A tax on sugar-sweetened beverages: What the modelling shows

9 Jun 2021

The AMA has modelled the likely effects on obesity from a tax on sugary drinks.

The report describes how overweight and obesity is a significant and growing issue in Australia. Sugar-sweetened beverages (SSBs) are a major contributor to the obesity crisis and provide almost no nutritional benefit. 

With increasing population body mass index (BMI), direct healthcare costs increase, many of which are borne by government(s). A tax on SSBs would be an important first step towards tackling obesity and would raise revenue to take further steps. Modelling indicates a tax on select SSBs would reduce sugar consumption from soft drinks by 12 to 18 per cent and raise annual government revenue of $814 million to $749 million. 
There would be minimal impact on the sugar industry. Reduced sugar consumption and improved diet would likely lead to a reduction in the prevalence of obesity and substantial healthcare savings. 

Key points

Sugar and the cost of obesity 

  • Overweight and obesity is a significant and growing issue in Australia. Sugar-sweetened beverages (SSBs) are a major contributor to the obesity crisis and provide almost no nutritional benefit. 
  • SSBs contain large amounts of free sugar — delivering a high number of liquid calories but providing almost no nutritional benefit. There are 8-12 teaspoons (33-50 grams) of sugar in the average 375 ml can of soft drink. 
  • The AMA estimates that Australians drink at least 2.4 billion litres of sugary drinks every year. That’s enough to fill 960 olympic sized swimming pools. Young males are the biggest consumers. 
  • The AMA estimates that if no action is taken to stem the obesity crisis, by 2025 taxpayers will have footed a further $29.5 billion (over four years) for the direct healthcare costs of obesity. 
  • A systematic review of worldwide costing studies estimated that people living with obesity have medical costs that are approximately 30 per cent% greater than their healthy weight peers. 
  • The AMA wants to see steps taken towards reducing obesity because it is a major risk factor for a range of chronic and preventable conditions including type 2 diabetes, heart disease, stroke and cancer. 

How a tax on SSBs would work 

  • The benefits of an SSB tax are threefold: it would introduce a price signal to consumers that the product is unhealthy; create a disincentive in the form of higher prices; and incentivise manufacturers to reformulate (i.e. lower the sugar content of products). An added bonus is that it would raise government revenue which could be spent on further initiatives to tackle obesity.  
  • In this report it is suggested to tax a subset of SSBs — all non-alcoholic drinks containing free sugars, excluding 100 per cent fruit juice, milk-based and cordial drinks. The focus is on drinks that provide no nutritional benefit. 
  • Original modelling by the AMA indicates a tax on select SSBs would reduce sugar consumption from soft drinks by 12 to 18 per cent (27,596 to 43,804 tonnes of sugar) and raise annual government revenue of $749 million to $814 million.  

The tax that has been modelled is a specific excise tax based on sugar content, set at $0.40 per 100 grams of sugar (per unit of product). This tax rate was chosen with the World Health Organization’s recommendation in mind – that a tax on SSBs would need to raise the retail price by at least 20 per cent in order to have a meaningful health effect. The tax rate of $0.40/100g sugar would raise the retail price of the average supermarket SSB by 20 per cent.  Under the proposed tax rate, the amount of tax paid on a 375ml can of coke with 40g sugar (sugar content is 10.6g/100ml) would be $0.16. 

Impact of the tax 

  • Reduced sugar consumption and improved diet would likely lead to a reduction in the prevalence of obesity and substantial healthcare savings. Previous Australian modelling estimated that an SSB tax that increases the retail price by 20 per cent would lead to a reduction in the prevalence of obesity of around 2 per cent and healthcare expenditure savings of $609 million to $1.73 billion. It also estimated that the tax could, over a 25-year period, result in 16,000 fewer cases of type 2 diabetes, 4,400 fewer cases of heart disease and 1,100 fewer cases of stroke.  
  • More than 45 jurisdictions across the world have implemented SSB taxes. There has been confirmed success already in a number of countries, including the United Kingdom (2018), Mexico (2014), France (2012), Chile (2014), Catalonia, Spain (2016), and in some US jurisdictions (Portland 1991; Cleveland 2003; Berkeley 2015), where robust evaluations have shown a drop in consumption following the tax. The report includes case studies of SSB taxes in the UK and Mexico on pages 11 and 12, with the UK tax very similar in design to the proposed Australian tax.  
  • A tax on SSBs would be an important first step towards tackling obesity and would raise revenue to take further steps. Revenue should be earmarked for preventive health measures such as awareness and education initiatives to improve health literacy around diet and nutrition.  
  • For the majority of the population, there is an affordable alternative to SSBs in the form of tap water, and part of the intent of an SSB tax would be to move consumers towards this untaxed, healthy substitute. This means that any barriers to safe water access also require action. Therefore, revenue should also be used to ensure all Australians have reliable access to a clean, safe water supply. 
  • Australian surveys have consistently shown majority support for a tax on SSBs. Public support is even higher if tax revenue is hypothecated to fund initiatives to tackle obesity. A nationally representative survey undertaken in 2017 found 60 per cent of Australians support a tax on sugary drinks. This increased to 77 per cent support if the proceeds were used to fund obesity prevention.