1. Tobacco Control Policy The 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
There is no doubt that smoking kills. The challenging issue is to implement tobacco control policies without hurting the economy. Tobacco taxes are the most cost-effective policy for reducing smoking. This is a sensitive issue, because tax increases will affect a large number of stakeholders, including policy makers, the tobacco industry and consumers. Governments will want to weigh carefully all the effects, to arrive the best decision.

2. 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
Neither tobacco taxes nor tobacco control activities are new for public health advocates and policy makers.
What is new is the accumulating evidence that tobacco taxes are a very powerful policy tool to affect cigarette consumption, and that they also are economically beneficial. For a long time economists thought that because tobacco is highly addictive, consumers would respond differently to changes in price. But it turns out – with evidence from many many countries and hundreds of studies – that tobacco products are just like other products. They are “normal goods” that is – if prices rise, people buy less. This basic law of demand is maybe the one thing that economists all agree about. As public health advocates have come to understand that tobacco taxes are a very powerful tool for reducing consumption, they have begun to their colleagues in the Ministries of Finance and Planning to increase tobacco taxes.
Some have done so. Some never needed to be asked, and have had high tobacco taxes long before the public health community started paying attention to taxes. But some policy makers, hesitate to increase tobacco taxes, worried that higher taxes may have a negative impact on the economy.
In this talk, I’d like to explore the concerns and the evidence on the economic issues, taking a broad perspective.

3. 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
Lets first take a look at the evidence on the relationship between prices and consumption. (Cigarettes – but applies to all tobacco products)
Tax increases that raise cigarette prices are the single most effective way to reduce consumption. When done as part of a set of interventions, the impact is likely to be even stronger. There is clear evidence that higher cigarette prices lead some people to quit (or try and quit, or think about quitting), other reduce their consumption, some switch to cheaper brands. On average, a 10% increase in price reduces cigarette consumption by 4% in high-income countries and 8% in low- and middle income countries.
People with low incomes – including especially young people – are more sensitive to higher prices. This makes sense intuitively, and is consistent with the evidence. Most smokers begin before they are 20. Higher prices reduce cigarette consumption among young people, and deter or delay others from starting to smoke. That delay results in lower prevalence rates at all ages, and makes it easier for people to quit, reduces health risks and health care cost in the future.

4. Price Elasticity Evidence As real price decreases, consumption increases Evidence from South Africa
Some country examples. In South Africa, the Apartheid regime had close links with the cigarette industry, and left tax rates low. Inflation was relatively high during the 1970s and 1980s, and prices and taxes were not adjusted to match inflation. So the real price (adjusted for inflation) decreased sharply. And consumption rose steadily. I’m pleased to say that the situation has changed dramatically in recent years, since the new Government has raised tobacco taxes sharply, and also introduced several other measures to reinforce their effect. And they received strong public support for these new policies.

5. Evidence from the UK
Here is evidence from the UK. We observe reductions in tobacco consumption with increases in the real price over the last thirty years in the UK. The same picture san be seen in many other countries that have raised tobacco taxes, causing the real price of cigarettes to rise.

6. 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 ?
Higher taxes will reduce the cigarette consumption and will improve the public health. But the consequences of higher taxes do not only effect the public health but also other stakeholders especially the government officials who are in charge of changing tax levels. MOF worries that higher taxes mean lower revenues. MOL and MOA worries that higher takes may lead to lower employment in agriculture and industry. And the most common argument is that higher taxes will motivate smuggling activities.

7. Tobacco Taxes- Important source of revenue!
I will review the evidence on each of these important concerns.
First, the impact on total revenues.
MOF certainly right to worry about the consequences of taxes on govt. revenues because tobacco brings significant revenue to government. In EU the share of tobacco taxes in total government revenue ranges between 1.2% to 9.4%, but given the amount of total taxes these countries collect, these small percentages represent significant amounts for the governments.

8. Tobacco Taxes- Important source of revenue!
In developing world, tobacco taxes have rather higher share in total govt. revenues but of course of a much lower total.

9. Tobacco Tax Revenues: How Much?
EU countries collect from US$ 5 billion to over US $18 billion from cigarettes only.

10. As Cigarette Tax Rises Revenue Increases Tax per pack and cigarette tax revenues in Norway,
The biggest concern, especially raised by the MOF, is whether higher taxes will reduce total revenues. The evidence for over 100 developed and developing countries has been carefully reviewed, and so far, every single country that increased its tobacco excise rate also saw total revenues increase. Here is one example from a developed country, Norway, where even at very high tax rates, and very high cigarette prices, and with many other measures all trying to reduce consumption, tax increases keep generating more revenues.

11. 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.
The less elastic the demand, the less effective the tax will be in reducing cigarette consumption, but the more the gain in tax revenues.
The product or service is considered a luxury rather than a basic necessity. Not only does consumption of luxury goods and services rise as income rises, but it rises even faster than the rise in income.
This reduces the chance of tax avoidance.

12. Revenue Generating Potential of Tobacco Taxes
Depends on:
Consumption level
Tobacco tax rates
Retail price of cigarettes
Incomes
Control of smuggling activities

13. Cigarette consumption has been increasing significantly especially among developing countries
We see higher consumption increase in middle-income Med. Countries and either lower increase or some decrease in high income Med. Countries. The differences are due to policies, information levels, social norms, demographics, and price trends.
(Turkey is omitted, sorry)

14. Big Gap between Developing and Developed World Cigarette Prices and Tax rates
Countries in the EU must meet a 57% minimum excise tax requirement for cigarettes. Interesting picture here is the level of cigarette prices in EU Med. Countries compared to EU. The price of cigarettes lower than EU average, although they have similar tax rates. Developing Med. Countries on the other hand have lower prices and lower tax rates, and so lower tax per pack (absolute amount).
EU Med: Greece, France, Italy, Portugal, Spain
Other Med: Algeria, Egypt, Cyprus,Lebanon, Morocco, Syria, Turkey

15. Total Tobacco Taxes as % of Retail Price in Mediterranean Countries
These data by country:
The level of tax rates and the price level are mixed in the developing Med. Countries. We have high priced but low taxed Algeria, tax tax rate but low price in Turkey, Egypt and Jordan, high price and high tax rate in Tunisia, and low tax, low price in Lebanon and Syria.

16. Impact of Increased Taxes on the Economy
Higher total tobacco tax revenue
Job losses and gains – net effect on employment?

17. 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%
If tobacco consumption falls, there may indeed be some job losses, among farmers, people who work in cigarette factories, advertisers, and people who specialize in distributing and selling tobacco products. But the money that used to be spent on cigarettes does NOT disappear from the economy. When people cut back their smoking or quit, they spend the money they save on other things – they eat out more (or just eat more), they join a health club, buy a bicycle, pay school fees or buy shoes for their children, and so on. This generates new jobs in other sectors. And in countries where this expenditure switching has been carefully studied, more often than not, there are more new jobs created than there are jobs lost.
The more a country imports tobacco products, and the more labor-intensive (relative to tobacco product production) are the things that tobacco money is spent on instead, the more likely that a fall in tobacco consumption will INCREASE total employment.
Of course, there are winners and losers. Some people will lose jobs and income, others will gain, and I don’t want to pretend that this isnt a major concern. But it is not something unique to tobacco – we have to deal with changes in consumption patterns and other economic adjustments all the time.
Source:Buck and others, 1995; Irvine and Sims, 1997; McNicoll and Boyle 1992,
van der Merwe and others, background paper; Warner and others 1996

18. 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
Tomorrow Luk Jossens will discuss smuggling in great detail, so I will say very little. There are some key points to make. It is not JUST high taxes or high tax differentials that lead to smuggling. Certainly they provide an incentive. But the overall level of corruption is at least as important a factor in predicting how much smuggling of cigarettes there is in a country.
Smuggling involves internationally well-known brands

19. Tobacco smuggling tends to rise in line with the degree of corruption Smuggling as a function of transparency index
Smuggling is the most common argument against raising tobacco taxes. Smuggling is an issue in almost every country regardless of the level of their tobacco tax rate. Taxes are by no means the whole story, or even the most important factor in smuggling. What is to be done? Tomorrow we will hear how smugglers operate.
POINT: (Who should intervene – Customs have an important role in combating smuggling.)

20. Smuggling: What is the Solution
Smuggling: What is the Solution? Canadian Government reduced tobacco tax rates dramatically in February 1993
I’ve said that taxes are not the whole story when talking about smuggling. But one often hears that taxes are to blame for smuggling, and some governments have been persuaded that if only taxes were not so high, smuggling would fall. In Canada, smuggling became a major issue. So in 1993, the Canadian government reduced the rate of tobacco tax. [ smuggling did decline, but there are many other factors, and we might just mention that the Canadian Government has taken some tobacco companies to court, arguing that they have had a major role in smuggling] But there were 2 very negative results of the REDUCTION in tobacco taxes – total revenues fell (which is not shown on this slide) and total consumption rose dramatically – especially among young people.

21. Smuggling Sweden decreased cigarette taxes (17%) due to fear of smuggling in 1998
In 1998 Sweden also reduced its (very high) tax rates, hoping that smuggling would fall and revenues would rise. But as you can see, 1998 was one of the few years in which revenues fell, despite the big jump in consumption – also a result of the price fall that year. We don’t know what happened to smuggling, because for obvious reasons there are no hard data on smuggling, but given the fall in revenues, we can deduce that it did not fall.
And these are not the only country. Almost every time tobacco tax increases begin to be discussed, someone argues that higher taxes will cause an increase in smuggling. And coincidentally, smuggling often increases even before a decision is taken. Is this a coincidence – or is someone with a strong vested interest trying to make a very strong point? I’ll just mention that there are quite a number of court cases in which tobacco companies are accused of involvement in smuggling.

22. 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

23. Annual Cigarette Taxes Paid per Smoker in Mediterranean Countries in 1999
Poor smokers are clearly a cause of concern. But lets look overall at the incidence of taxes, to assess the extent to which higher taxes would be burden consumers. With higher tax rates and higher prices, smokers pay more tobacco taxes. These amounts are quite significant in EU countries, but there is quite a different picture in the countries with relatively low cigarette prices (yellow bars).
% of total average income by country?? (look up in WDR)
Paid gradually over the year, a little each day, so people tend not to add it up like this. But when they do, that’s exactly when many people become very motivated to quit.

24. Summary Why 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
Won’t necessarily increase smuggling