Taxing sweetness

There is a bill in Congress that would tax sugar-sweetened beverages (SSBs) at P10 a liter or perhaps P5 a liter.

Research has been done on the impact of such a tax in other countries, and the results are inconclusive. As a University of Iowa study said, “large increases in soft drink taxes are unlikely to reduce total caloric intake as the impact of soft drink taxes on the body mass index is small in magnitude and not statistically significant.” In fact, soft drinks, even those with a high sugar content, account for only less than a tenth of the caloric intake of Filipinos; the Food and Nutrition Research Institute says rice comprises the bulk, over 75 percent, of the Filipino diet. White rice has too little nutrition in it. But you can imagine what would happen if rice is taxed.

Taxing sugary drinks by volume misses the problem, and leads to a wrong solution. The problem is twofold: First, sugar is considered a health problem if taken in excess of a modest calorie limit; second, the government needs a new source of revenues to replace the loss from the lower personal income tax from which we’ll all benefit.

Sugar is thought to be not good for you if taken in excess. A moderate amount is not known to be harmful, and is greatly enjoyed by most people. The aim should be to cut consumption through awareness, not price it out of reach.

One can even argue that if health is the issue, and taxing to discourage consumption is deemed the solution, then instant noodles, fast food, and sugar-laden cakes should have a specific tax, too. Ease of acceptance, rather than health, would seem to be a reason to choose sugary drinks. That’s not a very sound reason for doing anything.

Some countries where a sugar tax is applied have a single-tier tax system, some a two-tier system, and some a progressive tax based on the grams of sugar added. If you decide to tax in this way, I prefer the third: It eliminates possible distortions, and the arbitrariness of setting the tier or tiers.

If the tax break is 8 grams of sugar, why would a drink with 7.9 grams of sugar be better for you than one with 8.1 grams? It wouldn’t, and what would happen is that producers would reduce the sugar content by 0.2 grams to be below the tier, and thereby pay less tax with no health benefit. But the government will lose substantial revenues.

A specific amount of tax can lead to distortions in pricing—if it’s set at specific price break points. But if it’s based on percentage by volume or weight of sugar, that distortion doesn’t occur. The problem is sugar, not water. So to tax water makes little sense, yet that is what a tax of P10/liter, or even P5/liter, of fluid would do. If there is to be a tax, there’s a growing feeling it should be a tax based on the level of sugar by weight. Which makes sense.

A unique problem is “3-in-1” coffee, where sugar plays a large part. But it’s a powder, not a liquid, so you don’t know how strong a cup will be. These 3-in-1 coffee sachets are present in about 90 percent of Filipino households, according to a number of market research studies. The amount of sugar in the average (200 ml) cup is 131 calories, a mere 5-7 percent of the recommended 2,000-2,500 calories to be taken daily.

A little sugar daily is not a bad thing, and it gives considerable satisfaction to Filipinos daily, especially the estimated 20 million living under the poverty line. To increase the price of 3-in-1 coffee would result in a significant fraction of the population having to give up their daily cup, especially the poor who depend on instant coffee mixes as their source of sugar and energy in the morning. So it’s good that Sen. Sonny Angara has exempted it from the tax. As he has exempted milk, too. Milk is essential for kids, and in the Philippines those kids like their milk sweeter, so a little sugar is added. Not enough to affect the health of kids, but enough for them to want to drink it.

For other SSBs a modest tax increase might be acceptable, but must be set at a level that increases, not decreases, government revenues. It might be better to tax something else. Perhaps coal, as economist Ciel Habito suggests.

A fuller version of this column is available online at www.wallacebusinessforum.com.