Tobacco Control Policy The Challenge of Raising Tobacco Taxes

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Tobacco Control PolicyThe Challenge of Raising
Tobacco Taxes
Global, Regional and Country Experience Joy de
Beyer Tobacco Control Coordinator World
Bank Meeting of Mediterranean Countries, Malta,
September 2001
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Why is Raising Tobacco Taxes a Policy Challenge?

• Tobacco taxes are NOT new taxes
• The challenge
• higher taxes are good for public health
• but
• Policy makers worry about the economic
  consequences of higher taxes

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Why do higher taxes reduce tobacco use?

• Tax increases raise prices
• A 10 price increase reduces consumption by
• 4 in developed countries
• 8 in developing countries
• Poor and Youth are more price-sensitive
• A 10 price increase reduces smoking as much as
  10 among youth and the poor.
• High prices deter youth from starting to smoke

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Price Elasticity EvidenceAs real price
decreases, consumption increasesEvidence from
South Africa
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Evidence from the UK
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Why do policy makers worry?Will higher tobacco
taxes

• Reduce revenues ?
• Tobacco is a good source of revenue
• Excise VAT tax revenues, import tariffs
• Income tax and profit taxes
• Cause job losses ?
• Farmers, tobacco industry workers, others
• Increase smuggling ?
• smuggling loses revenues, and is a crime
• Hurt poor smokers ?

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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 How Much?
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As Cigarette Tax Rises Revenue Increases Tax per
pack and cigarette tax revenues in Norway,
1990-1998
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Revenue Generating Potential of Tobacco Taxes

• As price rises, consumption falls, but by less
  than the percentage rise in price (demand is
  price-inelastic).
• As incomes rise, so does consumption - and total
  revenue (the income elasticity of demand is
  greater than one).
• Production can be closely supervised by the
  government easy to collect taxes.

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Revenue Generating Potential of Tobacco Taxes

• Depends on
• Consumption level
• Tobacco tax rates
• Retail price of cigarettes
• Incomes
• Control of smuggling activities

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Cigarette consumption has been increasing
significantly especially among developing
countries
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Big Gap between Developing and Developed World
Cigarette Prices and Tax rates
EU Med Greece, France, Italy, Portugal,
Spain Other Med Algeria, Egypt, Cyprus,Lebanon,
Morocco, Syria, Turkey
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Total Tobacco Taxes as of Retail Price in
Mediterranean Countries
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Impact of Increased Taxeson the Economy

• Higher total tobacco tax revenue
• Job losses and gains net effect on employment?

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Studies on the employment effects of dramatically
reduced or eliminated tobacco consumption
Type of Country Name and year Net change as of employment in base year
Net Exporters US (1993) 0
UK (1990) 0.5
Zimbabwe (1980) -12.4
Balanced Tobacco Economies South Africa (1995) 0.4
Scotland (1989) 0.3
Net Importers Bangladesh (1994) 18.7
SourceBuck and others, 1995 Irvine and Sims,
1997 McNicoll and Boyle 1992, van der Merwe and
others, background paper Warner and others 1996

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What about Smuggling?

• More smuggling if
• Public is tolerant
• Controls are weak
• corruption in the country is high
• tobacco industry is complicit
• organized crime plays a big role

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Tobacco smuggling tends to rise in line with the
degree of corruptionSmuggling as a function of
transparency index
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Smuggling What is the Solution?Canadian
Government reduced tobacco tax rates dramatically
in February 1993
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Smuggling Sweden decreased cigarette taxes (17)
due to fear of smuggling in 1998
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What about the impact on poor smokers?

• Poor smokers tend to spend the highest of
  income on tobacco
• How do they react to a tax/price rise ?
• more likely to quit/reduce consumption, which
  will improve health outcomes, release income for
  other uses
• increased tax revenue can be used in ways that
  benefit poor
• Help smokers who want to quit

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Annual Cigarette Taxes Paid per Smoker in
Mediterranean Countries in 1999
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SummaryWhy increase tobacco taxes

• Good for public health
• Less tobacco use better health outcomes
• Youth and the poor are more price-sensitive
• Good for economy
• Will generate tax revenues
• May increase employment, as spending is switched
  to other goods and services
• Wont necessarily increase smuggling