How should an Australian tax on sugar-sweetened beverages (SSBs) be designed?

A number of major reports have recommended a tax on SSBs in Australia. These include the Australian Food Policy Index¹ (scorecard and priority recommendations for Australian governments to tackle obesity), and the Assessing Cost-effectiveness of Obesity Prevention Policies in Australia study.²

In a dedicated report, the Grattan Institute called for a tax on SSBs as part of a broader suite of interventions to address obesity in Australia.³ It concluded that taxing SSBs was simple, and could be implemented quickly and incorporated into the existing tax system, thereby minimising administrative costs.³ The Grattan report found that an SSB tax would effectively target products contributing to the obesity crisis without capturing products that contain beneficial nutrients; and encourage consumers to switch to untaxed substitutes, such as water.³

The key design features recommended for an SSB tax in Australia are listed below, with further detail throughout this page:³

• Type of tax – Specific excise tax
• Design of tax – Based on sugar content per 100mL
• Target for tax – Manufacturers
• Tax rate – A tiered design that taxes drinks with more sugar at a higher rate would nudge manufacturers to reduce the sugar in their products. One recommended design is: 40 ¢per litre for beverages containing 5 to 8 grams of sugar/100mL; 60 ¢per litre for beverages containing ≥ 8 grams of sugar/100mL. This should be indexed to account for inflation.
• Use of funds – Earmarked for public health initiatives

Type of tax

The type of SSB tax most commonly used worldwide is a specific excise tax (levied on a particular product at the point of manufacture).⁴ An alternative to excise taxes are ad valorem taxes (calculated on a percentage of the wholesale or retail price); however, these do not promote reformulation and may simply encourage the purchase of lower-priced brands or larger size products that are cheaper on a per-litre basis.⁴

There are precedents for imposing specific excise taxes at the federal level in Australia, including on alcohol and tobacco. Section 90 of the Constitution gives the Commonwealth exclusive power to impose duties of excise and customs, while the states reserve powers to impose other taxes, such as stamp duty. In Australia, there are currently two systems for taxing alcohol - one based on volume and alcohol content for beer and spirits (excise and excise-equivalent customs duty); and the other based on wholesale value for wine (wine equalisation tax).⁵ An excise tax on tobacco is calculated ‘per stick’ for cigarettes and per kilogram for all other tobacco products, and is indexed twice a year in line with average earnings to keep pace with inflation.⁶

Design of tax

Excise taxes can apply to the sugar in the drink (nutrient/content-based) and/or the volume of the drink (volumetric).⁶ In countries with strong tax administration, the WHO recommends nutrient-based taxes, which can have the greatest impact because they both incentivise consumers to have fewer SSBs, and simultaneously encourage producers to reformulate products to reduce sugar content.⁷

An example of a tax designed to meet multiple objectives is the Soft Drinks Industry Levy (SDIL) in the United Kingdom (UK). The SDIL is a two-tiered excise tax with different rates for drinks containing more than 8 grams of sugar per 100 millilitres, and those containing 5 to 8 grams of sugar per 100 millilitres; therefore, the tax is both nutrient-based and volumetric. This tiered approach was the design adopted by five out of seven national jurisdictions that implemented SSB taxes in 2018: the UK, Estonia, South Africa, Republic of Ireland and Peru.⁸

Target for tax

Excise taxes are imposed on the manufacturer of a product, who can respond by passing on costs to consumers, absorbing the costs or reformulating. For a tax to change consumer behaviour, it should alter the price paid by the consumer at the point of sale. Evidence from Mexico, which imposed a volumetric tax of 1 peso per litre on SSBs in 2014, shows the tax was generally passed onto consumers (the pass-through rate was higher in urban areas compared to rural)⁹ and led to reduced sales of taxed beverages.¹⁰ In the United States (US), an SSB tax in Berkeley, California was mostly (but not uniformly) passed onto customers, and sales of SSBs declined significantly in the first year.¹¹

In the UK, the SDIL led to reductions in sugar content even before it came into effect in April 2018: the UK Treasury announced that it had prompted manufacturers to reformulate more than half of all soft drinks, removing the equivalent of 45 million kilograms of sugar each year.¹² A report published in 2022 compared sugar levels and drink sales between 2015 and 2020.¹³ The report concluded that sales of soft drinks increased by about 21% (largely due to higher sales of drinks below the initial threshold), but total sugar sales from these drinks fell by over 46,000 tonnes (decreasing by 34%).¹³ This suggests that the amount of sugar consumed from soft drinks has reduced, despite the increase in the sale of these products.¹³

Rate of tax

An important consideration in designing an SSB tax is setting the rate of tax, which must be high enough to impact purchasing behaviour. A systematic review of research on health taxes found that higher-level taxes are likely to achieve greater health gains through behavioural change compared to lower-level taxes.¹⁴ According to the Grattan Institute, taxing drinks with the highest level of sugar (more than 8 grams of sugar per 100 millilitres) at a rate of 60¢ per litre would increase prices by approximately 12%.³ For example, a 250ml can of a leading soft drinks brand would increase by 15¢, while a 2-litre bottle would increase by $1.20. In turn, this tax design could reduce sugar intake by about 700 grams per person each year and significantly improve the health and well-being of Australians.³

Use of funds

Beyond their impact on purchases and consumption, SSB taxes can raise revenue to fund programs that improve health, equity and community development.¹⁵ An evaluation of seven US cities with SSB taxes found that the combined annual revenue from the policies was $134 million (using the most recent financial data in each area from 2018 to 2020).¹⁶ Nearly $60 million were invested in early childhood programs, about $20 million were used for community infrastructure (e.g., parks and recreation centres) and over $15 million supported access to healthy food and drinks.¹⁶ Importantly, about 85% of revenues targeted communities most impacted by SSB consumption, including those of lower socioeconomic status and minority ethnicities.¹⁶

To maximize the ability of SSB taxes to support both health and equity goals, is it recommended that the SSB tax legislation specifies the use of revenues and monitors ongoing investments.¹⁶ For example, an initial feature of the UK’s SDIL was that the funds raised were earmarked for health initiatives, including children’s sport and breakfast clubs in schools (although funds raised by the UK SDIL are currently diverted to general use).¹⁷ Between 2022 and 2023, the SDIL was estimated to have raised more than £350 million.¹⁸

Public health groups in Australia have recommended that funds raised through an SSB tax are used for public health initiatives.¹⁹ A survey of Australian grocery buyers found that 69% supported a levy if the revenue was used to reduce the cost of healthy foods.²⁰ Similarly, studies have found greater support for SSB taxes when revenues were earmarked to fund health programs, suggesting the importance of funding considerations for both implementation and ongoing management of the tax.^21222324

Evaluation

Developing a framework for monitoring and evaluating an SSB tax is a key element of designing a robust intervention. This includes monitoring the tax to assess how it is performing, and evaluating its design, implementation and outcomes in light of observed effects, including between different socioeconomic groups. Monitoring and evaluation can help an SSB tax withstand challenges, and allows for refinement of the tax where necessary. The World Cancer Research Fund International (WCRFI) advises that it is important to identify appropriate outcomes as part of any assessment: “For an SSB tax, it is not appropriate to solely evaluate the effectiveness of a tax based on obesity rates, as this is a long-term outcome in the pathways of effects;”²⁵ more appropriate, short-term endpoints may include changes in sales and consumption of SSBs and untaxed substitutes such as bottled water.²⁶

The Grattan Institute further recommends that, once implemented, the Australian Centre for Disease Control (CDC) should periodically evaluate the tax to determine if sugar consumption is decreasing, whether complementary policies could be implemented and if the tax should be updated (e.g., increasing the tax, updating the tiers, or expanding the taxable products).³