Mexico May See Black Market For Soda, Junk Food After Tax Raises Prices

As the controversial tax reform starts working its way into Mexican society, so do worries about the impact it will have in everyday lives. One of the most unpopular measures, the so-called obesity tax, which targets sugary drinks and junk food as a way to fight the growing number of overweight people in the country, has already produced a consequence that supporters probably did not foresee: a black market for junk food.

“It will be the same as with liquor and cigarettes,” said Iñaki Landavuro, president of the Asociación Nacional de Abarroteros Mayoristas (National Association of Wholesale Sellers, or ANAM). “Producers and distributors will start taking cash, instead of issuing receipts, to avoid the higher tax.”

Landavuro said that out of the 2,800 liquor producers in the country, only 800 pay taxes, an example that junk food and sugary drink companies might start to follow. He even said that companies might try to smuggle in candy and soft drinks from abroad, a practice done by several tobacco distributors.

One of the issues with the tax is that it may affect sales. In 2013, the food and drink sector in Mexico grew 7 percent in volume, though not in revenue, with more sales at lower prices. Sales totaled 164 billion pesos ($12 billion), or 1.8 percent of the country’s GDP.

The reason behind it is that Mexicans buy “day-to-day” in mom-and-pop stores in their neighborhood, where the owners sometimes even sell on credit.

The tax on junk food and sugary drinks was imposed as a way to fight obesity, since Mexico recently became the country with the highest percentage of overweight people in the world. A third of Mexicans are considered overweight, a rate even higher than that of the U.S. The tax would increase the price of sodas by 1 peso (7 cents) and of junk food by 8 percent.

The measure is unpopular with many Mexicans as well as, unsurprisingly, with soda bottlers and fast food retailers, and led to protests. Several experts even questioned the practicality of the decision, arguing that there was no correlation between the ingestion of soda and obesity, and that taxing the products more would only bring down profits for the companies, which would counterbalance the tax by lowering prices.

Nevertheless, the full tax reform, including the “obesity measure,” was passed by Congress in November 2013, with 72 votes in favor and just 2 against.