Newfoundland and Labrador is taking aim at sugary drinks, and along the way lower-income consumers, with a new tax that will slap a 20-cent levy on every litre of sugar-sweetened beverages sold in the province.
Once it comes into force next April, Newfoundland’s sugar tax will be the most aggressive such measure in Canada, with consumers facing an increase of more than 40 per cent in the cost of heavily discounted soda pop brands.
Like any consumption tax, Newfoundland’s sugar tax will weigh more heavily on poorer households. But this is a rare case of what economists call a regressive impact being helpful, since those households are more likely to buy and consume sugary beverages – meaning that the hefty tax is likely to propel a big shift in purchasing behaviour.
The province is releasing few details on the tax, beyond the broad strokes it announced on Monday as part of its 2021-22 budget. The 20-cent-a-litre tax will apply to sugar-sweetened beverages, although that category has not been further defined. And the province projects it will raise $8.7-million a year initially, implying that the tax will be applied to 43.5 million litres of sugary drinks in its first year.
But revenue isn’t the point of the sugar tax, according to Newfoundland’s budget documents. Instead, the aim is to nudge consumers toward healthier beverage choices, with the government noting that more than half of the province’s residents that are over the age of 12 have at least one chronic disease. If, over time, sugar consumption falls, public health could improve and health care costs could fall.
Economics and nutritional experts praised Newfoundland’s effort, saying its design will indeed discourage consumers from purchasing sugared drinks.
Lower-income consumers will feel the tax’s weight the most, said Yann Cornil, assistant professor of marketing and behavioural studies at the Sauder School of Business at the University of British Columbia.
That’s true of any sales tax, since the cost of such a levy will be relatively higher for poorer households. But it’s doubly true with a sugar tax, Dr. Cornil said, since lower-income households generally consume more sugared beverages. “They are a natural target for this kind of tax,” he said.
The province hasn’t provided any forecast on the expected effect on health care costs. But the move does take place as the government attempts to rein in spending, including in a health care system that is the most costly among the provinces on a per capita basis. In a statement, the government noted that the Newfoundland and Labrador income supplement provides tax-free payments to low-income individuals and families, and to persons with disabilities, to mitigate the impact of additional provincial tax measures.
Kory Kroft, associate professor of economics at the Rotman School of Management at the University of Toronto, said studies in the United States have shown that an optimal sugar tax would add 39 per cent to the cost of products.
On that measure, Newfoundland’s tax isn’t far from the mark. For a store-brand two-litre bottle of soda costing 97 cents, the tax would add 40 cents, an increase of 41 per cent. A two-litre bottle of brand-name cola costing $1.99 would see its cost rise by more than 20 per cent, a smaller disincentive to consumers.
Either way, Prof. Kroft sees the new tax as an effective tool in reducing the costs that overconsumption of sugar by an individual inflicts on the health care system, called an externality, and on that individual, called an internality. An externality occurs when the market price of a product doesn’t reflect all of the costs borne by third parties. The effect on the climate of fossil fuel consumption is one example of an externality.
Sugar consumption also creates an internality, Prof. Kroft notes, since consumers are making short-term choices that aren’t in their long-term interests. In other words, a habit of heavy sugar consumption can set the stage for a slide into chronic disease such as diabetes. “Somehow we’re not taking into account the full private cost,” he said.
In earlier decades, that would have been called a sin tax.
Taking that full cost into account doesn’t necessarily mean that consumers will pay more. If they choose a substitute or simply not to buy, they’ll avoid the tax. How good a job a tax does in changing behaviour is related in part to the price elasticity of the product being taxed. Price increases don’t have much impact on inelastic goods; life-saving medicine is one example. But sugared drinks are price elastic, with demand dropping off as prices rise. In part, that’s because there is a readily available substitute that won’t be subject to Newfoundland’s sugar tax: artificially sweetened beverages.
Mary L’Abbé, a professor in the department of nutritional sciences at the Temerty Faculty of Medicine at the University of Toronto, said Newfoundland’s tax was a good first step in reducing consumption of sugar, since it takes aim at one of the worst culprits, sugar-sweetened beverages. Those drinks have negligible nutritional value, are packed with quick-to-consume calories and are the single biggest source of sugar for Canadians, she said.
But Dr. L’Abbé said there are some gaps in the policy, the most obvious being fruit juices. While they have naturally occurring sugars, they are still likely to lead to overconsumption. A glass of apple juice, she said, contains as much sugar as four apples. An individual will easily drink a glass of juice, but isn’t that likely to eat four pieces of fruit, she noted.
She said there isn’t much research in Canada on how sugar consumption varies by income. But research in the United States has pointed to an inverse correlation, with sugar-sweetened beverage consumption falling as household income increases.
In an e-mail, Dr. L’Abbé said the consumption of sugar-sweetened beverages among Newfoundland and Labrador residents is slightly higher than the Canadian average, but not by much. Across Canada, the average intake of those who drink sugar-sweetened beverages is 489 grams, plus or minus 18 grams. For Newfoundland and Labrador, that figure is 500 grams, plus or minus 54 grams.
Dr. Cornil at UBC said there are many positive aspects of imposing a tax on sugar, including reducing the incidence of obesity, diabetes and heart disease, particularly among low-income individuals.
But he said there is a paternalistic undertone, as the government attempts to guide consumers to what it sees as better choices – and, in the case of a sugar tax, targeting the bad habits of lower-income households rather than those with more money. “There is a class issue, there is a social issue.”
Tax and Spend examines the intricacies and oddities of taxation and government spending.
Sign up for the Tax and Spend newsletter.