The Covid-19 pandemic blew up budget deficits in low- and middle-income countries, pushing many toward or into precarious financial straits. There is also growing pressure on policymakers to soften the impact of food and energy inflation with temporary tax and tariff cuts and consumption subsidies, measures that will need to be offset by other fiscal responses to fill budget holes. One way to do that while simultaneously improving the health of individuals and populations is by raising excise taxes on tobacco, alcohol, and sugary beverages.
With public fiscal space constrained more than ever, few policy levers remain as potent for raising revenue — and as narrowly targeted and socially beneficial — as excise taxes. The Center for Global Development estimates that health taxes could help countries close at least half of their revenue shortfalls in the near term.
These taxes also have the added advantage of ensuring better health outcomes, significantly reducing the number of premature deaths from heart disease, cancer, diabetes, liver disease, chronic respiratory ailments, and other noncommunicable diseases (NCDs). And these health benefits would skew disproportionately to low-income consumers.
This is the moment for policymakers, supported by the International Monetary Fund (IMF) and the World Bank, to raise excise taxes on tobacco, alcohol, and sugary beverages — policies passed in recent years in our countries, Colombia (M.C.) and the Philippines (C.P.) — to boost their coffers for the herculean rebuilding efforts to come.
More than 40 million people die each year from NCDs, accounting for 71% of all deaths globally. Taxing consumer products that are leading risk factors of these diseases would be the most cost-effective way to save lives while simultaneously raising much-needed government revenue.
Research commissioned by Bloomberg Philanthropies Task Force on Fiscal Policy for Health shows that if all countries increased their excise taxes to raise prices on tobacco, alcohol, and sugary beverages by 50%, over 50 million premature deaths could be averted worldwide over the next 50 years, while raising more than $20 trillion of additional revenues in present discounted value.
Higher taxes on these three products would generate the most revenue in middle-income countries, which make up more than half of the world’s countries. In low-income countries, which need the most financial assistance, these taxes could generate an average of about $225 million per country each year — a revenue increase of 10% to 15% — and avert, in total, 4.2 million premature deaths.
Over time, increased taxes on tobacco, alcohol, and sugary beverages could generate both vital health benefits and substantial revenues, but they need to be designed for maximum effectiveness. Their design, implementation, administration, and monitoring will all matter in terms of how much health and revenue outcomes they deliver. As a former finance ministers who took decisive action on this front, we understand this well.
As part of Colombia’s larger fiscal reform in 2016, the specific tax rate for cigarettes was tripled between 2016 and 2018, with a 4% real increase per year after 2019. This caused a 34% drop in cigarette consumption by 2018, while excise tax revenues, which are earmarked for funding of universal health coverage, almost doubled. Colombia’s current government recently adopted a new tax on products with a high sugar content.
The 2012 Philippines Sin Tax Law raised and simplified tobacco and alcohol excise taxes, which increased government revenues and reduced smoking. The law helped the Philippines break free of its historical label as the “sick man of Asia,” and achieve an investment-grade sovereign debt rating. Subsequent laws passed by the succeeding administration, which included taxes on sugar-sweetened beverages, bolstered the incremental revenues raised by these excise taxes, providing a significant buffer for public resources while limiting its impact on inflation.
Policymakers, working with the IMF and the World Bank, could envision a full package of health taxes to close revenue gaps and create fiscal space.
The IMF has not explicitly acknowledged the importance of tobacco, alcohol, and sugary beverage taxes as a fiscal policy tool, nor has the organization consistently viewed these taxes through the same lens it uses to examine and advance taxes on fuel consumption. The IMF could expand the use of such taxes in financial programs, especially upcoming medium-term programs helping to fill fiscal holes.
The World Bank also has significant expertise in designing and implementing health taxes and is rolling out a program of technical assistance as part of its global tax initiatives. This initiative could be complemented by results-oriented health tax actions under its development policy financing.
The agenda for action would support governments’ capacity to put evidence-based health policies in place, adopt or revise agreements that constrain domestic health tax reforms, educate stakeholders on the effectiveness of health taxes, push back against misinformation about their benefits, and provide technical assistance as well as critical political air cover to governments that will inevitably face private industry opposition.
Health taxes on tobacco, alcohol, and sugary beverages earmarked towards health spending and social assistance can go a long way toward ensuring a more sustainable fiscal policy capable of addressing some of the long-lasting negative effects of the pandemic and current world crises. We urge the leadership of the World Bank and IMF to form a compelling agenda for action for the adoption of healthy fiscal policies.
Mauricio Cárdenas, the minister of finance of Colombia from 2012 to 2018, is director of the Master of Public Administration in Global Leadership program at Columbia University in New York and a nonresident fellow at the Center for Global Development. Cesar Purisima, the secretary of finance of Philippines from 2010 to 2016, is an Asia Fellow at the Milken Institute and a founding partner of Ikhlas Capital, an ASEAN private equity platform.