Mexican tax on sugar a complete flop

11 June 2015

Mexico’s much-quoted tax on high calorie foods and beverages containing sugar is proving to be a complete flop, says FGC Chief Executive Katherine Rich.

Mrs Rich was in Mexico City recently and took the opportunity to gather some background on how effective the taxes have been just over a year after they were implemented.

“This tax is one of the few examples that pro-sugar-tax activists can find to try to prove their tired claims that higher taxes reduce consumption but it’s proving to be a complete flop.

“Just as with the failed Denmark fat tax before it, activists around the world have been jumping on the Mexican Government’s initiative to tax foods – anything from chocolate to peanut butter, and full-sugar fizzy drinks – and using it as a platform to rally calls for similar taxes in their own countries.

“In the first months after its implementation, supporters heralded the tax a success as volumes of the foods and drinks concerned appeared to reduce.

“But what I found was that since those early months the successes being claimed by the activists have not matched reality.”

Mrs Rich says just over 12 months later, consumption volumes were reported to be back to where they were before the tax was put in place.

“In other words, the taxes have had no long-term effect. Basically, they have failed to deliver what they were meant to. People got used to the higher prices and life went on as before.

“What I also found particularly interesting was that while the consumption of fizzy drinks bounced back to pre-tax levels, there have been some unintended consequences because incomes haven’t shifted.

“Industry colleagues told me that while shoppers were now back to buying as much fizzy drink as previously, they were buying less non-taxed, non-food goods such as shampoos and other personal goods. In other words, they had adjusted their expenditure so they could maintain consumption of taxed categories at the expense of non-taxed categories.

“As a consequence of this, the average shopping trolley had declined for the first time in Mexican supermarket history. They are now buying fewer groceries for their families. But being able to afford less food because of higher prices should not be viewed as a win.”

She says what was also interesting was that the tax is not a sales tax applied at the retail end, which is the impression she had.

“It is, in fact, levied on manufacturers that are then free to choose how they apportion it across their product portfolios.

“So, different companies have made different choices. Some simply spread the tax across all products, creating the embarrassing anomaly that the fizzy tax in some cases had contributed to an increase in the price of water! Talk about unintended consequences!

“Other companies decided to absorb the tax completely due to concerns about missing certain price points, meaning the supposed price signals designed to effect behavioural change were completely lost. So much for using taxes to send a signal to consume less.

“In terms of reducing obesity, the taxes have been a complete flop. But in one area they have been an outstanding success. Where? Raising money for the government, of course.

“In an economy where collecting tax is difficult, and where there is significant tax “leakage” due to a large chunk of the Mexican economy being cash-based, the food and beverage taxes paid by a small number of identifiable and accessible corporates have been extraordinarily efficient earners.

“I was given figures showing that the government had collected some 75% more than it had budgeted from the tax. It had budgeted on 18 billion pesos (NZS$1.5 billion) but had collected 31.5 billion (NZ$2.7 billion). And it is budgeting to collect even more ($2.9 billion) in the coming year because of the figures showing volumes back at their pre-tax levels.

“So much for a diminishing tax due to reduced consumption. What this has shown is that, as expected, the demand for the taxed food and beverage products is largely inelastic. You don’t hear the health activists talking about any of that.”