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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.