How A Fat Tax Can Help Fight Obesity

Cutting the Fat:
How A Fat Tax Can Help Fight Obesity

Diabetes New Zealand and
Fight the Obesity Epidemic, Inc

Foreword

In 1976, a report from the Royal College of Physicians, London, suggested that “Obesity is a hazard to health and a detriment to wellbeing. It is common enough to constitute one of the most important medical and public health problems of our time, whether we judge importance by a shorter life expectancy, increased morbidity, or cost to the community in terms of money and anxiety.”

This warning was largely unheeded, and the global epidemic of obesity and its consequences has escalated out of control. Inherited attributes may explain a predisposition to the disease but there is no doubt that environmental factors account for its epidemic proportions. Lack of physical activity and increased availability and consumption of energy dense foods appear to be major determinants.

By definition an epidemic should be reversible if the causative factors can be identified and eliminated or reduced. While it is obviously important to encourage individuals to make appropriate lifestyle choices, it is widely recognised that modifying the environment to facilitate such choices is an essential component of the strategy required to halt or, better still, reverse the escalating results.

There is no universal agreement as to how such environmental change might be achieved. However the magnitude of the problem suggests that all possibilities, including legislative measures, must be seriously considered.

This report provides an important contribution to the debate. The fact that the possible introduction of a fat tax is a potentially controversial topic should not inhibit discussion of this or any other measures that may facilitate the lifestyle changes necessary to stem the tide of the obesity epidemic.

Jim Mann CNZM FRSNZ
Professor in Human Nutrition and Medicine
Director, Edgar National Centre for Diabetes Research and WHO Collaborating Centre for Human Nutrition
Executive Summary

The obesity epidemic
There is an obesity epidemic afflicting New Zealand, and the obesity epidemic is causing a diabetes epidemic.

Consider the following:

- In the last five years carbonated beverage consumption in New Zealand has increased by about 45 percent; New Zealanders are now the 11th highest consumers per capita worldwide.
- New Zealand children are among the fattest in the world – we have a higher percentage of overweight and obese children than the United States or Australia.
- The rise in type 2 diabetes –the greatest contributor to the diabetes epidemic – is strongly linked to an increasingly overweight and obese population.
- Services to people with diabetes cost New Zealand taxpayers $247 million per year, and this figure is likely to rise to over $1 billion by 2021 with the increasing incidence of diabetes.
- A person with diabetes costs the New Zealand health system 2.5 times as much as a person without diabetes.

Rationale for a fat tax
Health ailments linked to diets rich in fats and calories impose huge costs on New Zealand society, including the costs of treating diabetes, heart disease, and other health conditions. In addition to impairing the lives of those suffering these diseases, debilitating illness and premature death linked to obesity also cause losses to society in the form of lost economic contributions from those who are forced to curtail work or retire early, or die while still in the work force, as well as lost contributions that many retirees make as community leaders and volunteers. Social and cultural contributions are also lost, including to family and wider whanau who could have benefited from assistance with child-rearing, passing of family and cultural history, and simply the enjoyment of having elders present.

There are four main reasons for implementing a fat tax. First, a fat tax would address financial costs to society and act as an insurance premium for the costs of prevention measures and future medical treatment linked to diets rich in fats and calories. This would be similar to the government’s current practice of collecting insurance premiums for motor vehicle accidents through petrol tax and a levy on vehicle licenses.
Second, while a fat tax might have little impact on most consumers, a tax could deter children or at least reduce their purchases of unhealthy products. This could change the long-term dietary habits and patterns of some members of the population who might be vulnerable to obesity and related health conditions.
Third, even a tax that imposes only a small burden on consumers could still create strong incentives for food manufacturers to alter product composition to reduce the energy content and hence the amount of tax paid. This would be especially effective where high-energy items are directly competing with lower-energy alternatives.
And fourth, a tax would generate revenue that could be used to fund complementary measures, e.g. a major advertising campaign, to encourage consumers with excessive energy diets to make the change to a more balanced diet. Earlier studies have found that increased interventions now can reduce the future costs of treating diabetes by about $250 million per year.

Far from denying individual responsibility for lifestyle choices, taxes on alcohol, tobacco and unhealthy foods actually require that consumers of these products take more responsibility for the consequences of their actions.

The proposed tax
There are several ways a fat tax could be structured. Options include taxing fat content, following overseas examples of a tax on snack foods and soft drinks, taxing all energy content of food, or taxing only energy-dense (i.e. calorie-rich) foods.
Given the nature of the obesity problem, a tax on foods with high energy density would be the most direct approach. However, this approach would result in a tax on staples such as flour, while exempting energy dense/nutrition poor beverages such as soft drinks. Furthermore, obesity and diabetes are not the only health conditions that would be ameliorated via a well-designed fat tax. In particular, the incidence of coronary heart disease could fall if consumption of saturated fats were reduced. This suggests that multiple criteria would be appropriate.
An approach that is easy to understand, and therefore more viable politically, would be to have one set of criteria for fat content and other criteria for soft drinks, snacks and other foods that are “energy dense and nutrition poor”. Apart from beverages, most foods of concern would be identified by the high-fat criteria.
The tax would be calculated and paid by manufacturers, importers and some wholesale food distributors and, in the case of meat products, by retail outlets, except that retail businesses with sales less than $250,000 per year would be exempt.
The rate of the tax would be determined based on a revenue target and the extent of exemptions. Based on predictions of future costs of treating type 2 diabetes, coronary heart disease and other medical conditions linked to diet, a revenue target on the order of $1 billion per year would appear to be justified.
A tax of this magnitude might not be politically feasible, as it amounts to roughly $5 per person per week. This does serve to underline, however, the magnitude of the problem and demonstrates that the upper limit on the tax is likely to be what is politically feasible rather than what can be justified on a rational basis.
Various government jurisdictions in developed countries have implemented taxes on “snack foods” or otherwise imposed differential taxes on food products considered to be less than healthful. From this experience, and from what has been learned from alcohol and tobacco policy in this country, it is clear that taxes can be an effective component of a wider package of measures to reduce the harm to society from these products.
Issues of equity
Low-income people tend to be over-represented in the incidence of obesity and diabetes, as are Maori and Pacific peoples. A fat tax, by helping to fund interventions to reduce the incidence of obesity and diabetes and to improve treatment for diabetics, will have positive distributional impacts for these groups.
Because people on lower incomes spend a higher proportion of their income on food, any tax on food could be seen as “regressive”, i.e. having a greater relative effect on the poor. The same could be said of alcohol and tobacco, of course, but that has not been a persuasive argument against taxing those products. If a fat tax leads to substantially better health outcomes for lower income groups, it can hardly be described as unfair.
Financial impacts on disadvantaged groups could be addressed by returning the amount of fat tax paid by a typical low-income household to those families by reductions in income tax rates. For instance, revenue of $1 billion would be sufficient to reduce GST by up to 2%, i.e. to 10.5%, or to fund a 3% cut in the bottom tax rate of 19.5% on income up to $38,000, which would benefit all taxpayers. This would mean that those families that choose to consume more than the average would help to fund diabetes interventions through the health care system to reduce the incidence and improve the treatment of diabetes. Meanwhile, those who eat healthy diets would come out ahead financially, i.e. for them, any increased food costs due to the fat tax would be more than offset by reductions in income tax. Some of the revenue could also be used to fund other health interventions to lower the incidence of diabetes, possibly including eliminating GST on fresh fruit and vegetables.
Finally, equity is not just about helping disadvantaged groups. There is a basic principle of fairness involved in making people take some responsibility for their dietary choices, including paying a share of the consequent medical costs, so that people who adopt more healthy lifestyles do not find that their access to high quality and timely health care is limited because of the costs of treating the epidemic of diabetes in New Zealand. A fat tax can help to slow down, and hopefully reverse, that epidemic, while funding at least a portion of the cost of medical care for the next generation of people with diabetes.
Recommendations
Of the four options presented, this report concludes that the best approach would be to have one set of criteria for fat content and another set of criteria for soft drinks, snacks and other foods that are “energy dense and nutrition poor”. More work is required, however, before such a tax could be implemented, including resolution of political as well as technical issues.
We recommend a Select Committee enquiry, with opportunity for extensive public input, to explore and resolve these issues.

Questions that should be addressed by the enquiry include:

- Specific criteria for the tax
- Exemptions
- Revenue target
- Additional health interventions to be funded by the tax
- Reductions in income tax or other taxes to protect low-income households
- How the tax would affect the overall well-being of different groups.

The obesity epidemic is a time-bomb set to impair the lives of hundreds of thousands of New Zealanders and cause spiralling medical costs over the next 10 to 20 years. It is time to seriously consider implementing a fat tax to fight that epidemic.

The full report is available on www.foe.org.nz or www.diabetes.org.nz

ENDS

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