The case for sugar taxes

If sugar is considered the new tobacco, do we have a strong case for increasing the price of added sugar or is it time to rethink food taxes altogether?

Author: Violeta Ruiz Almendral, Legal Counsel at the Spanish Constitutional Court and Expert in International Tax

One year ago, the Spanish Autonomous Community of Catalonia established a tax on sugary beverages[1]. On average, the tax will increase the price of sugary drinks between 5 and 10 percent for cans, and about 20 percent for two-liter bottles. According to one study, it may have already contributed to decreasing demand for the product[2].

This Catalan tax is part of a growing trend spurred by the World Health Organization’s recommendation of such taxes in 2016[3]. To date, nearly thirty countries and regions have enacted some sort of beverage tax, which may have also contributed to reduced demand[4].

In the European Union, only Portugal, Estonia and the UK have established such taxes[5], while Ireland is currently considering it. Taxes on other sugary products are far less popular. (An exception is the tax on unhealthy food established by Hungary in 2011.)[6]

The Case for Sugar Tax

Sugar is the new tobacco. Accumulating data suggests that a massive increase in sugar consumption is behind the current obesity epidemic[7]. This increase often goes unnoticed, as sugar is present even in food that tastes salty. A typical pizza, for instance, contains the maximum amount of sugar one should consume in a day. We eat sugar all the time without even thinking about it[8].

This is the rationale behind the multiple proposals specifically meant to target sugar in food. In particular, recommendations to establish taxes on sugary beverages abound[9]. Several factors explain this. One is that sugar is more easily absorbed in liquid form than in solid form, with the added issue that sugar is not as satiating in liquid form, so there’s a greater risk for overconsumption[10]. Additionally, there is a strong link between the consumption of sugary drinks and childhood obesity. The high concentration of sugar, as well as the homogeneity of this type of product, makes it an easy target for a sugar tax.

Obesity is also linked to age and income, in that younger and poorer children are more likely to be obese, especially in the developing world. If current trends continue, more African children will die of obesity than of hunger by 2022[11].

Are Sugar Taxes Fair?

Taxes that target the consumption of specific products on the basis of their harmfulness have a long history. Usually known as “sin taxes” —for obvious reasons—they have been around for years[12]. Thus, taxes on alcohol, gambling, tobacco or, more recently, harmful environmental practices are present in all OECD tax systems.

These taxes are still popular because demand for the targeted goods or services tends to be relatively rigid, especially if they are addictive. This is particularly relevant for sugar, as there is evidence that proves its addictive nature[13].

Of course, this creates a moral dilemma that cannot be easily dismissed: Are governments profiting from addiction? Additionally, doesn’t establishing a tax normalize and embolden conduct that may be socially disruptive? (For example, gambling or excessive drinking.)

One of the classic criticisms of this type of behavior or lifestyle tax is that it curbs the freedom of individuals, making it fundamentally contrary to market efficiency. This is true unless of course there is a market failure in the form of an externality (spillover) which must then be addressed[14].

Taxes must comply with general principles of fairness. This is not just a moral argument, but a fundamental issue from a legal standpoint.

In simpler words, if the overconsumption of sugar is the main cause of obesity, and if obesity imposes a cost on the rest of society, then a tax may be a good instrument to curb consumption. The basis for this type of tax was established by A. C. Pigou, a British economist who pointed out the need for a specific fee to bridge the gap between private marginal benefit and social marginal cost[15]. However, the reason for the enduring success of sin taxes is that they also tend to provide a stable flow of revenue.

Of course, taxes must comply with general principles of fairness. This is not just a moral argument, but a fundamental issue from a legal standpoint.

From a tax justice perspective, any tax on consumption will have regressive consequences, since poorer people dedicate a higher proportion of their income to consumption[16]. This explains the existence of reduced rates in value-added taxes for essential products, such as food.

In the case of sugar, increasing economic costs (mainly on health) derived from obesity may well justify such a tax, in spite of regressive effects. There may also be a fairness argument, which is that, typically, lower-income populations are more prone to the overconsumption of sugar. Also, childhood obesity numbers are much higher in low-income children[17]. Therefore, this population would be especially targeted and, if the tax worked, it would be largely beneficial from a health perspective[18]. A well-designed tax would then offset any possible regressive effect.

Sugary beverage tax and more: Some Legal Issues

From a European law perspective, sugar taxes may be deemed discriminatory, hinder free circulation of goods, clash with value-added taxes or even be considered an Aid of State[19]. In short, such taxes may have a negative impact on the construction of the internal market. If that is the case, they may be declared contrary to European Union Law by the Courts.

Thus far, the Catalan tax has generated outcry in the affected industry, which has resulted in legal action. Among the various legal arguments[20] that have been presented against these taxes, two could potentially have merit, depending on how the tax is designed[21].

The first argument is that taxing only sugary beverages is discriminatory, since many other sugar-laden products also contribute to obesity and should, therefore, be taxed as well. Should this argument be accepted, these sugar taxes would infringe upon fundamental constitutional rules. However, this same discriminatory aspect, if proven, may also be grounds to argue that an Aid of State is being granted to other sugary products that fall outside of the scope of the tax. In such a case, the exemption may be deemed “selective.”

One way to avoid the material selectivity claim would be to establish that the exemption is sufficiently justified. That may be the case if the objective is protected by the Treaty.

This is relevant for sugar taxes because health is a protected objective of EU Law as declared by the Treaty on the Functioning of the European Union (Articles 9, 168, and 169.1 TFUE).

The fact that these taxes may help protect human health will also influence other limits embedded in EU Law, applicable to indirect taxes. This is relevant when examining specific taxes or measures as shown, among others, by the Judgment of Court 3, December 2015, (C-333/14, Scotch Whisky, ECLI:EU:C:2015:845)[22], a non-tax case regarding the prohibition of quantitative restrictions (Arts. 34 and 36 TFEU). In the case, the Court rules that a tax may actually be less restrictive than a minimum price on alcohol.

The second legal argument is that these taxes may clash with rules governing the Value-Added Tax. These rules prohibit the establishment of other general taxes on consumption. In practice, the European Court of Justice has interpreted incompatibility with VAT in a very broad manner. In over thirty cases[23] the Court has established that, for a tax to be deemed similar to VAT, all the elements of the tax must be similar, not just the fact that consumption is targeted.

In theory, such taxes should not be contrary to Spanish law.

Some Spanish internal (domestic) limits—as regulated in the Organic Law 8/1980, 22 September, to finance Autonomous Communities—fundamentally coincide with the main limitations derived from the Treaty on the Functioning of the European Union, as interpreted by the case-law of the European Court of Justice. One key issue is assessing whether or not the tax is discriminatory. If it is not, then the tax is likely compatible with the Spanish Constitution.

There is, however, a trickier issue in Spanish Constitutional law which has to do with the distribution of tax powers between the Central Government and the regions. Regions have taxation powers (sections 133 and 157, Spanish Constitution[24]), but the creation of new taxes is limited by the Autonomous Communities Finance Act[25]. The most important of such limits is the prohibition of double taxation, which prevents regional taxes from being similar to taxes created by the central State and the municipalities. As these two bodies had already established taxes on most of the imaginable sources of revenue sources when the majority of the Communities were created (in the early 1980s), little room was left for the Communities to create new taxes.

The Constitutional Court has interpreted these limits in a vast number of cases. Relevant to sugar taxes is Opinion 94/2017, 6 June. This case is relevant because it interprets equivalence between a regional tax on consumption of services in a broad way, deeming it equivalent to VAT. Were the Court to follow the same interpretation in a hypothetical case regarding the Catalan beverages tax, it might reach the same conclusion.

However, even if the Court considered the taxes to be similar, it might still reject an unconstitutionality claim if the tax were also to serve a specific purpose, such as protecting health, which is enshrined in the Spanish Constitution (art. 43).

Conclusion: A Legal But Insufficient Measure

In principle, sugar taxes are not illegal, and they do make sense in general terms. However, they are a highly limited tax measure. First, they typically only target sugary drinks, which represent only a small fraction of the total sugar intake of the average person.

Second, current tax rates are not high enough to actually make a difference in demand. Studies have shown that demand continues to be relatively inelastic until tax rates are significantly higher[26]. The rates established by the Catalan tax are considerably lower than similar taxes established in the UK, Estonia and Portugal[27].

It is also debatable whether it is really necessary to establish a new tax at all.

In the European Union, there is already a general tax on consumption, so it would make more sense to apply this tax to sugary beverages, rather than create an entirely new tax. One way to encourage EU Member States to increase VAT rates for sugary drinks would be to amend the definition of “foodstuff” for the purpose of value-added taxes. Currently, Annex III of the EU Vat Directive, which lists the goods and services to which the reduced rates may be applied by EU Member States, includes all beverages except those that are alcoholic. One effective measure might be to exclude sugary beverages from the “food” definition altogether. An exclusion of other products which have no nutritional value and have been shown to be damaging to health could follow suit. Some countries, such as the UK, already apply the general VAT rate to sugary beverages[28].

A final question is whether or not this type of tax makes sense in the long run. As mentioned before, there is a strong case to be made for increasing the price of added sugar. However, this may be insufficient. It may be time to rethink food taxes altogether.

Prof. Dr. Violeta Ruiz Almendral (Madrid, 1975) has served as a Legal Counsel at the Spanish Constitutional Court since 2011. She is an Associate Professor of Tax and Finance Law at the Universidad Carlos III de Madrid, and teaches at IE Law School in the Master in Global Taxation. She has published three books and over fifty articles in her main areas of research, which include International Tax Law, Tax Avoidance Rules, European Tax Harmonization, Subnational Taxes, Fiscal Federalism and Budgetary Law.

Note: The views expressed by the author of this paper are completely personal and do not represent the position of any affiliated institution.

[1] Articles 69-83 [Full name of the enacting legislation: Ley 5/2017, de 28 de marzo, de medidas fiscales, administrativas, financieras y del sector público y de creación y regulación de los impuestos sobre grandes establecimientos comerciales, sobre estancias en establecimientos turísticos, sobre elementos radiotóxicos, sobre bebidas azucaradas envasadas y sobre emisiones de dióxido de carbono. Available here.
[2] This is one of the conclusions of the only article (so far) assessing the impact of the tax. See: VALL CASTELLÓ, J.; LÓPEZ-CASASNOVAS, G.: “Impact of SSB Taxes on Consumption”. CRES-UPFWorkingPaper#201804-110, April 2018. Available here:
[3] See: World Health Organization (‎2017)‎. Taxes on sugary drinks: Why do it?  World Health Organization.  (link: here)
[4] The tax on sugary beverages established in Mexico in 2014 may have contributed to a 6 percent decrease in demand, according to: COLCHERO, A.; POPKIN, B. M.; RIVERA, J. A.;WEN NG, S.:Beverage purchases from stores in Mexico under the excise tax on sugar-sweetened beverages: observational study”. British Medical Journal [BMJ 2016;352:h6704].
[5] Taxation trends in the European Union. 2017.
[6] World Health Organization. Assessment of the impact of a public health product tax. National Institute for Food and Nutrition Science Directorate General, Budapest, 2015. Link: here. 
[7] See the following report by The Lancet (a UK medical journal): NCD Risk Factor Collaboration. Worldwide trends in body-mass index, underweight, overweight, and obesity from 1975 to 2016: a pooled analysis of 2416 population-based measurement studies in 128.9 million children, adolescents, and adults. The Lancet, 2017; S0140-6736(17)321293. Available here:
[8] See the Sugar Science project, developed by a team of health scientists from the University of California, San Francisco (UCSF). In Spain, this photography project graphically shows the actual content of added sugar in everyday products:
[9] In the last ten years a vast array of academic work has emerged on the economic costs of obesity and obesity-related diseases. See OCDE: Fiscal Sustainability of Health Systems: Bridging Health and Finance Perspectives. Paris, 2015 See in particular: Sassi, F.: Obesity and the Economics of Prevention. Fit not Fat. OECD, 2010 ), showing the parallels between the warning issues concerning tobacco –which were ignored for years- and the current warnings regarding obesity and its consequences (pages 25 et seq.).
[10] See the conclusions of the following articles: VARTANIAN, L. R., MARLENE B. SCHWARTZ; KELLY D. B.: “Effects of Soft Drink Consumption on Nutrition and Health: A Systematic Review and Meta-Analysis.” American Journal of Public Health 97 (4): 2007, 667–75; AN, P.; HU. F. B.: “Effects of Carbohydrates on Satiety: Differences Between Liquid and Solid Food.” Current Opinion in Clinical Nutrition & Metabolic Care 14(4): 2011, pp. 385–90; MALIK, V. S.; MATTHIAS, B. S.; HU, F. B.: “Intake of sugar-sweetened beverages and weight gain: a systematic review”. The American Journal of Clinical Nutrition, Volume 84, Issue 2, 1/ 2006, pp. 274–288.
[11] See this short documentary by The Economist.
[12] A recent (and critical) view on sin taxes can be found here: The Economist, “Do “sin taxes” work?” (10 August 2018).
[13] JOHNSON, R. J.; SEGAL, M. S.; et alii: “Potential role of sugar (fructose) in the epidemic of hypertension, obesity and the metabolic syndrome, diabetes, kidney disease, and cardiovascular disease”.  The American Journal of Clinical Nutrition, Volume 86, Issue 4, 1 October 2007, pp. 899–906,
[14] See the commentary by Jonathan GRUBER, at: Institute of Fiscal Studies. Mirrlees, Dimensions of Tax Design, 2008, pp. 407 y ss. Link here. 
[15] PIGOU, A. C.: The Economics of Welfare. London: Macmillan, 1920. On these type of taxes, and the consequences on the tax system, see: Institute of Fiscal Studies (IFS): Mirrleess Report (Dimensions of Tax Design), Chapter 5 ‘Environmental taxes’, D. Fullerton, A. Leicester, and S. Smith (pp. 424 et seq.). Specifically on unhealthy products, see: MARRON, D. B.; GEARING, M. E; ISELIN, J.: “Should We Tax Unhealthy Foods and Drinks?” (December 14, 2015). Tax Policy Center. Urban Institute & Brookings Institution. Link here.
[16] AIGNER, R.: “Environmental taxation and redistribution concerns”, Max Planck Institute for Research on Collective Goods, 2011, pp. 17.
[17] FERNÁNDEZ-ALVIRA, J. M.; MOURATIDOU, T.; et alii: “Parental education and frequency of food consumption in European children: the IDEFICS study”. Public Health Nutr. 2013 Mar; 16(3):487-98;
[18] KOTAKORPI, K.; HÄRKÄNEN, T.; et alii: The Welfare Effects of Health-Based Food Tax Policy (November 14, 2011). CESifo Working Paper Series No. 3633. SSRN. 
[19] For a detailed analysis of the legal challenges posed by these taxes see: RUIZ ALMENDRAL, V.: “La imposición sobre las bebidas azucaradas envasadas: su compatibilidad con los límites y principios del ordenamiento tributario”, forthcoming in Quincena Fiscal 18/2018 (October).
[20] Some of the arguments used by the industry in Spain are summarized in this text by Spanish law firm Uría & Menéndez: Asociación Nacional de Grandes Empresas de Distribución (ANGED). Link here. Similar arguments can be found in other countries were sugar taxes have either been enacted or proposed. See the text by the Australian industry (7 January 2018). Link here. See additional elements of this discussion at: “Ditch sugar or raise prices? Drinks-makers face a new tax”. The Economist, 5 April 2018; and See  “Sugar tax leaves bitter taste for drinks makers”, Financial Times, 1 April 2018.
[21] For a detailed analysis of all the different legal arguments, from an EU Law and (Spanish) domestic law perspective, see: RUIZ ALMENDRAL, V.: “La imposición sobre las bebidas azucaradas envasadas: su compatibilidad con los límites y principios del ordenamiento tributario”, forthcoming in Quincena Fiscal n. 18/2018 (October issue).
[22] ALEMANNO, A.: “Balancing free movement and public health: The case of minimum unit pricing of alcohol in Scotch Whisky”. Common Market Law Review, 53/2016, pp. 1038 y ss.
[23] See, among other, the following judgments of the European Court of Justice: 11 October 2011, KÖGÁZ rt, C-283/06 and C-312/06, EU:C:2007:598; 8 June 1999, Erna Pelzl, C-338/97, C-344/97 and C-390/97, EU:C:1999:285; 9 March 2000, EKW y Wien & Co, C-437/97, EU:C:2000:110; 3 October 2006, Banca Popolare di Cremona, C-475/03, EU:C:2006:629.
[24] See link.
[25] Ley Orgánica 8/1980, de 22 de septiembre, de Financiación de las Comunidades Autónomas. Link here. 
[26] SASSI, F.; BELLONI, A.; CAPOBIANCO, C.; ALEMANNO, A.: “Taxation and Economic Incentives on Health-Related Commodities: Alcohol, Tobacco and Food” (February 25, 2014). ALEMANNO, A.; GARDE, A.: Regulating Lifestyle – Europe, Alcohol, Tobacco and Unhealthy Diets, Cambridge University Press, 2014; HEC Paris Research Paper No. LAW-2014-1038. Link here.
[27] See UK tax in detail here.
[28] VAT Notice 701/14: food, available here.