Sugar Taxes: Do They Work?

Why many countries tax sugary drinks, what happened in Mexico and the United Kingdom, and the debate over fairness and effectiveness.

Many governments have introduced taxes on sugary drinks. These are an example of a Pigouvian tax, a tax on something that causes harm, intended to reduce its use. Sugary drinks are linked to obesity, diabetes and tooth decay, which impose costs on health systems and individuals.

Mexico’s tax

In 2014, Mexico introduced a tax of one peso per litre on sugar-sweetened drinks, roughly a 10 percent price increase. Studies found that purchases of taxed drinks fell, with larger declines among lower-income households, while purchases of untaxed drinks, including water, rose.

The United Kingdom’s levy

The United Kingdom introduced its Soft Drinks Industry Levy in 2018. It was designed differently: it charges manufacturers based on sugar content, with a higher rate for drinks with more sugar and no charge for drinks below a threshold. The goal was to encourage companies to reformulate, reducing sugar in their products. Many companies cut sugar before the levy took effect to avoid it. Research found a large fall in the amount of sugar sold in soft drinks.

India

India places aerated and sugar-sweetened drinks in its highest GST bracket, a special 40 percent rate for harmful and luxury goods since the September 2025 GST reform, making them among the most heavily taxed consumer goods.

Reformulation in action

A drink contains 10 grams of sugar per 100 millilitres, above the UK levy's higher threshold. Rather than pay the levy or raise prices, the manufacturer reduces sugar to below 5 grams, using sweeteners or smaller amounts of sugar. The drink avoids the tax entirely, and consumers take in less sugar without changing what they buy. This is exactly the behaviour the levy was designed to encourage.

The debate

Supporters argue sugar taxes reduce consumption, encourage healthier products and raise revenue for health programmes. Critics argue they are regressive, taking a larger share of income from poorer households, and that people may switch to other unhealthy foods. Supporters respond that poorer households also tend to gain the most health benefits, and that revenue can fund programmes benefiting them.

Thinking a tax only works if it raises lots of money

The UK levy raised less revenue than first expected, but this was a sign of success: companies cut sugar to avoid it. A health tax can work by changing behaviour, even if it collects little money.

Key takeaways

Sugar taxes are Pigouvian taxes aimed at reducing harmful consumption.
Mexico's 2014 tax reduced purchases of sugary drinks, especially among lower-income households.
The UK's 2018 levy encouraged companies to cut sugar in their drinks.
Critics call such taxes regressive; supporters point to larger health gains for poorer households.