Key lessons from Costa Rica’s attempt to use taxation to boost healthy eating

In 2023, Costa Rica became the first country in the world to link the rates of value-added tax (VAT) on food with nutritional goals. This reform revised the basic tax basket – the list of items taxed at the lowest rate of VAT  – and was intended, in the government’s words, to ‘guarantee a balanced diet’.

But it may have misfired. In a recent study, using the latest two waves of the national household budget survey linked with nutritional composition data, I’ve found the reform to be associated with the purchase of more calories, sugar, and saturated fat. What’s gone wrong?

Impacts of the reform

Costa Rica has some of the highest rates of overweightness and obesity in Central America, especially among children. At the same time, healthy diets are the second most expensive in Latin America.

Discounted food items were pre-selected according to the purchasing patterns of the poorest 30 per cent of households. While previously not involved in this process, the reform mandated that the Ministry of Health assess the nutritional suitability of the identified list. Items included in the basic tax basket were ultimately selected in agreement between the economy, finance, and health ministries.

But the curation of the reformed list was opaque, with an apparent lack of nutritional criteria. While the list has more healthy staples and approximately double the number of fruits and vegetables under the lower VAT rate of one per cent, unhealthy and highly processed foods such as ketchup, mayonnaise, sweet biscuits and more have also crept in, avoiding the higher VAT rate of 13 per cent. Overall, 26 highly processed savoury food items – representing 68 per cent of the total quantity consumed in that food group – are now effectively discounted, up from 15 items before the reform.

As a result, the reform is associated with the purchase of 0.7 per cent more calories, 0.4 per cent more sugar, and 1.2 per cent more saturated fat, and no overall improvement in the nutritional content of Costa Rican diets.

What could be done differently?

By simulating alternative policy designs, I find that VAT discounts applied according to clear nutritional criteria could instead reduce the purchase of sodium (-1.0 per cent), saturated fat (-0.6 per cent), and calories (-0.2 per cent), with greater benefits for lower-income households, without increasing household spending.

The most effective approach involves differentiating VAT rates according to a nutrient profile model – in this study, I considered the model established by the Pan American Health Organisation (the World Health Organization Regional Office for the Americas). These standards provide evidence-based nutrient content limits to identify healthier and less healthy foods, set evidence-based nutrient content thresholds to identify healthier and less healthy foods. They are increasingly used in food policy, such as regulating the marketing of foods to children in the UK.

The research also reveals that while lower-income households are more sensitive to price changes, the demand for highly processed foods is inelastic in Costa Rica - it doesn’t fall away to the same extent as prices increase. For instance, a one per cent price rise results in a less than one per cent drop in consumption. This means prices would have to rise more steeply to discourage Costa Ricans from unhealthy foods.

Costa Rica now has an opening to amend the reform – by law, the government is obliged to review the list of discounted items in the event of a new household expenditure survey, and one took place in 2024 with results due later this year. This presents a timely opportunity to revise the basic tax basket according to evidence-based quantitative nutritional criteria in order to encourage better diets.

Policy implications

Taxation has already emerged as one of the most powerful tools to improve public health. Governments have applied it to harmful products such as tobacco and alcohol for decades, and more recently to sugary drinks – more than half the world’s population is now covered by a tax on sugary drinks. But foods high in fat, salt, or sugar represent a larger tax base – any tax targeting these items without lowering the tax burden on healthier alternatives may raise equity concerns.

Countries with existing varying VAT or sales tax rates on foods have an opportunity to align these rates with nutritional objectives to make healthy foods more affordable while discouraging consumption of junk foods. However, taxing foods based on nutritional content may incur tax administration and compliance costs. There are also largely unknown implications for tax revenue efficiency.

In addition to this work in Costa Rica, researchers at the Centre for Health Economics & Policy Innovation have previously systematised the evidence around taxes for healthy eating. They are currently evaluating options for India and the UK to reform existing differentiated VAT rates to promote healthier diets using an in-house microsimulation tool, Health-GPS, to simulate future health and economic outcomes.

Now, all eyes are on Colombia, where lawmakers have recently introduced a tax on ultra-processed foods high in salt, sugar, and saturated fat, albeit with some exceptions. But taxation is only part of the solution. As is underway in Colombia, a combination of tax increases and clear label warnings on unhealthy foods, as identified using nutrient profiling, could help further shift the dial towards healthier choices, with lasting impacts on public health.