Analysis

A Wise Tax on Soft Drinks Could Make Israel Healthier and Wealthier

The measure would not only help close the budget deficit but would also deter consumption of a product that’s a major cause of obesity and diabetes

A man pours himself a Sprite at a soda machine.
Tali Mayer

Shaul Meridor, the head of the Finance Ministry’s budget division, caused a small ruckus last week when he said officials were weighing a tax on sugary drinks. But the tax could be just the thing the government needs to help close a gaping deficit and get Israelis to lose some critical kilos.

“We would like to see taxes imposed on negative things, because taxes are supposed to encourage certain behavior economically,” he told the audience at a conference organized by the financial daily Calcalist. “One of the main diseases among the young and the public in general is diabetes and the consumption of sweet drinks contributes to high rates of morbidity. A tax on sugary drinks both contribute to government coffers and, I hope, will have the effect of getting people to consume healthier drinks and reduce the incidence [of diabetes].”

Merdior’s bombshell didn’t come from nowhere. TheMarker has learned that he has been consulting with public health experts, who say the treasury is determined to move ahead with the initiative. But as Meridor said himself, another driver is revenues. The government is running an increasingly wide fiscal deficit and the tax would help narrow it.

How much it would help depends on the tax rate, which products would be covered and how the tax would be implemented. However, a rough calculation with an assumed tax of 20% of the retail price – and the assumption that soft drink consumption would decline significantly after it – shows that revenues would reach about 250 million shekels ($71 million).

However, if the goal is not just to raise tax revenue but to reduce consumption, the tax would ideally reduce purchases and yield lower revenues.

The tax would square with the Israeli government’s stated goals of reducing the country’s high rates of obesity, especially among children, and incidence of disease and social inequality.

About 1.7 million Israelis – 25% of adults and 14% of children – suffer from excess weight. Some 700,000 are deemed to be pre-diabetic and 500,000 suffer from Type 2 diabetes. If you add those who are overweight (with a body mass index of more than 25) to the obese population, almost half of Israelis need to lose weight.

A convenience store in Ashdod, southern Israel.
Gil Eliahu

“Today we understand more and more that diabetes in the great enemy of mankind and the thing most likely to cause insufferable rates of disease and mortality,” says Prof. Itamar Raz, chairman of the National Council on Diabetes.

“In Israel, the average adult consumes 30 teaspoons of sugar a day – it’s a catastrophe,” he says. “If there’s no fundamental change in how we eat, we can expect that every third child will have diabetes by age 50. Sugar, more than any other ingredient, needs to be targeted if we want to make a dramatic change in morbidity and mortality of the Israeli public.”

A tax on soft drinks and other unhealthy products also compensates the state for the heavy costs overweight people impose on the health care system. The cost of obesity in Israel runs at 6 billion shekels annually, according to Health Ministry estimates. A third of that is the direct cost of treating health issues; the other two-thirds derives from indirect factors, such as lower labor productivity, sick days and nursing care.

The Maccabi health maintenance organization estimates that insurance covers only 53% of the costs a diabetic incurs.

“In research conducted on 2.3 million enlistees of the Israel Defense Forces found that 90% of those who were overweight at age 17 were already overweight at age six. So if we want to prevent adult obesity, we need to focus on children,” says Raz, who supports a tax on sugary drinks and other heavily sweetened products.

Prof. Hagai Levine, chairman of the Israeli Association of Public Health Physicians, also supports the tax and the idea of designating the revenues it generates for the health care system. The Health Ministry is on board.

“The measure had to be undertaken as part of a national public health policy, accompanied by a public campaign and at least two other measures – subsidies for healthful foods, to protect the poorest, and at least part of the revenues going toward advancing health vis-a-vis obesity and treating the effects of unhealthy food,” says Levine. For instance, the money could be spent on subsidized dental care for children.

Taxes on unhealthful foods and drinks are common around the world, but the systems used by various governments differ. Sometimes it is based on product price, sometimes on its weight, the type of product or its ingredients.

If Israel moves ahead with Meridor’s idea, the job of designating unhealthy products has already been done by the Health Ministry and the Knesset in exact terms: the quantity of sugar, nitrates and fat as defined by the “red label” rules due to go into effect next year. That law will require manufacturers and importers to affix labels to products that exceed government-set ceilings.

Highest consumption in the world

It’s understandable that Meridor chose to focus on soft drinks: Sweetened drinks have high amounts of sugar – one can may contain eight teaspoons’ worth. Health Ministry research has shown that one sugary drink a day increased the risk of being overweight by 60%, and two a day increased the risk of Type 2 diabetes by 25%.

Israeli children are the world leaders in soft drink consumption, even more than their peers in the United States. Worldwide, 25% of girls and 32% of boys drink a sugary drink every day. The U.S. average is 30% and 37%, respectively, while in Israel it’s 41% and 45%.

Poor people are more likely to be overweight more than those in any other socioeconomic stratum; Arabs are more likely to be overweight than Jews. Among Israeli Arab children, 51% of those between 11 and 15 years old drink at least one can of a sweetened beverage a day.

A Health Ministry committee that weighed options for policies aimed at reducing obesity recognized that a tax could have the perverse effect of causing consumers to switch to other unhealthful foods like diet drinks if sugary drinks are taxed.

There were also concerns about the impact on the poor, who tend to consume more unhealthy foods than wealthier groups.

Politicians, among them Deputy Health Minister Yaakov Litzman, dislike being held responsible for increasing the tax burden on consumer, no matter what the purposes. Despite that, the Health Ministry said it was considering the soft drinks tax in coordination with the treasury.