Tobacco Control Policy The Challenge of Raising Tobacco Taxes

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Tobacco Control PolicyThe Challenge of Raising
Tobacco Taxes
Global and Regional Experience by Ayda A.
Yurekli, Ph.D World Bank World Bank ECA Regional
PCU Conference, Warsaw, Poland September 9, 2001
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Why is Raising Tobacco Taxes a Policy Challenge?

• Tobacco taxes are NOT new taxes
• Challenging, because
• higher taxes improve public health, but
• Policy makers worry about the economic
  consequences of higher taxes

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Why increase tobacco taxes

• Good for public health
• Improve health outcomes
• Change smoking behavior
• Youth and the poor are more sensitive
• Increase budget share for other goods and
  services
• Good for economy
• Generate revenues
• Wont necessarily reduce employment
• Wont necessarily increase smuggling

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Why are higher taxes good for public health?

• Change Smoking Behavior
• As tax increases consumption decreases
• A 10 increase in price reduces consumption by
• 4 in developed countries,
• 8 in developing countries
• Poor and Youth are more sensitive
• A 10 price increase reduces smoking as much as
  10 among youth and the poor.
• Deter youth taking up smoking
• High opportunity costs
• Higher budget share for other goods and services

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Price Elasticity EvidenceAs tax increases,
consumption decreasesEvidence from Turkey
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Price Elasticity EvidenceAs tax increases,
consumption decreasesEvidence from Hungary
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High opportunity cost for smokers and their
families
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High Opportunity Cost in Bulgaria
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Will higher tobacco taxes be good for the
economy? Why do policy makers worry?

• reduce revenues?
• Tobacco generates revenues
• Excise VAT tax revenues
• Import tariffs
• Income taxes
• cause job losses?
• Create employment opportunities
• In agriculture- farmers- and industry
• accelerate smuggling activities?
• Means less revenues,
• more criminal activities

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Tobacco Taxes- Important source of revenue!
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Tobacco Taxes- Important source of revenue!
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Tobacco Tax Revenues Who Earns, How Much?
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Tobacco Tax Revenues Who Earns, How Much?
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Revenue Generating Potential of Tobacco
TaxesEmpirical Arguments

• Depends on several factors.
• Consumption level
• Tobacco tax rates
• Retail price of cigarettes
• Income
• Price and income elasticity of demand
• Control of smuggling activities

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As Cigarette Tax Rises Revenue IncreasesTax per
pack and cigarette tax revenues in Norway,
1990-1998
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Evidence from Hungary Since 1997 the tax rate
has increased, and so has total revenue (in real
terms)
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Tobacco Tax Rates and Prices Where ECA fits in
the Globe!
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Global (European) Evidence Total and Excise
Tobacco Taxes as of Retail Price 2000
Total tobacco tax ExciseVAT, Excise
(SpecificAd Valorem)
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Regional Evidence ECATotal and Excise Tobacco
Taxes as of Retail Price
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Do high tax rates mean high prices? Not in ECA
countries!
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Cigarette prices lower than most food products in
Bulgaria
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High tax rates and high average prices of
cigarettes in EU
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Will higher taxes lead to smuggling What is
the Solution?Canadian Government reduced
tobacco tax rates dramatically in
February 1993
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Sweden decreased cigarette taxes (17) due to
fear of smuggling in 1998
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Recommendations to control smuggling

• Require that all cigarette exporters,
  manufacturers and distributors have a license and
  keep detailed records
• Make cigarette exporters post a bond that will
  only be returned when it is proven that the
  cigarettes have reached their final destination
  and
• Require that unique markings be placed on
  cigarette packages so that smuggled cigarettes
  can be traced back to their source.

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Employment is decreasing for several reasons
Efficiency, technology and privatization
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RecommendationsIncreasing taxesWin win
situation for both public health and the economy.

• Higher taxes will generate higher revenues while
  reducing consumption
• There is still room to increase cigarette taxes
  in ECA countries due to inelastic demand, and
  low tax rates
• Reducing tax rates is not a solution for
  smuggling
• Employment in cigarette manufacturing is reduced
  for different reasons other than reduced
  consumption ?