Transforming Health and Revenue: Brazil’s Bold Tax Reform on Tobacco, Alcohol, and Sugary Drinks

Brazil's tax reform on tobacco, alcohol, and sugary drinks, guided by the World Bank, aims to curb consumption and raise revenue through higher, inflation-indexed specific taxes, with stronger enforcement to combat illicit trade. This approach seeks to improve public health and set a new standard in Latin America.

The World Bank’s Health Taxes Knowledge Note #6, part of the Global Tax Program, examines how Brazil’s reform of excise taxes on tobacco, alcohol, and sugar-sweetened beverages (SSBs) could transform public health while raising vital revenue. Compared to international standards, Brazil’s current excise taxes on these goods remain low, keeping prices affordable and driving high consumption. This affordability contributes significantly to chronic diseases and mortality in Brazil, overburdening the healthcare system and increasing out-of-pocket costs for households. The country’s landmark tax reform legislation, PLP 68/2024, presents an opportunity to reshape Brazil’s tax structure in alignment with global best practices, addressing consumption and raising revenue.

Why Specific Taxes Are More Effective Than Ad Valorem

To curb consumption effectively, the World Bank recommends a shift towards specific taxes rather than ad valorem taxes, ideally using a mixed system with a heavier emphasis on the specific component. Specific taxes target harmful product characteristics such as alcohol or sugar content, regardless of the product's price, making it a more reliable tool for reducing consumption. Countries like South Africa demonstrate the potential of this approach; a steady rise in specific cigarette taxes has resulted in significant declines in smoking rates over the past two decades. For Brazil, the World Bank estimates that a tobacco excise tax set at approximately R$13.9 per pack could align with the Latin American median, while higher rates could bring Brazil in line with stricter international standards. Similar measures are suggested for alcohol, where high taxes varying by alcohol content could discourage the consumption of high-alcohol beverages. The recommendation extends to SSBs, where taxes should ideally vary by sugar content, incentivizing manufacturers to reduce sugar levels and consumers to choose healthier options.

Automatic Adjustments to Protect Tax Impact Over Time

To maintain the value of these taxes, the World Bank suggests annual indexation to inflation, plus an additional three percentage points to reflect income growth. Without such measures, the effectiveness of these taxes would erode as inflation and income growth make harmful products more affordable. Countries like Chile and Australia have implemented automatic indexation to offset inflation and preserve the tax’s public health impact. In Chile, for instance, inflation adjustments prevented the tobacco tax’s real value from declining by 27 percent between 2018 and 2024. By following this model, Brazil could ensure that cigarettes, alcohol, and sugary drinks do not become more affordable over time, supporting longer-term public health goals.

Tackling Illicit Trade to Strengthen Tax Policy

A major challenge for Brazil’s health tax reform is illicit trade, especially in tobacco products, where nearly 39 percent of the market is untaxed. Illicit trade undermines the health and revenue goals of excise taxes, allowing consumers access to cheaper products that escape tax enforcement. The World Bank’s experience in other countries shows that illicit trade often stems from non-price factors, such as weak regulatory frameworks, insufficient enforcement, and the social acceptance of illegal markets. Effective regulation in Brazil should therefore involve enhanced tax administration, better enforcement, and collaboration with neighboring countries to track, trace, and deter smuggling. Stronger governance could significantly reduce the presence of untaxed products and protect the benefits of the new tax policies.

Health Gains and Fiscal Impact Await

Implementing well-designed health taxes on tobacco, alcohol, and sugary drinks could deliver remarkable benefits for Brazil, improving public health and increasing revenue. Studies show that sharp price increases through substantial rate hikes have a more pronounced effect on reducing consumption than gradual, smaller increases, which often go unnoticed by consumers. The World Bank advises that high initial rates, supported by regular indexation, discourage consumption better, whereas smaller, infrequent increases risk having little impact. Experiences from other countries indicate that mixed systems with a strong specific component are particularly effective in keeping prices higher and reducing product affordability, thereby reducing consumption.

In summary, Brazil’s tax reform is poised to set a new standard in Latin America, showing how well-structured health taxes can address both fiscal and public health challenges. The World Bank’s guidance on leveraging specific taxes, ensuring automatic inflation adjustments, and tackling illicit trade provides a comprehensive strategy to maximize the reform’s benefits, potentially creating a lasting impact on the health and economy of Brazil.