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Sugar tax toothless and tax-grabbing

Bittersweet tax: levy on sugar in other countries has failed to have desired effect

On Friday, the Minister of Health announced that the Customs Tariff Amendment (No 2) Bill 2018, more commonly referred to as the Sugar Tax Bill, would be amended during the debate to take into account “further consideration of the consultation feedback” after the said Bill was tabled in the House of Assembly. This is parliamentary language for back-pedalling.

In short, the minister engaged in gratuitous spin and announced that the new duty rates in “sugary items” would be phased in gradually, starting with a duty rate of 50 per cent from October 1 rising to 75 per cent from April 1, 2019 — oddly enough, April Fool’s Day.

The minister went to great lengths to explain how this tax will be a “fundamental part of the broader government’s commitment to reduce ... conditions that are costing us so dearly” in terms of healthcare. A more careful analysis of the statement uncovers the flaws in the sugar tax proposals and show that ultimately the sugar tax will be a toothless tax-grabbing tiger.

The minister spent a fair amount of time discussing the World Health Organisation’s proposals on the “use of economic tools to improve health outcomes and direct persons towards healthy options”, but she failed entirely to mention the main tenets for a successful use of the tools. By way of reminder again, the WHO says the following are all the pieces to the puzzle that will make a sugar tax work:

1. Retail prices on sugar drinks would need to be raised by 20 per cent or more.

2. Subsidies for fresh fruit and vegetables would need to be between 10 per cent and 30 per cent.

3. Taxing “other foods and beverages high in sugar, salt and fat” up to 50 per cent would help to reduce obesity.

4. Earmarking revenues raised from the sugar tax for healthcare.

5. Proper monitoring and evaluation to measure the effect of the sugar tax.

6. Requiring warning labels on taxed products as an education strategy.

7. Drafting a multidisciplinary policy and implementation plan that includes advocacy for political buy-in, monitoring and evaluation is critical.

As you may recall from my three previous opinions on this topic, the Government is failing on just about all of these requirements, save for the first.

In addition the minister said that “while sugary drinks have been the focus of the sugar taxes in most other jurisdictions, the tax proposed for Bermuda includes items such as candies and plain sugar. The goal is to curb unwanted consumption of these foods which contribute no nutritional value to our daily diets”.

She also explained what other jurisdictions such as Mexico and Finland have done, but then failed to mention in her statement that the initiatives have not been successful. As is often the case, it is what the Government is not telling you that is important.

Per my opinion in January 2018, recent evidence as to practice versus theory has blown a huge hole in the theoretical effect of sugar tax on consumption. Mexico’s National Institute of Public Health showed that from 2007 to 2013, Mexicans drank per capita 160 litres of soft drinks. In 2014 they drank 162 litres and in 2015 they drank 161 litres. In other words, despite the theory as to how sugar taxes are supposed to work, Mexicans actually drink more soft drinks after the implementation of the tax than before.

In other jurisdictions such as Finland, upon which the minister also relies, when the price of soft drinks rose by 7.3 per cent for two years, the European Consortium for Sustainable Industrial Policy found that consumption fell by less than 1 per cent in the first year and by only 3.1 per cent in the second year.

Even more interesting is that Denmark, which had a tax on soft drinks in place for 80 years, repealed it in 2014 owing to scepticism of its success. And why is that? The Institute of Economic Affairs in 2016 reported that when sugary drinks are taxed, those consumers switch to high-calorie substitutes for sugar-sweetened beverages, including fruit juice, full fat milk, wine and beer.

The institute also reported on studies examining the effect of soda taxes on children and adolescents in the United States, which found a “modest reduction in soft-drink consumption” but no effect on obesity because “any reduction in soft-drink consumption has been offset by the consumption of other calories”.

Even more interesting is the minister’s statement that “retail prices could increase 20 per cent to 50 per cent for the affected items, although this will depend on individual businesses”. However, the Institute of Economic Affairs reported in 2016 that in “Finland and France, taxes on sweet foods, fat and sugary drinks have typically been associated with price rises that were higher than expected given the rate of tax and that evidence from Mexico suggests that ‘prices of regular sodas jumped by more than the amount of the tax’”.

Based on such international experiences, I do not have a lot of faith in the assumptions made by the minister.

Finally, and here’s the kicker, the minister finally acknowledged that the Government does not “want to unintentionally disadvantage local businesses” and that they will “allow for local preparers of foodstuffs to apply for concessionary rates from the Minister of Finance under the existing provisions for commercial manufacturers of goods”.

The minister and junior minister had a heck of a time trying to explain how that concession would work in practice.

So I ask, what is the point of the sugar tax if the very businesses that manufacture food with huge amounts of sugar can get a concession? I have argued from the very beginning that the tax is not being implemented in a way to be successful. Right now the Sugar Tax Bill is a joke of immense proportions and will result in higher prices at the till.

It will affect local business with more administration. It will not reduce obesity as demonstrated by other jurisdictions that have such taxes. This tax is nothing but a tax grab, which will harm Mr and Mrs Bermuda.

The Government has wilfully ignored the overwhelming evidence and has simply put lipstick on a pig.

The Institute of Economic Affairs concluded that “the evidence for taxing soft drinks — or any other source of calories — as a means of reducing obesity is weak and largely theoretical. In practice, people in prosperous countries are not easy to manipulate with blunt tax instruments given the diverse food environment”.

I could not agree more.

Michael Fahy is a former Minister of Home Affairs, Minister of Tourism, Transport and Municipalities, and Junior Minister of Finance under the One Bermuda Alliance government