Higher taxes on tobacco, alcohol, and sugary drinks can raise vital funds for development

Developing economies face mounting fiscal pressure from slowing global growth, crippling debt service, and steep cuts to international aid budgets. Higher taxes on tobacco, alcohol, and sugary drinks may be part of the solution.

Often implemented to improve public health, these taxes have significant fiscal benefits too. They can raise revenue for cash-strapped governments and reduce reliance on foreign donors while lowering health care costs by cutting cases of noncommunicable diseases such as cancer, diabetes, and stroke.

A 50 percent increase in the price of tobacco, alcohol, and sugary drinks through higher taxes could raise $2.1 trillion for low- and middle-income countries over five years, according to the Task Force on Fiscal Policy for Health, of which we are both members. That’s equivalent to 40 percent of their public health spending and far exceeds official development assistance, which currently amounts to about $223 billion a year.

Several countries have introduced such taxes already. Successive increases in tobacco excise tax in the Philippines led to a threefold increase in revenue, from $1 billion in 2012 to $2.9 billion in 2022. It helped finance health insurance for all. Lithuania doubled its tax take from alcohol on a per capita basis by increasing excise tax on beer, wine, and spirits between 2015 and 2022. The tax now accounts for 3 percent of total government revenue.

Tobacco poses the greatest health risk, resulting in over 8 million premature deaths annually, according to the World Health Organization (WHO). Alcohol is responsible for an additional 2.6 million deaths yearly, and sugary drinks are contributing to a spike in obesity and type 2 diabetes.

Tax increases that raise the price of these harmful products by 50 percent would save 50 million lives over the next 50 years as well as prevent significant health problems, our research shows. These health benefits are distributed progressively, because people with lower incomes reduce their consumption of these unhealthy products the most in response to higher prices. It lowers their health care costs too. Together with the progressive health impacts, this offsets any regressive income effects, making health taxes a progressive policy overall.

Higher health taxes can also generate health benefits by pushing manufacturers to change their products. The UK soft drinks industry levy, for example, led manufacturers to reduce the sugar content of affected products by 43.7 percent between 2015 and 2019—equivalent to removing 45 million kilograms of sugar from soft drinks each year.

Economic benefits

The impact on mortality and morbidity from tobacco, alcohol, and sugary drinks also has substantial economic implications. Every year in the United States, tobacco-related premature deaths and smoking-related health conditions result in nearly $180 billion and $185 billion in lost productivity respectively, according to the US Centers for Disease Control and Prevention. Researchers have estimated that the economic cost of alcohol consumption amounts to 2.6 percent of global GDP, mostly from productivity losses.

Improving public health frees up budgets for other services. Today more than $2 trillion is spent annually treating the five leading noncommunicable diseases. If countries fail to stem the rise in cases using policies such as health taxes, the costs will become unsustainable.

Even though health taxes are a win-win for health and revenue, they are underused and set at rates that are too low. The average rate of tobacco tax is 42 percent of the retail price, well below WHO’s target of 75 percent. Alcohol and sugary drink tax rates are lower still. Moreover, health taxes are failing to keep pace with inflation, meaning their impact is eroded over time. Indeed, cigarettes became more affordable in 41 countries between 2016 and 2022.

Political pressure

Industry groups lobbied governments for tax breaks to mitigate the impact of the COVID-19 pandemic. However, recent research shows that the tobacco industry did not lose profits during the pandemic. Alcohol and sugary drink industry profits did dip in 2020, but these industries had more or less recovered by the following year and have since seen increasing profits. The case for taxing these products remains as strong as ever.

These taxes have little or no economic downside, especially when compared with other ways to finance development: They do not cause economic distortions on the supply side nor do they drive down employment, because consumers shift spending to other sectors. Governments can mitigate the risk of a black market for these products with stronger enforcement. Even where illicit trade does occur, it does not offset the ability to raise revenue and reduce consumption.

Politicians may balk at imposing higher taxes, but a wide range of countries—with governments of all stripes—have shown that it’s possible. Health tax hikes even have public support, especially when the health gains are emphasized. Surveys in Colombia, India, Jordan, Tanzania, and the US have consistently found that a majority of people support raising these taxes, especially when the health benefits are explained and revenues earmarked for public services.

Governments, especially in developing economies, must make the case for a steep increase in health taxes. They should commit to raising them regularly above inflation and economic growth to ensure that the taxes rise in real terms and these products become less affordable over time. It’s the best approach in constrained times and will be good for fiscal policy and public health.

Opinions expressed in articles and other materials are those of the authors; they do not necessarily reflect IMF policy.