Danish lawmakers have killed a controversial "fat tax" one year after its implementation, after finding its negative effect on the economy and the strain it has put on small businesses far outweigh the health benefits.
Nations including Switzerland, the U.K, and Germany have held up the tax, which applies to any food containing more than 2.3% saturated fat, as a potential model for addressing obesity and other health concerns. But in Denmark, it has been a source of pain for consumers, food producers and retailers as the nation's economy struggles.
"The fat tax is one of the most maligned we [have] had in a long time," Mette Gjerskov, the minister for food, agriculture and fisheries, said during a news conference Saturday announcing the decision to dump the tax. "Now we have to try improving the public health by other means."
The failure of Denmark's fat tax is a demonstration of how difficult it can be to modify behavior by slapping additional duties on products seen by many as essential staples, especially during tough economic times. Products such as butter, oil, sausage, cheese and cream were subject to increases of as much as 9% immediately after the new tax was enacted.
"What made consumers upset was probably that an extra tax was put on a natural ingredient," said Sinne Smed, a professor at the Institute of Food and Resource Economics.
The fat tax comes to an end after netting an estimated €170 million ($216 million) in 2012 in new revenue. Danish lawmakers will slightly raise income taxes and reduce personal tax deductions to offset the lost revenue. The lawmakers also decided on Saturday to reverse an earlier decision to create a sugar tax.
"This is not what is needed in the current economic situation," said Holger Nielsen, Denmark's minister for taxation. "We have listened to objections that were raised."
Danes shoulder one of the world's highest tax burdens, but the country's economic output has fallen in 2012 amid poor domestic consumption and a decline in investment.
The fat tax was created in 2011 to address Denmark's rising obesity rates and relatively low life expectancy. There is little evidence the tax impacted consumers financially, but it did spark a shift in consumer habits. Many Danes have bought lower-cost alternatives, or in some cases hopped the border to Germany, where prices are roughly 20% lower, or to Sweden.
"Since the introduction of the new tax the demand for butter has risen," Lars Aarup, head of analysis at FDB, a dominant retail chain operator in Denmark, said. He notes that one factor driving demand is the emergence of a cooking show in which the hosts stress how desirable using butter is. "That might outweigh the effect of the tax."
Peter Giørtz-Carlsen, head of the Danish consumer market at Arla Foods—the country's largest dairy company—said the fat tax has driven consumers toward lower-quality cheeses.
The Sky supermarket located in northern Germany was one company benefiting from the trend. Last week, more than half the cars in the crowded parking lot had Danish license plates.
"We did not use to buy cheese here, but the price difference for our favorite type is now more than 30%," Anitha Nissen said, while helping her husband load groceries into their silver Suzuki. The Danish couple now crosses the border three or four times a year to stock up on goods.
While some German businesses have benefited, many Danish companies say they have suffered.
Lone Saaby, director of economic policy at Denmark's Landbrug & Fødevarer farmers association, said the fat tax "increased border trade as well as administrative costs," putting Danish jobs in jeopardy. Ms. Saaby's organization lobbied the government to kill the fat tax and abandon the sugar tax before the impact to employment became too noticeable.
Mr. Giørtz-Carlsen said the fat tax cost his company about €670,000 over one year, and estimates "smaller companies probably had disproportionately higher costs."