Supply-Side Responses to Health Taxes

Abstract

Health taxes are typically levied on manufacturers. The impact of health taxes on consumption, and ultimately on health, depends on the extent of which taxes are transferred from manufacturers onto the prices faced by consumers, referred to as tax pass-through. We discuss the theoretical economic arguments and the empirical evidence on key factors influencing tax pass-through for tobacco, alcohol, and sugar-sweetened beverage (SSB) products, and provide general conclusions and recommendations for government policy. Key drivers of tax pass-through include strategic behaviours of manufacturers and retailers (production and marketing strategies, particularly for multi-product firms), market structure (especially the degree of concentration of a market), and supply and demand price elasticities. Based on empirical observations, taxes on tobacco, alcohol and SSBs are usually passed on to consumers through increases in market prices, sometimes exceeding the amount of the tax. The extent of tax pass-through can vary widely, depending on type of product, package size, brand characteristics, store type, etc. Furthermore, strategic firm behaviours may be triggered by features of tax design. For instance, ad valorem, or mixed specific and ad valorem tax structures may incentivise manufacturers to differentiate their brands and price levels, while specific excise taxes tend to reduce relative price differences between products, stifling potential substitutions. Moreover, specific taxes based on ingredients (e.g. grams of alcohol, or sugar), may incentivise manufacturers to reformulate their products, or to increase the promotion of products with a lower concentration of the taxed ingredient. The evidence presented underscores the importance for policymakers to carefully adjust the design, and closely monitor the impacts, of health taxes, to ensure that health benefits are not hindered by firms’ strategic responses.