Political economy analysis of health taxes (tobacco, alcohol drink and sugar-sweteened beverage): qualitative study of three provinces in Indonesia

Structural diagnosis

Structural diagnosis concerns the structural factors that shapes the stakeholders’ behaviour.45 We identified two subthemes under the domain of the structural diagnosis in our PEA, that is, social context and institutional arrangement.

Social context

The social context influences health systems, and our case selection focuses on high consumption levels for each commodity in each province to understand the underlying factors influencing consumption and inform necessary policy interventions. The study has identified three recurring keywords or categories. First, cultural factors emerged as a significant determinant. Our FGDs with consumers and NGOs/experts revealed that high consumption rates are predominantly influenced by cultural factors, in addition to price-related factors. Remarkably, this pattern holds true across all provinces, despite variations in the specific commodity category. For example, in Lampung, tobacco consumption is deeply ingrained in local traditions as ‘Tobacco is a cultural item in Lampung during wedding ceremonies’ (NGOs 1, Lampung). This also applies to alcoholic beverages where alcohol consumption is common during celebrations, ceremonies, or religious activities:

Most Balinese people have arak (distilled spirit, traditional alcoholic drinks commonly found in Bali) at home for ceremonies, and there are numerous traditional alcoholic beverage producers in Bali. (NGOs 1, Bali)

Finally, in DI Yogyakarta, like other provinces, the consumption of sweetened foods and beverages appears to be commonplace due to the inclusion of sugary ingredients in many traditional food and beverage items. All three products are easily accessible at nearby stores and come at a affordable price, starting as low as IDR 500 (=US$0.03):

A sachet beverage can be as cheap as Rp 500 per pack, relatively inexpensive compared to daily expenses. (Consumer 1, DI Yogyakarta)

A second aspect of the social context is consumer awareness. Our findings indicate that there may be varying levels of consumer awareness regarding regulated and unregulated commodities. In the case of regulated items such as tobacco and alcoholic beverages, despite high consumption rates, consumers are generally aware of the harm associated with these products, although many remain unaware of the specific purpose of taxing them. Conversely, in the case of SSBs, which are still unregulated, some consumers lack awareness of the long-term disadvantages of SSB consumption. As a common case in Asia, this is especially true for certain types of SSBs marketed as ‘healthy’, such as dairy products or probiotic drinks, which mislead consumers into believing in their health benefits while remaining unaware of the sugar content:

In my house, we usually stock up ready-to-drink tea and coffee and consume them up to three times a week. For probiotic drinks, it can be as much as three times a day (Consumer 2, DI Yogyakarta)

Consumers argued that due to current packaging, it is difficult to easily understand the nutritional content. Moreover, as there is no age limit for SSBs consumption, unlike tobacco and alcoholic beverages, parents make consumption decisions for children in their households, contributing to a relatively high SSBs consumption rate among individuals aged three and above. This common misconception among parents, exacerbates SSBs consumption as it can begin at an early age and lead to developing unhealthy dietary habits. Additionally, in the case of SSBs, advertising and packaging are recognised as two significant factors driving their purchase:

The packaging is attractive, leading to curiosity. As in case for probiotic drinks, [I usually consume] for health (Consumer 3, DI Yogyakarta)

The third aspect is interlinked with the second factor in that consumer awareness shapes the social perception of a commodity Regulated products like tobacco and alcohol are negatively viewed, leading to a stronger desire to quit or reduce consumption. In contrast, SSBs, which have never been marketed negatively, are still seen as relatively normal and harmless commodities, making health taxes implementation more challenging for SSBs compared with tobacco and alcoholic beverages.

Institutional arrangement

The discussion focuses on the institutional arrangement of governmental and non-governmental institutions, their power dynamics, and shared understanding in adopting national government policy, identifying two categories: ideology on health tax objectives and regulation and programmes.

First, the ideological perspective on the health tax objectives focuses on shared policy objectives among institutions, with most agreeing that fiscal measures like health taxes are needed for consumption control, especially among minors and lower-income individuals. Nevertheless, some institutions with a vested interest in industry and trade protection expressed reservations about the concept of health taxes, particularly in the case of alcoholic beverages and SSBs, due to their potential disadvantages to local businesses operating at a micro-to-small scale. This concern is particularly relevant in the case of alcoholic beverages and SSBs, given that two provinces also host local businesses engaged in the production of these commodities:

The sugary food and beverage industry is among the most popular in DI Yogyakarta. When Small and Microenterprises (SMEs) are asked to change their products, they will clearly refuse. Therefore, consumers are encouraged to control their intake. (Dinkes, DI Yogyakarta)

The second aspect of the institutional arrangement pertains to regulations and programmes. Subnational level institutions argued that the national government has the authority to implement fiscal measures to control NCDs, with subnational governments focusing on non-fiscal measures, such as tobacco taxes. This is particularly evident in the implementation of tobacco taxes, where the national government clearly defines the non-fiscal measures to be adopted by subnational governments in accordance with Law No. 17/2023 on Health.49 In tobacco and alcoholic beverage cases, these measures include smoke-free area (specific for tobacco) and limit or ban advertising.

In the case of alcoholic beverages, although advertisements are more prominently visible in tourism areas, the sale of arak by micro enterprises remains prevalent. To address the potential impact of arak production, the Governor of Bali issued Governor Regulation No. 1/2020 on the Management of Balinese Fermented and/or Distilled Beverages.50 However, the orientation of this regulation is towards industry development, rather than protecting minors from alcohol consumption:

There is Governor Regulation No. 1 of 2020, which aims to be a solution for marginalized Balinese alcoholic beverages [arak]. Many people in Bali used to consume imported beverages. Meanwhile, in Bali, we have our own distinctive Balinese alcoholic beverages, but due to regulations, they seem to be illegal, causing traditional drinks to be undermined. [As a result] they are consumed less by our local community, which is unfair. Balinese beverages, distinct to Bali, have become illegal, while imported ones are considered legal. (DinkopUKM, Bali)

In the case of tobacco, even though Lampung has already established local regulations for Smoke-Free Areas (Kawasan Tanpa Rokok/KTR), tobacco advertisements can still be prominently observed along the main roads. This is compounded by the fact that microenterprises continue to sell tobacco to minors. Furthermore, the implementation of KTR itself remains notably weak:

Many people continue to smoke in places where KTR have been designated. A significant portion of the population remains unaware of the KTR policy, and there are still people who smoke in hospital/health center areas. (NGOs 1, Lampung)

Regarding SSBs, while the fiscal measure has not yet been implemented, the non-fiscal measures that the subnational government can take have not been clearly outlined. The initiative to raise issues related to limiting SSB consumption primarily came from public health government officials or NGOs/experts responsible for public health. Even in the governmental institutions responsible for the education sector or women and child empowerment, these initiatives have not been specifically adopted:

Educational outreach to schools, especially in high schools and vocational schools, regarding health (the dangers of NCDs) has not specifically addressed SSBs. (Disdik, DI Yogyakarta)

Agency diagnosis

Agency diagnosis outlines power, incentives and behaviour.43 These three aspects are closely related to the stakeholders or actors who shape policy implementation. In our case, we are interested in discussing the main stakeholder’s power surrounding the implementation of health taxes at the subnational level, as well as the factors influencing their behaviour (ie, motives) and their interactions. While subnational governments do not have a role in tax collection itself, they play a strategic role in tax allocation and in assisting national government agencies in their areas (eg, the Customs and Excise Office or Kantor Perwakilan Bea dan Cukai/KPBC). We have identified two main aspects of agency diagnosis in our case, namely stakeholders and incentives. See figure 2. for a summary of the stakeholders, their decision-making power and their motives that we have determined from our analysis.

Figure 2

Key actors relationship in supporting health tax implementation at subnational level in Indonesia. Bappeda, Badan Perencanaan Pembangunan Daerah; BPKAD, Badan Perencanaan Keuangan dan Anggaran Daerah; Dinkes, Dinas Kesehatan; Disdik, Dinas Pendidikan; DinkopUKM, Dinas Koperasi dan UMKM; DP3A, Dinas Pemberdayaan Perempuan dan Perlindungan Anak; DPRD, Dewan Perwakilan Rakyat Daerah; Disperindag, Dinas Perdagangan dan Perindustrian; Setda, Sekretariat Daerah.

Stakeholders

This subtheme identifies key stakeholders in the implementation of subnational health taxes, their roles and their interactions (see figure 2). Two topics have been derived from this subtheme, that is, key actors at the subnational level and the power and relationships between actors at the subnational level.

The first aspect comprises actors responsible for decision-making at the subnational level. Based on our FGD findings, we have identified three categories (see figure 2, the colour of each institution differs based on their roles) of actors at the subnational level who can influence the adoption of health tax policies. While they may not be exactly the same across all provinces, they typically share similar sets of institutions/agencies. The first category (yellow coloured) includes actors responsible for strategic policy development and priority setting. At the provincial level, this includes the governor, the provincial regional legislative council (Dewan Perwakilan Rakyat Daerah/DPRD), the regional secretariat (Sekretariat Daerah/Setda), the regional agency of development planning (Badan Perencanaan Pembangunan Daerah/Bappeda) and the regional agency of finance and budgeting (Badan Perencanaan Keuangan dan Anggaran Daerah/BPKAD).

The second category comprises actors concerned with human capital development (orange coloured), including the regional department of health (Dinas Kesehatan/Dinkes), the department of education (Dinas Pendidikan/Disdik) and the department of child protection and women empowerment (Dinas Pemberdayaan Perempuan dan Perlindungan Anak/DP3A). Finally, the third category comprises actors in the economic sector (purple coloured), including the regional department of trade and industry (Dinas Perdagangan dan Perindustrian/Disperindag) and the department for cooperative and micro, small and medium enterprises (Dinas Koperasi dan UMKM/DinkopUKM). In addition to these subnational policy makers, there are actors without decision-making roles who interact with them: the local agency of the Customs and Excise Office—the representative of the MoF in each region—assumes the responsibility for revenue collection and supervision at the local level, and the local agency of the Food and Drug Authority (Badan Pengawas Obat dan Makanan/BPOM), which exercises authority over nutritional value and safety in consumed products.

The second aspect is the power and relationships between the identified stakeholders. In this aspect, we identified four categories (see figure 2). The four categories ranked from highest position in the strategic decision-making include the policy agenda and priority setting, policy coordination and planning, policy budgeting, and policy implementation, respectively.

The first category of actors holds higher positions in terms of regional decision-making compared with the other two categories. This is because they have the authority to set policy targets and priorities, which are then translated into policy planning and budget allocation by Bappeda in collaboration with BPKAD. Additionally, Setda and Bappeda coordinate and supervise intersectoral policy implementation. Actors in the human capital development sector and the economic sector mostly implement policies but can propose programmes for prioritisation before the budgeting process. They must provide evidence for why certain programmes should be prioritised during the annual budgeting and planning process. Finally, the local KPBC does not hold a vertical position with other policymakers. However, in terms of implementing its supervisory role (ie, eradicating illicit trade), it can collaborate with the subnational government.

Motives

This subtheme pertains to the factors that shape the behaviour of stakeholders. We have identified three main keywords that emerged from our analysis in this domain: the actors’ orientation/position towards public health and their incentive to support the health tax policy.

First is the actors’ orientation/position towards public health. To illustrate each institution’s objectives, we have created a spectrum of the actors’ orientation, ranging from public health motives to economic motives (see figure 2). At the implementor level, Dinkes is the main actor with a public health orientation, along with other actors in human capital development. However, they maintain a relatively neutral stance towards the health tax policy issue since it is not their core institutional motive, but they actively engage in public health advocacy:

There are provincial and district programs for child-friendly areas with indicators that include a smoking ban. There are child forums throughout Indonesia that have actively campaigned against smoking with active outreach in schools. DP3A has also conducted anti-smoking campaigns at the neighborhood level, and there are regional regulations supporting smoke-free child-friendly areas. Disdik needs to be involved in raising awareness about the dangers of smoking. (DP3A, Lampung).

While at the right hindside, for Disperindag and DinkopUKM, the orientation is more towards economy, in this case industry protection:

As supporters of MSMEs, we agree because this excise tax applies to large manufacturers. Therefore, it can enable UMKMs to compete with large manufacturers. (DinkopUKM, DI Yogyakarta)

As for the coordinating bodies, BPKAD’s position leans more towards the economic aspect since their motive is to collect revenue for the regional government. We position Bappeda and Setda in a more neutral role since they both house units for human capital policy and economic policy development and primarily function as coordinators:

This tax serves as an instrument to reduce consumption or circulation. I agree that this tax should increase, especially if there is revenue-sharing. The revenue-sharing from the tax can be used for SMEs in the alcoholic beverage industry and for awareness campaigns to improve the understanding that alcoholic beverages are detrimental to health. (Bappeda, Bali)

Finally, political actors like the governor and DPRD are also in a neutral position due to their political motives, which can change with each election year.

Considering each actor’s motive, we can also identify their incentives for supporting and prioritising the health tax policy. For Dinkes, their main performance indicator focuses on enhancing public health status, making them staunch supporters of adopting the health tax. In addition to the potential reduction in unhealthy consumption, this move offers substantial public health benefits. Furthermore, the public health sector anticipates receiving allocations from the tobacco tax and expects similar outcomes for other types of health taxes:

I agree with the health tax and revenue-sharing that can be used to improve the quality and the healthcare sector. (Dinkes, Bali)

As for DP3A and Disdik, their support is somewhat conditional, hinging on the expectation that health tax revenue will be allocated to programmes that bolster the implementation of health taxes. These programmes could include initiatives to raise public awareness about unhealthy consumption in educational institutions or to aid women entrepreneurs in developing healthier product alternatives. These conditions are especially relevant in the case of SSBs, where there are currently no regulations in place to curb consumption, and public awareness is lacking:

For health and for the education of children, women, families in rural areas, and SMEs. Because many of the supported families also produce juices and beverages, so they can have better awareness [on the harm of SSBs]. (DP3A, DI Yogyakarta)

Conversely, Disperindag and DinkopUKM are primarily driven by the motive of safeguarding the local industry. Consequently, their support for health taxes hinges on whether these measures will protect local businesses. For instance, if the tax structure is tailored to the size of the industry, if it contributes to industrial development with an export focus, or if, in the case of SSBs, it serves to educate local industries about adopting healthier alternatives, these factors can influence their support:

It [health tax] can be used for education and development of MSMEs [in the sector]. (DinkopUKM, DI Yogyakarta)

Regarding BPKAD, their support for the health tax is more pronounced when the tax revenue can be earmarked for local government revenue, mirroring the structure of the tobacco tax. In the case of Bappeda, they maintain a more neutral stance towards the incentive, as policy priorities are subject to a bottom-up discussion, beginning with sector-specific priorities and later being communicated and decided on by higher-ranking government entities such as Setda, the governor and the DPRD.

Way forward

In this subsection, we discuss the main barriers and opportunities associated with the implementation of health tax policies at the subnational level. Recommendations for addressing these barriers and optimising opportunities will be discussed in the subsequent section.

Barriers

After conducting the structural and agency diagnosis, we can now identify potential barriers that may impede the implementation of health tax policies at the subnational level. Three main barriers have been identified: a lack of awareness, distrust towards governmental institutions and the existence of product substitution.

First and foremost is the issue of awareness. As discussed previously in the social context, there remains a significant lack of awareness among consumers regarding the health risks associated with the consumption of certain products. This lack of awareness is particularly pronounced in the cases of tobacco and SSBs. Concerning tobacco, the early age at which consumers often initiate smoking, combined with the addictive nature of tobacco, presents a formidable challenge in curbing consumption through the imposition of health taxes. While alcoholic beverages are also considered addictive substances, we do not observe the same patterns of consumption:

It is somewhat impossible that Bali has the highest alcohol consumption rate. Most of it is related to traditional and religious purposes (it should be emphasized whether the factors driving this high alcohol consumption are for traditional and religious ceremonies or for recreational purposes and regular consumption). (NGOs 2, Bali)

Regarding SSBs consumption, the public still lacks a negative perception of these products, unlike the clear aversion to tobacco and alcoholic beverages. Furthermore, consumers currently struggle with understanding how to interpret the nutritional information on packaging and determining a safe sugar intake limit. Consequently, shifting their perspective on these products and raising awareness about limiting their consumption poses a significant challenge.

Second, there is an issue of trust in governmental institutions. Both consumers and institutions share a lack of trust in the government’s intent behind imposing health taxes. Presently, health taxes are predominantly viewed as revenue-generation tools rather than instruments for controlling consumption:

I want this tax to be clearly used for a specific purpose. Let’s not allow it to be used solely for new political targets just to increase revenue. (Consumer 3, DI Yogyakarta)

Hence, consumers and institutions driven by the motive of safeguarding local industries still harbour reservations about the necessity of implementing health taxes, fearing potential harm to the local economy. The absence of transparent policy communication at the subnational level, particularly to consumers, regarding the public health benefits of health tax implementation exacerbates this barrier.

Finally, there is the challenge of product substitution and non-commercial consumption. Consumer substitution towards illicit alternatives represents a potential loss for both public health and revenue generation:

I disagree because if the tax is high, it can trigger illicit tobacco due to low supervision in Indonesia. So, it shouldn’t be increased continuously; its upper limit should be assessed. The funds for law enforcement need to be increased to improve supervision. (Bappeda, Lampung)

However, an additional challenge arises from the fact that health taxes are levied on the end product rather than on the main ingredients of those products. In contrast to alcohol, tobacco is only taxed at the final product stage. Consequently, we can still observe instances where consumers purchase tobacco and hand-roll their own cigarettes, a practice known as ‘linting dewe’. In this scenario, the government has little control over the trade of these self-rolled cigarettes, and there are no limits on the quantity of tobacco that can be used, in contrast to commercially marketed products where such limits exist, potentially posing a health risk to the public:

I don’t agree [with the increase in tobacco tax]. If it’s raised, I will still buy, maybe reduce a bit, I can do ‘linting dewe’ or choose cheaper cigarettes, but still stick to stick my smoking habits. (Consumer 3, Lampung)

This is also a concern raised by consumers and NGOs/experts regarding the implementation of taxes on SSBs. Many small-scale SSB manufacturers are unaware of the sugar content in their products. This lack of awareness extends to homemade SSBs as well, where consumers, lacking an understanding of the potential health risks associated with excessive sugar consumption, like homemade soy milk, may add as much sugar as they desire without recognising the potential health drawbacks:

Homemade SSBs are actually more risky because there are no [limit] for the sugar doses. (Consumer 6, DI Yogyakarta)

As a result of health tax implementation, which can lead to higher product prices, consumers are increasingly inclined to consider more affordable alternatives, including homemade options.

Opportunities

Regarding opportunities, we have identified two primary avenues to bolster the implementation of health taxes at the subnational level. The first opportunity lies in garnering public support. While the lack of consumer awareness presents a challenge, there are individuals with a heightened awareness of the adverse health effects associated with tobacco, alcohol and SSBs who wholeheartedly endorse the health tax policy, even if they are consumers themselves. Consumers tend to rally behind policies that promise health benefits rather than revenue generation motives:

I agree, because it relates to the non-communicable disease (NCD) prevention program. Because not all of the population is educated yet. If, for example, the price increases, it will compete with healthier food and drinks that are relatively expensive. But it’s also necessary to raise the base ingredients of sweetened beverages. It should be supported by education. Previous policies should also be maintained to support the tax. (Consumer 7, DI Yogyakarta)

The second opportunity centres around engagement with non-governmental organisations (NGOs). At times, subnational governments lack the initiative to enhance public awareness, potentially undermining the effectiveness of health tax implementation. Local NGOs and academic institutions exhibit greater proactiveness in advocacy efforts. This presents an opportunity because focusing solely on engaging NGOs and academics at the national level may limit outreach to broader segments of society, especially beyond the Java region.