Impact of excise tax on price, consumption and revenue

Introduction Increase in tobacco tax that leads to price increase is expected to

reduce tobacco consumption and improve public health.

This section reviews existing empirical evidence on the effects of excise tax on price, consumption, government revenue and public health.

Tobacco taxes account for a fraction of tobacco product prices and the percentage reduction in tobacco use resulting from a price increase is smaller than the percentage increase in price in most countries. As a result, tobacco tax increases will increase tax revenues over the short to medium term.

Outline

Impact of excise tax on tobacco price

Impact of excise tax on tobacco consumption

Impact of excise tax on government revenue

Cost-effectiveness of tobacco control through taxation

Harm reduction and product differentiation

Illicit trade and taxation

Employment of tobacco farmers and taxation

Taxes and prices in the USA

State Cigarette Taxes and Prices November 1, 2008

y = 1.2066x + 3.1132R2 = 0.9214

$3.00

$3.50

$4.00

$4.50

$5.00

$5.50

$6.00

$6.50

$7.00

$0.00 $0.50 $1.00 $1.50 $2.00 $2.50

State Tax per Pack

Ave

rage

Cig

aret

te P

rice

per P

ack

Source: Frank J Chaloupka

Inflationary impact of tobacco tax increase

Tax as a share of price Tobacco weight in price index

Inflationary impact

Low (<40%)

Medium (40-70%)

High (>70%)

Low (<2%)

Medium (2-4%)

High (4-8%)

Low (<1.0%)

Medium (1-2.5%)

High (>2.5%)

X X X X X X

X X X X X X

X X X X X X

X X X X X X

X X X

Source: WHO Technical Manual on Tobacco Tax Administration, WHO, 2011.

Impact of excise tax on tobacco consumption in South Africa

0

500

1000

1500

2000

2500

0.00

5.00

10.00

15.00

20.00

25.0019

61

1965

1969

1973

1977

1981

1985

1989

1993

1997

2001

2005

2009 Ci

gare

tte

cons

umpt

ion

(mill

ion

pack

s, ta

x-pa

id o

nly)

Aver

age

pric

e pe

r pac

k, 2

012

pric

es

Aggregate cigarette consumption and real cigarette price

Price per pack, constant 2012 prices Cigarette consumption, million packs

Source: Corne van Walbeek, data derived from National Treasury, South Africa and Statistics South Africa, 2014.

Impact of excise tax on tobacco consumption in USA

Source: WHO calculations based on data from Frank Chaloupka

0

500

1000

1500

2000

2500

3000

0.00

1.00

2.00

3.00

4.00

5.00

6.00

1954

1957

1960

1963

1966

1969

1972

1975

1978

1981

1984

1987

1990

1993

1996

1999

2002

2005

2008

2011

Cigare

ttes p

er cap

ita

$

Real State and Federal Cigarette Excise Tax Per Pack ($, 2011=100)

Real weighted average price per pack ($, 2011=100)

Cigarettes per capita

Impact of excise tax on government revenue Inflation Adjusted Federal Cigarette Taxes and

Cigarette Tax Revenues, USA, 1940-2011

Source: WHO calculations based on data from Frank Chaloupka

- 2 4 6 8 10 12 14 16 18

0

10

20

30

40

50

60

1948 1958 1968 1978 1988 1998 2008

Real

reve

nue

colle

ctio

n ($

milli

on,

2011

=100

)

Real

Fed

eral

ciga

rette

tax r

ate

per 1

000

($, 2

011=

100)

Real Federal cigarette tax rate per 1000 ($, 2011=100)

Real revenue collection ($ million, 2011=100)

9

Impact of excise tax on government revenue

Source: Corne van Walbeek, data derived from National Treasury, South Africa and Statistics South Africa, 2014.

Inflation Adjusted Cigarette Taxes and Cigarette Tax Revenues, South Africa, 1961-2012

0

2000

4000

6000

8000

10000

12000

0.00

2.00

4.00

6.00

8.00

10.00

12.00

1961

1963

1965

1967

1969

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

Gov

ernm

ent r

even

ue fr

om to

bacc

o ex

cise

, con

stan

t 20

12 p

rices

Exci

se ta

x pe

r pac

k, co

nsta

nt 2

012

pric

es

Excise tax per pack, constant 2012 prices

Government revenue from tobacco excise, constant 2012 prices

Tobacco control is cost- effective “There is robust evidence that tobacco

control is cost-effective compared to other health interventions.”

Best buys: Key cost-effective interventions include

– tobacco tax increases, – timely dissemination of information

about the health risks of smoking, – restrictions on smoking in public

places and workplaces, and – comprehensive bans on advertising,

promotion and sponsorship

Good buy: to provide smokers in particular, and tobacco users in general, with treatment for tobacco dependence

Harm reduction approach and product differentiation

“..smokers smoke predominantly for nicotine, .. nicotine itself is not especially hazardous, and .. if nicotine could be provided in a form that is acceptable and effective as a cigarette substitute, millions of lives could be saved.”-- John Britton, Chair, Tobacco Advisory Group of the Royal College of Physicians, 2007

The harm caused by tobacco smoking can be potentially reduced by making effective but less hazardous substitute products available to the smoker

The tobacco industry took advantage of this harm reduction approach and employed product differentiation to sustain the market of smokers by introducing products, e.g.,

– Filtered cigarettes: In the 1950s, cigarettes companies designed filtered cigarettes to mitigate consumers’ concerns about the health hazards of smoking

– ‘Light’ or ‘Mild’ cigarettes: In the 1950s and 1960s, these descriptors were introduced in cigarette packs to give smokers the impression that these products are less harmful for health

– E-cigarettes: New marketing strategy of the tobacco industry in the 21st century

E-cigarettes: a moral quandary

Although e-cigarettes might reduce harms compared with traditional cigarettes, appropriate regulation of safety and product consistency is essential. Marketing also needs to be monitored to ensure that the easy availability of e-cigarettes does not encourage people to start smoking.

Harm reduction should be our guiding principle, but the prospect of colluding with one of the industries most devastating to health presents a moral quandary that needs to be addressed through strong public and professional engagement.

The Lancet, Editorial, Vol 382 September 14, 2013

Tobacco taxation and harm reduction

Research has clearly demonstrated that smokers’ perceptions that “reduced risk” products are safer than regular cigarettes led many who might have otherwise quit smoking to continue, while the health hazard may not necessarily diminish from the use of these products.

Recognizing the uncertainty of health outcome of using the usually known “safer” products, the tax system should not be designed so as to favor the products perceived to be safer while disfavoring those perceived to be more harmful.

Illicit trade

Tobacco industry often uses the argument again excise tax increase that it induces larger volume of illicit trade of cigarettes that may take the form of smuggling or counterfeit production,

However, literature does not suggest any clear evidence on the effect of tax increase on sales and tax evasion through illicit trade.

More detailed discussion is available in a separate presentation on “Illicit Trade”.

Employment of tobacco farmers Opponents of tobacco tax increases often suggest that tax increases will result in

loss of livelihood and income of tobacco farmers. This argument is relevant for only a few agrarian countries that depend heavily on tobacco leaf growing for domestic production and exports

The spectre of employment loss is overstated for many countries due to – improvement in farming technique – opportunities for crop diversification – Scope for government support for alternative livelihood options

Given the current upward trend in global demand, higher taxes and other tobacco control measures are unlikely to lead to a sharp drop in demand in the short run. It may slow down the growth in global demand in the short run and lead to falling in the longer run. It implies that employment loss will be a gradual process in the tobacco growing countries for many years, allowing gradual transition from tobacco to other sectors.

Summary

Tobacco taxation has proven to be one of the most effective and cost-effective measures of reducing tobacco consumption and contributing to improved public health.

While reducing consumption, tobacco tax increase can contribute to higher government revenue.

Tobacco industry has historically opposed tobacco tax increases by following counter strategies, such as:

– Harm reduction through product differentiation – Arguing that tax increase induces illicit trade and loss of

employment to tobacco farmers.