Evidence of meeting #19 for Health in the 39th Parliament, 1st session. (The original version is on Parliament’s site, as are the minutes.) The winning word was foods.
A recording is available from Parliament.
Conservative
The Chair Conservative Rob Merrifield
We'll call this meeting to order.
I believe this is our fifth meeting on childhood obesity. We have a strong panel in front of us, and we are looking forward to hearing the presentations of the witnesses to the committee on this important issue.
Before we get into introducing our panel and hearing from them, I'd like to make note of a group here from the country of Tanzania. If you would stand, I want to welcome you to Canada and the committee.
Conservative
The Chair Conservative Rob Merrifield
Thank you for joining us. I know you have to be away sometime in the middle of this, and that's fine. But we hope we'll be functional, so we will give you an opportunity to see how the Canadian Parliament works.
Now we turn to our first group, from the Department of Finance. We have Geoff Trueman, Katherine Rechico, and Alex Lessard.
Katherine Rechico Special Advisor, Personal Income Tax Division, Tax Policy Branch, Department of Finance
Good afternoon. We are very pleased to have this opportunity to appear before the House of Commons Standing Committee on Health representing the tax policy branch of the Department of Finance.
The role of the tax policy branch is to develop and evaluate federal taxation policies and legislation in the areas of personal income tax, business income tax, and sales and excise taxes. We understand that the committee is currently studying childhood obesity and that witnesses appearing later this afternoon will discuss a range of issues pertaining to the potential use of economic instruments to affect health and lifestyle choices, including diet and physical activity.
Our appearance before the committee will allow us to provide some information on taxation initiatives that have been taken to date, and also to provide a sense of the process by which any future initiatives might be considered or evaluated. We will be pleased to answer any questions from the committee at the end of our presentation, and we look forward to remaining in the audience to hear the ideas that are advanced by other witnesses scheduled to appear later this afternoon.
Our presentation this afternoon will cover two main items. First, with respect to specific taxation-based initiatives designed to address the issues of health and fitness of Canadians, we will provide an overview of and update on the children's fitness tax credit, which was proposed by the government in budget 2006, as well as provide a brief overview of other credits related to medical expenses in the personal income tax system. Secondly, on a more general note, we will provide an overview of the analytical framework and the key parameters that are used to evaluate and consider diverse proposals for taxation-based economic instruments.
Turning to the children's fitness tax credit, budget 2006 proposed a new measure to promote physical fitness among children. Studies show that regular fitness activity has a positive effect on children, including balanced growth and development and improved physical fitness. At the same time, the escalating cost of organized sports makes it difficult for many families to afford these activities. Accordingly, budget 2006 proposed a tax credit of up to $500 on eligible fees for programs of physical activity for each child under the age of 16. This credit will begin in taxation year of 2007.
At the time of budget 2006, a working definition of an eligible program of physical activity was established. It is as follows: “An ongoing program suitable for children in which substantially all of the activities undertaken include a significant amount of physical activity that contributes to one or more of cardio-respiratory endurance, muscular strength, muscular endurance, flexibility and balance.”
On July 31, 2006, the government appointed a small panel of experts in health and physical fitness to provide advice on the definition of programs of physical activity that should qualify for the credit. The definition needs to reflect the broad range of activities that are engaged in by children in the pursuit of physical fitness, while at the same time ensuring that eligible programs meaningfully contribute to children's fitness. In particular, the expert panel is considering whether an eligible program should necessarily include an element of instruction or supervision and whether any changes in the eligibility criteria are required to accommodate programs for children with disabilities. The expert panel will also need to ensure that the definition is clear and sufficiently comprehensive to provide guidance to the Canada Revenue Agency in determining the eligibility of specific programs and activities.
The panel consulted extensively throughout Canada with national, provincial, and grassroots organizations and has received considerable feedback. The panel is currently reviewing submissions and is expected to report back to the Minister of Finance later this month in order to have the credit implemented on January 1, 2007.
More generally, the personal income tax system has a number of credits that reflect a person's reduced ability to pay tax because they have incurred non-discretionary expenses. The purpose of these credits is not to create disincentives or incentives. Although no credits are specially targeted to reduce child obesity in this context, there are certain credits that could be claimed under particular circumstances on behalf of obese children.
For example, the medical expense tax credit recognizes the effect of above-average, specific, itemizable medical and disability expenses on an individual's ability to pay income tax. Eligibility for the METC is limited to expenses for prescribed items that are designed for and used exclusively by persons with a medical condition. Certain expenses may be claimed on behalf of obese children under certain circumstances.
In the same way, the disability tax credit improves tax fairness by providing tax relief to individuals who, due to the effect of one or more severe and prolonged impairments in mental or physical function, are markedly restricted in their ability to perform a basic activity of daily living or would be markedly restricted were it not for extensive therapy to sustain a vital function. This needs to be certified by a qualified medical practitioner. Similar to the METC, the DTC may be claimed on behalf of obese children, but we would expect that to be under very limited circumstances.
That, in a nutshell, provides an overview of one specific tax measure, as well as a broad description of how health-related costs are treated in the personal income tax system. I hope it also highlighted some of the considerations that shape policy and legislation, especially in regard to the fitness tax credit. There are certainly many more ideas that have been advanced around the globe concerning diet, health, and activity.
What we would like to do now is provide the committee with an overview of the framework and some of the key factors that we would use within the Department of Finance to evaluate taxation-based economic instruments.
In order to do so, I will turn the microphone over to my colleague Alex Lessard.
Alex Lessard Tax Policy Officer, Sales Tax Division, Tax Policy Branch, Department of Finance
Good afternoon.
It goes without saying that using the tax system to promote public policy objectives must be done judiciously. For a particular objective, using the tax system must be weighed against other strategic instruments such as regulations, expenditure programs or subsidies.
The principles of sound public policy require that the government have a series of instruments, including tax measures, of course, that will contribute as far as possible to achieving these objectives at the lowest possible cost for the government and for the economy and in the fairest and simplest way possible. In addition, these initiatives must be undertaken in the context of a commitment toward a balanced budget and sound financial management.
The proposed new tax measures can be evaluated using the following criteria—and I hope you have all received a copy of the chart I distributed—: efficiency of achievement in the public policy goal, the legal and financial impacts, economic efficiency, fairness and simplicity. I would also mention that these proposals were evaluated individually, and that the weight given to each criterion may vary depending on the measure involved.
The first criterion, efficiency of achieving public policy goal, may be broken down into four aspects: targeting, consumer and producer responsiveness, experience in other jurisdictions and results measurement. There are two important factors involved in the first aspect, targeting. First, we must maximize the correlation between the products affected by the tax measure and the public policy objective. Second, we must choose the tax instrument to be used correctly. By tax instrument, I mean the individual income tax system, the sales tax, the excise tax, and so on.
In the case of the second factor, consumer and producer responsiveness, we have to determine whether the latter will change their behaviour as a result of a new tax measure, such as a tax, and to what extent they will do so.
A third very important factor is the experience in other jurisdictions, either provinces or countries. We have to analyze the context that existed when they were implemented and the results achieved compared to the objectives that had been set.
Results measurement is the fourth criterion, and it is very important to properly assess the government's ability to measure the results of a tax measure. That makes it easier to re-evaluate the measure and to take the necessary action.
The second main criterion is the legal and fiscal impact. The measures may be incentives or disincentives. Each of these measures will likely have an impact on government revenues. Of course, an incentive, such as a tax credit, will probably reduce the government's revenues, while a disincentive, such as a tax, should increase them. In both cases, in the context of a balanced budget, these increases or decreases in revenue could have an impact on other taxes or on government spending.
The second factor under this heading is indirect fiscal impact. In this context, it is important to evaluate the impact of a tax proposal on the income tax base, the GST base or the HST base. Any change of this type could have a financial impact on the provinces.
The third aspect is the precedents. It is important to bear in mind that some incentives targeting a particular industry could give rise to similar demands from other industries and, thereby, increase pressure on the government's fiscal framework.
Finally, it is essential to ensure that any tax measure put forward does not run counter to any agreements between Canada and other jurisdictions or to the Constitution, which of course includes the Canadian Charter of Rights and Freedoms.
I come now to the criterion of economic efficiency. In addition to an overall cost-benefit analysis, we will try to check the few criteria regarding the tax measure. For example, will it promote more productive use of resources or stimulate innovation? Or will the measure rather have some perverse effects such as creating a black market? Another possible perverse effect would be that by increasing a tax too much, the measure could become prohibitive and reduce revenues rather than increasing them. Consideration must of course be given to the impact of any measure of this type on competitiveness at the provincial or international level.
The administration costs of a measure are an aspect that should not be neglected. This is an integral part of any public policy, be it an expenditure program or a tax measure.
Finally, the adjustment costs change the behaviour of tax measures, and measures lead to new adjustments on the market, and in turn, result in social or economic costs. For example, if we put a tax on a particular product, it is possible that companies will experience a drop in sales and decide to close down some plants. That could lead to job losses, and so on.
It is important to estimate the fairness of the tax measures because they could result in a disproportionate burden or benefit for certain groups. This could be true of certain regions or industries as well.
The simplicity of the design, administration and compliance of a tax measure is the final criterion. A tax measure is more efficient if it is relatively simple to implement and easy to understand by the taxpayers it affects. However, if the targeting of the measure or adjustments to it over time require complex rules, this advantage may disappear. In such a case, there is a danger that the tax system may become too complicated with respect to the design, the administration or the compliance with the tax measures.
In conclusion, I would just like to say that the government has a range of strategic instruments it can use to meet its public policy objectives. They include economic instruments, and, of course, tax instruments such as consumption taxes or tax credits.
Any proposed tax measure may be evaluated using the five basic criteria we have just outlined. Whatever the objective, the government must take into account all of the strategic instruments available and select the solutions that can provide the best results at the lowest cost and of course in the simplest and fairest way possible.
We are now ready to answer your questions.
Conservative
The Chair Conservative Rob Merrifield
Thank you.
Before we ask you to answer some questions, we'll ask you to retreat from the table and then return when we get into the question and answer period. It is really difficult with our time constraints to open up a round of questioning when we don't have the other presenters.
We'll ask our other presenters to come to the table: from the Centre for Science in the Public Interest, Bill Jeffery, national coordinator; from the University of Alberta, Dr. Sean Cash, assistant professor, Department of Rural Economics; and from Nova Scotia Agricultural College, Dr. J. Stephen Clark, associate professor of economics, Department of Business and Social Sciences.
We'll start with the Centre for Science in the Public Interest. Bill Jeffery, the floor is yours for ten minutes.
Bill Jeffery National Coordinator, Centre for Science in the Public Interest
Thank you, Mr. Chair. I appreciate the invitation to appear before the committee.
The Centre for Science in the Public Interest is a non-profit consumer health advocacy organization, specializing in nutrition issues, with offices in Ottawa and Washington, D.C. Our health advocacy is funded by over 100,000 subscribers to the Canadian edition of our monthly Nutrition Action Healthletter, which is read by more than 1,000 residents in most federal ridings. CSPI does not accept funding from industry or government, and Nutrition Action does not carry advertisement.
Diet-related disease is an urgent public health problem in this country. Most Canadians consume too many calories and too much saturated and trans fat, salt, refined flour, and added sugars, and not enough vegetables, fruit, whole grains, and legumes. Every year, diet-related cases of cardiovascular disease, diabetes, and certain forms of cancer prematurely end the lives of tens of thousands of Canadians and rob the Canadian economy of $6.6 billion, according to Health Canada, due to health care costs and lost productivity. These numbers describe real avoidable deaths and financial losses, both on a grand scale, yet the Government of Canada has done little to help reduce them.
Health Canada could use its nutrition expertise to help provincial education authorities develop school curricula for health, nutrition, and cooking courses, and nutrition criteria for school food service offerings. The federal government could also use its spending power to become the last OECD country to publicly subsidize a national school meal program, so that every child, regardless of means or region, is fed a nutritious meal suitable for optimal health and learning. By comparison, in 2005, the United States federal government spent the equivalent of $11 billion Canadian in subsidizing school meals.
Parliament should revisit advertising rules in the Food and Drugs Act and the Competition Act to ensure that they adequately protect children against a barrage of commercial advertisements promoting nutrient-poor foods and products that promote sedentary living, such as video games and television programs. Parliament's prompt intervention is preferable to years of test case litigation that might determine that all ads directed at children are inherently misleading and therefore illegal, because of children's unique susceptibility to manipulation.
Rather than resting on the laurels of mandatory nutrition labelling for most prepackaged foods, as have some of the government witnesses, we hope the government, members of this committee, and their caucus colleagues will support the expansion of existing nutritional labelling rules when Bill C-283 comes to a vote in the House on November 8.
Current regulations are predicted to reduce the burden of diet-related disease by approximately 4%, by producing $5 billion in cumulative economic benefits in the coming two decades at a non-recurring cost of about one-fifth of one percent of food sales for a single year, during the phase-in period—a minimum of 2,000% return on investment.
Children and adults generally eat the same foods manufactured by the same companies and restaurants, and live in the same physical and social environments. As population health experts says, they swim in the same stream. So restricting remedies for childhood obesity to settings such as schools, where children can be targeted exclusively, would produce only partial success.
Many of our recommendations are echoed in the World Health Organization and the pan-Canadian healthy living strategies. But the federal government has made little progress in implementing the policies or funding programs recommended in these two strategies, despite having endorsed both.
Health Canada's scientific clout could also be used to urge food companies to reduce the amount of salt added to processed and restaurant foods, which are the sources of three-quarters of the sodium in our diet—as the United Kingdom and France are now doing, and as the World Health Organization is actively encouraging at a technical meeting in Paris this week, which starts today.
Extrapolating from a U.S. study, a 50% drop in the sodium intake in Canada would cut heart attack and stroke deaths by more than 15,000 annually. Ridding the food supply of trans fat could avert hundreds and possibly thousands more premature deaths.
Recommendations to reform food taxes have been advanced by expert reports published by--and I won't list them all--the Canadian Institute for Health Information; the World Health Organization; the Chief Medical Officer of Health for Ontario; and the U.S.'s Institute of Medicine, with two reports. Notably, the federal-provincial-territorial The Integrated Pan-Canadian Healthy Living Strategy, which was supported by ministers of health of all political stripes, recommends that Canadian governments “undertake [a] feasibility study on fiscal measures to encourage healthy living (i.e., tax credits/penalties, subsidies, price supports, etc.)”.
Our recommendations involve both taxation and tax relief, depending on the nutrient profiles of food. The federal government now collects GST from about one-third of all food expenditures, drawing about $2 billion in tax revenue annually. At present, the Excise Tax Act appears to partly acknowledge the importance of nutrition by imposing taxes on soft drinks, candy, and snack food, but promotes unhealthy diets by taxing low-fat milk and vegetable dishes when sold in restaurants, as well as club soda, salads, vegetable fruit trays, and small bottles of water when sold in retail stores.
Meanwhile, many unhealthful foods sold in retail stores are tax-free, such as sugary breakfast cereals, trans-fat-laden shortening, high-saturated-fat cheese, chicken wings, coffee, cream, and even unhealthy luxury foods such as salty caviar.
The federal government should consider whether economic disincentives to choose healthy foods and tax relief on health-eroding foods comport with this or any government's commitment to reduce the burden of chronic disease. Quite frankly, tax incentives should be smart, not dumb. They should help prevent disease and promote efficiency, not prevent efficiency and promote disease.
A British epidemiologist estimated, in a study published in the British Medical Journal, that applying his country's 17.5% value-added tax to a few categories of food that are high in saturated fat would reduce saturated fat intake enough to prevent between 1,800 and 2,500 heart attack deaths per year in the United Kingdom. Researchers examining conditions in the United States, Denmark, Tanzania—coincidentally—China, and Norway have lent credence to the potential of tax price incentives as a means to help achieve population-level dietary change. Even researchers critical of food tax reform predicted similar effects on dietary fat intake, but failed to appreciate the huge numbers of lives that could be saved by such dietary changes.
Like the successful Canadian experience with tobacco taxes, sensibly designed food tax incentives could help internalize the cost of food choices and promote nutritious eating. Moreover, the effects of adding GST to nutrient-poor foods could be amplified by requiring manufacturers of taxable foods to indicate on the label that the product is subject to GST. This would send both information and price signals to consumers and create incentives for manufacturers to reformulate foods by, for instance, including less added sugar and salt, more whole grains, fruits, and vegetables, or replacing saturated fats with unsaturated fats.
The average Canadian now spends about $56 per year paying GST on food purchases. In 2006-07, the GST credit reimburses $354 to the average single individual earning $20,000 per year and $708 to a family of four with the same income. These rebates could be increased by a few dollars per person to offset further regressive effects, if any, of GST reform, or increased even more ambitiously to help reduce food insecurity.
In conclusion, plainly policy-makers can't turn the clocks back to a time before obesity rates began to rise. They must consider the causes of the causes of childhood obesity and other diet-related diseases and then focus on solutions that the best available evidence indicates will protect population health benefits.
Some food and media companies defend their behaviour by wagging fingers at poor parenting or overstating the capacity of children for sound judgment by embracing notions like “kid power”. These are efforts to shirk responsibility and excuses for doing nothing. In reality, dramatic national--indeed global--changes in sales tax policies, government dietary advice, food manufacturing and marketing practices, school curricula, and the unprecedented growth of sedentary media and computer technologies used for marketing, entertainment, and work have likely all contributed to eroding environments for children and adults. Governments should actively develop programs and policies to repair and prevent the adverse health and economic effects of these major societal transformations.
Thank you.
Conservative
The Chair Conservative Rob Merrifield
Thank you very much.
Now we'll move onto the University of Alberta. Dr. Sean Cash, the floor is yours.
Dr. Sean B. Cash Assistant Professor, Department of Rural Economy, University of Alberta
I would like to thank the members of the committee for providing me this opportunity to address you today.
I'm a health economist at the University of Alberta, and I'll be focusing my comments today on food price interventions, because that's my area of expertise, but I don't in any way mean to suggest that other forms of intervention shouldn't also be considered.
As you know, obesity and dietary-related diseases have come to be viewed as some of the greatest ever threats to public health in Canada. Obesity-related diseases are estimated to cost the Canadian health care system billions of dollars annually. A particularly disturbing trend is an observed increase in childhood obesity, as highlighted most recently in the findings just published by Statistics Canada from the Canadian Community Health Survey.
Both policy-makers and the general public have been discussing whether government interventions are warranted and, if so, what measures should be undertaken. Tax policy has been proposed as a possible instrument for reducing the incidence of obesity and dietary-related non-communicable diseases. This has become popularly known as a fat tax approach, and I'll use fat taxes to discuss taxes on a wide variety of food items.
Several versions of fat taxes have been proposed. The most commonly discussed approach is actually not a tax on fat content per se, but rather a tax on foods deemed to be nutritionally undesirable, particularly energy-dense nutrition-poor foods. Sweet and soft drinks, potato and corn chips, and certain categories of fast food have all been suggested as candidates for such taxes.
A related but more complicated suggestion is to tax large categories of food on the basis of the content of certain macro-nutrients for which we wish to reduce consumption. For example, one might impose a per-unit tax on saturated fat content of all foods available to Canadian consumers.
In any case, the primary goal is to reduce consumption of certain food items or macro-nutrients by increasing their price relative to other food. Furthermore, such taxes would also raise revenues that could then be used to fund other health promotion activities, such as exercise programs for children or nutritional information campaigns. Alternatively, fat tax revenues could be used to reduce other taxes elsewhere in the economy.
Researchers have just recently begun to investigate the possible effects of such taxes. Such work necessarily involves interdisciplinary challenges and relating fiscal policy to behavioural changes and further relating these changes in behaviour to effects on public health.
With these important caveats in mind, there are still certain themes that emerge. One is that small price changes are only likely to achieve small changes in behaviour, and as a result, small taxes will have minimal impact on obesity. Large price changes, such as doubling the price of sugary soft drinks, would have much more dramatic deterrent effects, but would also necessarily involve larger monetary impacts on consumers who still choose to consume these foods.
One interesting thing to note with regard to childhood obesity is that very little is actually known about how children respond to price differences, as they are often outside the scope of economic studies of food demand and often, for reasons of research ethics, are deliberately left out of such studies.
We also do not know much about how fat taxes may impose a stigma on certain food items. For example a 5¢-per-bottle tax on soft drinks may not, in itself, induce large changes in behaviour, whereas a tax that is accompanied with a scarlet letter on the packaging highlighting that the food item has been singled out for a fat tax may have a much greater deterrent effect.
Another likely outcome is that fat taxes, particularly ones that target broad categories of food, will be regressive in that they will have a larger relative impact on the real purchasing power of poorer Canadians, who spend a much larger percentage of their income on groceries. They would therefore be paying a relatively larger portion of their income on fat taxes. As the previous speaker noted, this could be corrected through increasing rebates on these taxes. However, that would be an additional intervention.
Furthermore, economic pressures may already be pushing lower-income Canadians to some of the same energy-dense nutrition-poor foods that one may wish to target with fat taxes. Hunger may trump nutrition for many families with limited ability to pay for food, and basic energy needs can be met much more cheaply by purchasing energy-dense foods. Taxes targeting these foods may increase the difficulties faced by our most vulnerable households. There is also some evidence that tax schemes targeting saturated fats or other macro-nutrients will similarly have disproportional impacts on less wealthy households. In particular, if revenues from such taxes are used to offset taxes on income or allow for exemptions of other goods from GST, the net effect could be a transfer from poorer households to richer ones.
Another issue to bear in mind is that while taxes can indeed discourage consumption of targeted products, the universe of food items that consumers may instead choose to purchase is quite large. This is referred to as a targeting problem. A consumer who is discouraged from purchasing a sugary soft drink that has been subject to a large tax may instead switch to an item that is no more desirable from a nutritional point of view.
Taxes can only be implemented by clearly outlining in legislation, or in regulation, how and to what the tax is to apply. For example, a tax on carbonated beverages containing high-fructose corn syrup that doesn't apply to uncarbonated lemonade containing cane sugar may lead consumers to substitute one energy-dense, nutrition-poor food for another. If we agree that both the cola and the lemonade from the previous example should be subjected to the tax, but exclude beverages with the 10% real fruit juice content, producers will reformulate their products accordingly and consumers will follow their pocketbooks and buy those new products.
Whenever you draw a bright line, people will step over it to avoid the tax. The net effect may be that we redirect consumption while achieving negligible health benefits.
Macronutrient-based taxes may raise similar issues, as many affected food items may have both undesirable and desirable food properties. A tax discouraging pre-teens from consuming large amounts of ice cream containing high saturated fat may have appeal, but the same tax may also increase the price of the whole-milk products that most nutritionists encourage parents to buy for their toddlers. It would be difficult, if not impossible, to tax the same product differently for different uses.
Some studies have also suggested that macronutrient-based taxes may even have perverse nutritional effects. The next speaker may address this further in his comments.
An alternative approach to consider is the subsidization of food items of which we wish to encourage consumption, such as fresh fruit and vegetables. Such subsidies would benefit all consumers and may provide the greatest benefits to lower-income consumers. In contrast to my earlier comments regarding the difficulty of targeting a fat tax, we can be more certain that consumers will be encouraged to eat more of those foods that are the focus of what I would call thin subsidies.
I've been involved in work that suggested such subsidies could also further reduce disease-burning directly--that is, beyond the indirect impact through reductions and obesity--if they target food items known to aid in the prevention of diseases such as stroke, heart attack, or cancer. While such subsidies would necessarily involve outlays from government that eventually would cost taxpayers, it would also help the same consumers at the grocery store checkout counter and over time may also result in lower public expenditure on health care. However, this approach would still involve the difficult task of deciding what to subsidize and what not.
The members of this committee may also wish to consider those programs already in place that affect food prices in ways that may have undesirable influences on dietary choice. The previous speaker's testimony highlighted some of the tensions in the existing tax system. For example, in Canada we also have made extensive use of indirect and direct subsidies, administered pricing, and regulated marketing to support some areas of agricultural production. These affect prices, which in turn affect behaviour. Another example is that of increased trade with our neighbours. Increased trade in food products enhances consumer access to fresh fruit and vegetables, but also enhances their access to high-fructose corn syrup.
There is also a wide variety of non-food-related policies that may indirectly affect dietary choice. Since these programs were originally established in complete isolation from health policy, it's not at all surprising that the net effect on public health may be negative. In much the same way as policy-making processes are increasingly subjected to environmental impact assessment requirements, perhaps agricultural and food policies should be formulated with a health filter in place to avoid perverse dietary outcomes. Changing those programs that are currently having the most deleterious effects on public health should perhaps be considered before new taxes are imposed.
I feel strongly that there is a role for government in issues of childhood obesity and the promotion of dietary health. Yet as my comments today indicate, I do have some concerns regarding whether new taxes can be particularly effective in pursuing society's goals in these areas. The debate regarding fat taxes is a good one to have, however, particularly as it shines a spotlight on the extreme importance of food access and affordability on nutrition and obesity.
I thank you for inviting me here today and welcome any questions you may have later.
Conservative
The Chair Conservative Rob Merrifield
Thank you very much, Doctor.
Now we'll move to the Nova Scotia Agricultural College. Dr. Clark, the floor is yours.
Dr. J. Stephen Clark Associate Professor of Economics, Department of Business and Social Sciences, Nova Scotia Agricultural College
I thank the committee for inviting me here today. I've been working in agricultural economics for 30 years and no one has ever invited me to talk to them on anything I have ever done, so I welcome the opportunity. I know Sean hasn't been at this as long as I have, so he's very lucky it happened early in his career. I only hope you don't regret your decision.
Associate Professor of Economics, Department of Business and Social Sciences, Nova Scotia Agricultural College
I've been working on fat taxes now for about two years. I've been working on them with my colleagues in economic research at the U.S. Department of Agriculture. Of course, the U.S. has obesity issues as well, and they are basically the same as ours. There are obesity issues in the U.K., in Germany, and in particular, it's interesting that this committee is looking at childhood obesity, because that seems to be where the big concern is.
What I'd like to talk about today is the style of fat tax that we might think about imposing. If there is a call for fat taxes, basically we want to tax the food that is unhealthy so that will make us healthier. In other words, reduce the amount of unhealthy food we eat and, hopefully, reduce the obesity problem.
There are a couple of ways we might do it, and the previous two speakers have talked about that. We might actually tax the nutrient content of the food, based on what we believe are the unhealthy effects of that particular nutrient. That's what we call an excise tax, and that's one possibility. But that's not the one I'm going to talk about today and that's not the one I've actually been looking at, although I have some thoughts on that one as well, if you want to discuss it further.
The one I have looked at is basically the fat tax that taxes broad commodity groups because we believe they're unhealthy. For example, taxes on junk food or fast food or a food that's unhealthy are actually the kinds of taxes I look at.
You have to understand that if we tax a food group like that--for example, fast food--within that group there are all kinds of different foods, all of which have different fat content. So if we take that broad category and tax it at the same rate, what we're doing there is taxing the broad category by the same amount, whereas within that category there are several different levels of nutrients. There could be high fat or low fat within that group.
For example, if we're thinking about taxing cookies, if you go into the store and look, you'll see there are all kinds of different cookies, and it turns out that some of those cookies that have the lowest fat content could actually be the highest priced and they could be the highest-quality cookies from the point of view of the consumer. The low-quality cookies could actually be the high-fat-content cookies.
A colleague of mine once told me that he believed that putting fat into food was a cheap way to make it tasty. Once again, if you take the cookie as a tax example, you could think that perhaps the manufacturer will add a lot of fat to the cookie and then sell it at a very cheap price. If we take all cookies and we tax them, then what we're doing is taxing what we call the composite. We're not taxing the individual food group; we're taxing the composite. We're taking a rough swipe at taxing the cookies.
And if the high-priced, high-quality cookie is indeed the lowest-fat cookie, if you tax that, consumers will search for a way to avoid the tax. One thing consumers could easily do is lower the amount of tax they're paying by switching from the low-fat, high-quality cookie into the high-fat, low-quality cookie, because its price is less.
In fact, if you look at basic food groups--and I've spent a little bit of time looking around--it turns out that the lower-fat, healthier foods within a food group tend to be the highest priced. So it could easily be true that if you tax that whole composite, the consumers could switch from the low fat to the high fat. In other words, they could eat more of the unhealthy nutrient that we're trying to tax.
I'd like to talk about this switching among the composites, but it's also true that when consumers eat, they don't really eat a particular food group. They don't just sit down and eat cookies or ice cream or something like that. What they actually do is eat a meal. So if you start taxing one particular part of the meal, you could get effects going on in the other part of the meal.
For example, suppose we think of cookies as a dessert. Well, if a cookie is a dessert, and you tax the cookies, and the consumer doesn't want to have the cookies anymore, what they might do is just substitute ice cream. Ice cream might be higher in fat than cookies. So it's not just a case of the switch within the composite that could cause problems. There could be switching among food groups making up that meal that could actually make consumers eat more unhealthy food by switching to the ones that may actually have more fat or be more unhealthy.
So there are those two kinds of issues going on. There's the problem with the composite and there's the problem of switching among the food groups, so we might actually get a result that is kind of perverse. In other words, we might actually make people more obese by increasing the prices of those food groups.
I've spent a little bit of time looking at some numbers for the U.S., where I've gone through some of these things. What I'm finding when I look at the Americans is that basically, over time, the Americans have been shifting to lower-fat foods. They've just been doing it. So people are switching, as new information comes out, to the healthier foods.
Americans also consider the fat content of food to be a low-quality characteristic. When prices fall for American consumers, they switch to the lower-fat foods, and when prices rise, they switch to the higher-fat foods. Americans also consider the fat content of food to be an inferior. In other words, as their incomes rise, they will desire that characteristic, that fat in the food, to a lesser extent.
There's also a substantial shift between what I call quantity of food, measured in kilocalories, and quality of food, measured as fat content. Consumers seem to want to keep that thing constant, so if they increase one, they tend to lower the other. So they'll say to themselves, if they want to eat that fatty food, they won't eat as many kilocalories, and that's how they try to keep things relatively stable. Also, there are substantial shifts among the food groups in that meal that could cause very strange outcomes in terms of the amount of fat content people actually consume.
Those are what my results have shown. I would be happy to answer any questions you may have, and I thank the committee for inviting me.
Conservative
The Chair Conservative Rob Merrifield
Thank you very much.
Now we will move to the area of questioning. If the department would like to sit at the table, that would be fine.
We will start with Ms. Dhalla. You have 10 minutes. Are you splitting your time? No? So you have 10 minutes.
Liberal
Ruby Dhalla Liberal Brampton—Springdale, ON
I want to take this opportunity to thank all of you for your interesting presentations, and after hearing Mr. Clark's presentation, I don't think I'm going to be having any more of the cookies that are back there at every meeting. It was quite informative.
Liberal
Ruby Dhalla Liberal Brampton—Springdale, ON
We have one person on our committee who loves cookies--Mr. Batters, across the table.
Mr. Clark, you spoke about a variety of different tax incentives you could perhaps put into place, and I know you spoke about people either switching foods or switching the composition of foods. Where's your study at, and what was the end conclusion in terms of the types of incentives that would perhaps encourage individuals, and Canadians in particular, to eat healthier?
Associate Professor of Economics, Department of Business and Social Sciences, Nova Scotia Agricultural College
We found a very strange result, and that was that if you tax the low-fat, high-quality fruits and vegetables, you could actually increase the total amount of fat that people eat in the U.S. And if you tax the high-fat, low-quality things, you could actually decrease the amount of fat. That was because of the substitution among the food groups.
The problem with that study, I have to say, is that the numbers were very weak in terms of the way they were developed. So those are sort of preliminary results. The problem is that the data that are available don't line up as well as you might like, so I don't know how confident I am in that prediction.
Liberal
Ruby Dhalla Liberal Brampton—Springdale, ON
Based on your studies and research, what type of incentive would you suggest would work to promote healthier lifestyles and food choices?
Associate Professor of Economics, Department of Business and Social Sciences, Nova Scotia Agricultural College
Our conclusion is once again for Americans, but Americans are doing what you'd expect them to do. As their incomes go up, they eat less fat. Also, they do consider low-fat foods to be high in quality. So as new information comes out, they do try to switch.
What we recommend is that basic welfare programs would probably be the best thing to do. Encouraging income support programs and those kinds of things would be a good idea.
Now, sort of through the back door, we come at it by saying, well, if it's not quantity and quality, then what is it? It could be exercise that's really causing the issue. So we also say that if we don't find it with the quantity of food or the quality of food that people are eating, then perhaps we should really target that exercise thing.
Liberal
Ruby Dhalla Liberal Brampton—Springdale, ON
This is to our witnesses who came from the Department of Finance.
Upon doing some research on the fitness tax credit that the new government implemented, I believe there was a working group put together by the Minister of Finance that's supposed to be reporting tomorrow and providing advice on the types of physical activity that could qualify for this tax credit. Could you shed some light in terms of what the findings have been or what the feedback was from the individuals who met in regard to this tax credit?
Special Advisor, Personal Income Tax Division, Tax Policy Branch, Department of Finance
I'm afraid I'm not able to provide much feedback. It is an independent panel, and they've been meeting across the country. We are expecting their final report soon, but I'm afraid you'll have to wait for the report to hear their conclusions. I'm just not able, right now, to summarize it in any way that would be meaningful for this committee.
Liberal
Ruby Dhalla Liberal Brampton—Springdale, ON
Building upon what Mr. Clark said, in terms of your research, would you or Mr. Lessard be promoting tax incentives to encourage Canadians to have healthy foods, or would you perhaps be encouraging physical activity?
Special Advisor, Personal Income Tax Division, Tax Policy Branch, Department of Finance
As mentioned, we do have the child fitness tax credit.
Following up on what Dr. Clark said, it's important to note too--and I didn't include this in my presentation--that the federal government does provide a child tax benefit that provides low- and modest-income families a fair degree of income support as a refundable tax credit. It provides up to, I think, around $3,400 per family for families with incomes less than around $27,000 per year. So that's substantial income support that would help towards healthier food choices.
I'll let Alex or Geoff speak to the other half of your question, if they want to.
Geoff Trueman Chief, Sales Tax Division, Tax Policy Branch, Department of Finance
I think it's important to remember, before we would consider any taxation instruments, that the taxation system itself is a very powerful tool. And what we've heard--certainly some of the other witnesses have referred to this--is that one of the key messages we need to communicate is on food quality and making healthy food choices. I think those are very important issues to address before we start to look at taxation measures, which could have a very significant fiscal impact on individuals purchasing food in Canada. We'd be very concerned about the distribution of those impacts as well.
