CAN BEHAVIOURAL TAXES SAVE THE EU BUDGET?
With many citizens and member states looking at the European Union to provide answers to the challenges the continent faces, the European Commission needs to find the necessary funds to finance the ambitious targets. Behavioural taxes are increasingly gaining momentum. They are attractive to policy makers because they can be very specific in scope or targeted on achieving particular policy objectives in the field of health or environment and hence easier to “sell” to the population. The European Commission is looking at solutions to get around the unanimity requirement and make real progress in 2024.
From the Green Deal Agenda, the new Industrial Policy and the extra resources needed for Research, Innovation and Defence over the funds needed to integrate new candidate member states and rebuild Ukraine to a reform of the agricultural policy and cohesion fund, a lot of extra funding will be needed. At the same time, taxation regulators are considering how to move away from taxing labour and capital and looking for new economic models. Classic consumption taxes such as sales taxes, VAT and excises are seen in many emerging economies as more secure sources of income for state budgets and form an important part of policy recommendations linked to loans from the World Bank and other international institutions.
Although not new, behavioural taxes are increasingly gaining momentum. They are attractive to policy makers because they can be very specific in scope or targeted on achieving particular policy objectives in the field of health or environment and hence easier to “sell” to the population. Classical examples are the taxes based on the “polluter pays” principle, e.g. on selective waste collection, or the taxes on alcohol and tobacco (so called “Sin Taxes”), justified by the real or perceived extra cost for society linked to the consumption of these products. Also the World Health Organisation is actively advocating for what they brand as “health taxes”, levied on products that have a negative public health impact, such as tobacco, alcohol and sugar-sweetened beverages (SSBs). These taxes are presented as “win-win-win policies because they save lives and prevent disease while advancing health equity and mobilising revenue for the general budget”1
So Where does that leave the European Commission?
At the latest EU Tax Symposium2 in October, responsible Commissioner for Economy, Paolo Gentiloni, tipped his hand in front of a select group of hundreds of policy makers, from national, EU and international level (IMF, World Bank, OECD), academics, think tanks, business representatives and other stakeholders when discussing the future of taxation in the EU, where behavioural taxes should play a much bigger role in the policy mix 2050.
Mr. Gerassimos Thomas, Director General of DG TAXUD underlined that ‘behavioural taxes are underexploited in the EU, representing only 8% of total revenues. The EU and the Member States need to adjust the tax systems to deal with global megatrends, such as digitalization, climate change, globalization’.
And it goes beyond mere words: in preparation for the next policy cycle (2024-2029) DG TaxUD adapted its internal organization, splitting the Other Indirect Tax Department into “Energy Taxes and CBAM” and “Behavioural Taxes and Other Indirect Taxes (dealing with alcohol, tobacco)”. It was also announced that very soon research institute ECORYS will publish an EU-commissioned study on behavioural taxes.
Senior Commission officials have publicly declared that ‘the next EU Commission will include in its policy cycle 2024 – 2029 a focus on taxing so-called HFSS’s: products with a High content in Fat, Salt or Sugar’, adding that‘taxing for a good society is in vogue … and that taxation hits where it hurts!’3.
So How to get around unanimity?
In principle taxation is a Member State competency, except for very precise exceptions, and always requiring unanimity in the Council. But, clearly, DG TaxUD wants to take the lead in the debate on the introduction of future behavioural taxes and is looking for a way around this obstacle. The need for coordination at EU level is not the most difficult argument to make, because taxation can severely disrupt the internal market and the effects of the taxes will only fully play out if consequently applied across the whole internal market.
Getting around the unanimity requirement is more challenging but also here the European Commission is showing great creativity, taking a page from the play book of the people pushing for institutional reform. If it is impossible to reach a consensus on dropping unanimity voting, the Commission wants to use Enhanced Cooperation as a model to create a coalition of the willing. As a senior official declared “after a proposal is tabled under the unanimity rule, and, because no progress is made, nine or ten Member States can continue without unanimity, and later, other Member States could join. This works like a tractor. The legal base is obviously very wide, because it is linked to the Internal Market.”4
So What does this mean for stakeholders?
The purpose of behavioural taxes is to affect behaviour to achieve particular policy objectives. As some of the experts at the EU Tax Symposium warned, this also means that in order to be effective they have to respect certain guiding principles:
- Evidence-based: an evaluation must be made in advance of whether the tax will actually achieve the policy objective – will it fundamentally change behaviour, or will consumers / stakeholders find a way to circumvent it?
- Part of a broader policy mix: the tax by itself is not enough and maybe not even the most important or adequate instrument to change behaviour – nudging behaviour, information campaigns, treatment can all play a more important role and in some cases a simple ban or phasing out might be preferable (as e.g. under the Single Use Plastics Directive)
- Public acceptance and linked to a clear objective: there needs to be a buy in from the population for maximum effect
- Succesful taxes change behaviour: it will bring in less revenue the more successful it is – this is an important budget consideration
- Flexible: take innovation into account
- Regressive nature: because they are linked to purchasing power, they are often branded as unfair since they affect the less affluent the most and have the biggest impact on their budget – this makes it again important to make the tax part of a broader policy mix
Also the structure of the tax is important: when taxing e.g. HFSS products a tax could be based on sales price (“ad valorem”) or e.g. on the amount of sugar in the product (“content based”) or a combination of both. A simple ad valorem tax will make high end products more expensive and could lead to families spending their budget on larger quantities of cheaper alternatives. The trigger point of taxes and their progressive nature can make a big difference. A progressive tax based on content can inspire producers to look at product reformulation. This is exactly what has happened in the sector of sugar sweetened beverages, the most successful global example of recent behavioural taxation.
So What should Industry do?
In the EU, 2024 is going to be crucial year. After the elections in June, half of the European Parliamentarians will be new, the political balance might shift and many of them will be busily studying the details of the most important policy files they will concentrate on for the next five years. Also the European Commission will significantly change in composition and probably also in policy focus.
It is clear that DG TaxUD is preparing their policy briefing for their new Commissioner, so it is time to also get the industry’s voice heard. 2024 is the ideal time to make a first impression, help set the tone and the priorities in the debates that will affect the license to operate of companies and entire sectors. The industry should make sure to reach out and network to ensure that any taxation that might affect them, makes sense, works and actually achieves its objectives. Part of the evidence-based nature of taxation is taking into account what the industry will share with policy makers. Be proactive – rather than reactive.
If you are not exactly sure how, contact us. Together we will find the answers to your SoWhat questions.
Kristof Doms, December 2023
- https://www.who.int/health-topics/health-taxes#tab=tab_1 ↩︎
- https://taxation-customs.ec.europa.eu/road-2050-tax-mix-future/eu-tax-symposium-2023_en#:~:text=This%20year’s%20EU%20Tax%20Symposium,the%20EU%20Tax%20Symposium%202024! ↩︎
- Policy Voices | Hitting where it hurts: The power of behavioural taxation – Friends of Europe ↩︎
- Ibidem ↩︎