countries utilize alcohol tax, the rates are low and supportive policies such as annual adjustments are very poorly implemented ⁽¹¹⁾. Meanwhile, SSB taxes are levied in comparatively few countries (around 74) and often at levels too low to influence demand and improve health ⁽¹¹⁾.

Countries are not doing enough to reduce the affordability of tobacco, alcohol and SSBs. In many LMICs, alcohol and SSBs are becoming dramatically more affordable due to rapidly growing incomes and because progress on reducing the affordability of tobacco is still insufficient. An important reason why affordability is increasing rather than decreasing is insufficient action on health taxes, which is the only effective lever governments have for offsetting this negative effect of income growth.

Increasing taxes on tobacco, alcohol and SSBs requires political will and commitment. Affected vested interests will vigorously oppose tax increases with SCARE tactics that can include some combination of false and misleading statements in relation to Smuggling and illicit trade, Court and legal challenges, Anti-poor rhetoric or regressivity, Revenue reduction and Employment impact. 

WHO Response

Countries are increasingly interested in using health taxes to achieve their health, revenue and equity objectives but require assistance with framing, designing, implementing and administering these measures. WHO’s response leverages its unique methodological expertise, technical capacity and country-level relationships established over more than a decade of work on tobacco taxation.

WHO divides its response into 3 interconnected areas of work:

• Technical assistance to help governments seeking to adopt, reform or evaluate health tax measures. This tailored assistance grapples with the challenges faced by Member States by providing, for example, health tax system diagnostics, country-specific modelling for the impact of health tax reforms and independent evaluations of industry arguments.
• Capacity building engages regulators and policymakers on an ongoing basis in their framing and prioritization of health taxes including the development of plans for progressing, implementing and evaluating health tax policies.
• Global goods build on the latest evidence base to support country level work by defining best practices, guiding policy development, detailing technical requirements and providing data to support and benchmark policy progress.  

References

2 High-Performance Health Financing for Universal Health Coverage: Driving Sustainable Inclusive Growth in the 21^st Century. Washington DC: World Bank; 2019 (138096, https://documents.worldbank.org/en/publication/documents-reports/documentdetail/641451561043585615/driving-sustainable-inclusive-growth-in-the-21st-century, accessed 31 August 2021).

3 Addis Ababa Action Agenda of the Third International Conference on Financing for Development. New York: United Nations; 2015 (https://www.un.org/esa/ffd/wp-content/uploads/2015/08/AAAA_Outcome.pdf, accessed 31 August 2021).

5 Taxes on Sugar-Sweetened Beverages: International Evidence and Experiences. Washington DC: World Bank; 2020 (https://openknowledge.worldbank.org/handle/10986/33969, accessed 31 August 2021).

6 Chaloupka FJ, Powell LM, and Warner KE. The Use of Excise Taxes to Reduce Tobacco, Alcohol, and Sugary Beverage Consumption. Annual Review of Public Health. 2019 40: 1, 187-201 (https://www.annualreviews.org/doi/abs/10.1146/annurev-publhealth-040218-043816, accessed 31 August 2021).

7 Summan A, Stacey N, Birckmayer J, Blecher E, Chaloupka FJ, Laxminarayan R. The potential global gains in health and revenue from increased taxation of tobacco, alcohol and sugar-sweetened beverages: a modelling analysis. BMJ Global Health. 2020 5: e002143 (https://gh.bmj.com/content/5/3/e002143, accessed 31 August 2021).

8 Lane C, Glassman A, and Smitham E. Using Health Taxes to Support Revenue: An Action Agenda for the IMF and World Bank. Washington DC: Centre for Global Development, 2021 (Policy Paper 203, https://www.cgdev.org/publication/using-health-taxes-support-revenue-action-agenda-imf-and-world-bank, accessed 31 August 2021).

9 Kurowski C, Evans DB, Tandon A, et al. From Double Shock to Double Recovery – Implications and Options for Health Financing in the Time of COVID-19. Washington DC: World Bank, 2021 (https://openknowledge.worldbank.org/handle/10986/35298, accessed 31 August 2021).

10 Abdel-Kader K and de Mooj RA. IMF Working Paper: Tax Policy and Inclusive Growth. Washington DC: Internjational Monetary Fund, 2020 (WP/20/271, https://www.imf.org/en/Publications/WP/Issues/2020/12/04/Tax-Policy-and-Inclusive-Growth-49902, accessed 31 August 2021)

11 Williams J, Wickramasinghe K, Mikkelsen B, Roberts N, and Townsend N. A systematic review of associations between non-communicable diseases and socioeconomic status within low- and lower-middle-income countries. Journal of Global Health. 2018 Dec; 8(2): 020409 (https://pubmed.ncbi.nlm.nih.gov/30140435/, accessed 31 August 2021).

12 Allen L, Willaims J, Townsend N, Mikkelsen B, Roberts N, and Foster C. Socioeconomic status and non-communicable disease behavioural risk factors in low-income and lower-middle-income countries: a systematic review,. Lancet Global Health. 2017; 5(3): e277-289.

15 Inter-agency Task Force on Financing for Development. Financing for Sustainable Development Report 2021. New York: United Nations, 2021 (https://developmentfinance.un.org/fsdr2021, accessed 31 August 2021).