On 10 December 2021 the IMF issued a note entitled How to Apply Excise Taxes to Fight Obesity.

Measures to fight obesity have been complex to design owing to the complexity of food supply chains and the difficulty of targeting consumption of excess calories as compared to reducing overall consumption. The IMF note looks at the use of excise taxes on unhealthy food and how to identify the relevant tax bases and rates.

Experience shows that definition of the relevant tax base is not so difficult as might be thought. An important part of the problem of unhealthy consumption is added sugar, especially in sugar sweetened beverages (SSBs). Generally the key is to link obesity to a few clearly defined food categories that lead to excessive calory intake.

Encouraging substitution away from high calory food is an important consideration for policy efficiency, but further evidence is required on the effects of policy measures in practice. The effect of excise taxes on consumption is also influenced by non-tax measures and an inclusive approach is therefore required, involving various ministries and non-governmental organisations.

The IMF note highlights the importance of coherence between value added tax (VAT) and excise tax policy. Taking into account the relatively high rates of VAT in many countries, the exemptions for food in some countries may have a negative impact on health that could not be corrected by the introduction of an excise tax. It would therefore be simpler to remove the VAT exemptions and reduced rates rather than increasing the number of excise taxes.

The use of the revenue from food excise taxes is another consideration. At the same time as increasing tax on unhealthy food it might be useful to make a parallel commitment to fund health-related initiatives through the normal budget process – “soft earmarking”. This is more efficient and transparent than channelling the revenue to externally managed funds – “hard earmarking” – because it may encourage broader public support for higher funding for public health.

Conclusion

Although defining a comprehensive and administratively feasible tax base is a difficult challenge, the IMF note concludes that a case could be made for excise taxes to tackle obesity in specific circumstances. In low-income countries where resources are limited, SSBs may provide an efficient source of income, rather than more complex taxes for which the administrative capacity would be insufficient.

A tax on SSBs can also be applied to a relatively well-defined tax base that is known to be linked to obesity in high-income countries. This excise tax therefore has a potential role in improving health. The impact could be higher if complementary (tax or non-tax) policies are introduced as part of a broader package. Policy coherence could be maintained by removing VAT exemptions or reduced and zero-rates on unhealthy food items.

Potential problems include the possibility of consumers switching to other types of unhealthy food, and governments should consider how to encourage the right kind of substitution, to healthier products. There may be a relatively low revenue yield from an excise tax, but this is not so important if the main objective is to pursue health objectives.