Tobacco taxation:
Purpose and Myths.
The Role of the WB
Montserrat Meiro-Lorenzo
The World Bank,
mmeirolorenzo@worldbank.org
Outline
• Why?
• What to do? Clear
• How to do it? Article 6
• Key issues
• The Word Bank
Four Stages of Tobacco Smoking Epidemic
Source: Lopez AD, Collishaw NE, Piha T. A descriptive model of the cigarette epidemic in developed countries.
Tobacco Control, 1994; 3: 242-247.
Why tax tobacco? Economist
"Sugar, rum, and tobacco, are commodities
which are no where necessaries of life, which are
become objects of almost universal
consumption, and which are therefore extremely
proper subjects of taxation.
Adam Smith, An Inquiry into the Nature and Causes of The
Wealth of Nations, 1776
Why
Tax
Tobacco?
•Economic Efficiency
• Correct for failures in tobacco product markets
• Imperfect information
• Externalities
• Increased health care costs, lost productivity
• Increased financial costs related to publicly
financed health care used to treat diseases
• Can also include “internalities” that result from
addiction and time inconsistent preferences
•Other Motives affecting tax structure:
• To protect domestic industry and employment
• To keep some brands/products affordable to the
poor
Chalupka 2012
5
Why Tax tobacco? Health
Because high tobacco prices CAN:
•Reduce the % of people that use
tobacco products (prevalence).
•Reduce the quantity consumed by
those that continue to smoke
Improve health outcomes
6
Taxes, Prices; Health: US,
1980-2005
7
People Respond to Prices
• 10% price increase
price change
developing
countries
+10%
developed
countries
-8%
-4%
consumption change
reduces tobacco use rates
by about 4% among the
poor and around 8%
among the better off.
• Price-elasticity of demand
for cigarettes in LICs and
MIC is around -0.6
• Poor and young respond
more to prices than the
better-off and old
Cigarette Price and Youth Smoking Prevalence United States, 19912011
$5.50
31
26
$4.75
21
$4.00
16
$3.25
11
6
$2.50
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
Year
Cigarette Price
12th grade prevalence
10th grade prevalence
Source: MTF, Tax Burden on Tobacco, 2011, and author’s calculations
9
8th grade prevalence
Smoking Prevalence
Price per pack (8/11 dollars)
36
Taxes, Prices and Tobacco Use
Cigarette Consumption, Morocco, 1965-2000
Source: Aloui, 2003
10
Aggregate consumption
2011/2012
2009/2010
2007/2008
2005/2006
2003/2004
2001/2002
1999/2000
1997/1998
1995/1996
1993/1994
1991/1992
1989/1990
1987/1988
1985/1986
1983/1984
1981/1982
1979/1980
1977/1978
1975/1976
1973/1974
1971/1972
1969/1970
1967/1968
1965/1966
1963/1964
1961/1962
1959/1960
1957/1958
1955/1956
1953/1954
1951/1952
1949/1950
1947/1948
1945/1946
Aggregate consumption (million packs)
2,500
80
2,000
70
60
1,500
50
40
1,000
30
500
20
10
0
Per capita consumption (pack per person aged 15 +)
Cigarette consumption in SA, 1946 - 2011
90
0
Per capita consumption (age 15 +)
11
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Percentage of per capita GDP required to buy 100 packs of cigarettes
5.00
90
4.50
80
4.00
70
3.50
60
3.00
50
2.50
40
2.00
30
1.50
1.00
20
0.50
10
0.00
0
Cigarette affordability
Per capita consumption (RHS scale)
Per capita cigarette consumption (packs/year) (population aged 15+)
A very close relationship between cigarette
consumption and affordability (r = - 0.98)
12
Cigarette Taxes and Prices Globally
13
Average Price Most Sold Brand, Excise Tax/Pack &
Total Share 2010
Source: WHO GTCR III
Tobacco Tax: Time to Abolish Myths
• Will reduce government revenues.
• Will destroy jobs / hurt particularly farmers
• Smuggling (Illicit trade)
• Difficult to collect and implement
• Regressive (against poor)
• WTO, investment bilateral, agreements
Will reduce government
revenues
Philippines losses
Excise taxes (% of GDP)
0.7
0.6
0.59
0.5
0.47
0.49
0.50
0.4
0.3
0.2
0.35
Alcohol Excise Taxes
0.24
0.25
0.23
0.1
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
2013 2014
The South African experience,
1961 - 2011
6000
500
5000
400
4000
300
3000
200
2000
100
1000
Between
1993 and
2011 real
excise tax
increases by
487% and
real excise tax
revenue
increases by
249%
Real excise rate
Real excise revenue
2009
2005
2001
1997
1993
1989
1985
1981
1977
1973
1969
0
1965
0
Real excise revenue
(R million, 2000 prices)
600
1961
Real excise rate
(in constant 2000 cents)
Big increases in the excise tax have resulted in big increases in tax revenue
18
1970
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
R millions (adjusted for inflation, 2008 base)
16000
2000
12000
10000
1500
8000
6000
1000
4000
500
2000
0
0
Cigarette consumption (RHS scale)
Excise tax revenue
Total industry revenue
19
Aggregate cigarette consumption (millions of packs)
Fall in consumption, real excise &
industry revenues increased
2500
14000
Percentage changes in important
variables since 1993
Variable
Percentage
Real excise tax per pack of cigarettes
378%
Real net-of-tax price of cigarettes
153%
Real retail price
212%
Cigarette consumption
-33%
Per capita cigarette consumption
-51%
Real excise tax revenue
220%
Real industry revenue
69%
Smoking prevalence
From about 35% to about 22%
20
Destroy jobs, hurt farmers
•Tobacco Leaf production
Global : 6 million tons
Zimbabwe: 0.21 Tons (3.5%)
Malawi: 0.13 (2.2 %)
Where are the subsidies going?
Brazil COP4: Farmers demonstrations
Will destroy jobs, will hurt farmers
• Indian and Brazil experience from tobacco
farmers and bidi roller's opposition to tough
demand reduction measures on WHO-FCTC
• Min of Agriculture initiative engagement with
MOH and advocacy to farmers e.g. bamboo as
source of energy nets 3000 USD per acre as
against 1000 USD rom tobacco
• Min of Labour and Min of Rural Development
schemes on alternative livelihood to farmers
and bidi rollers
WILL INCREASE
SMUGLING &
ILLICIT TRADE
23
Mechanisms for Illicit trade
control
•Who? Who are the manufacturers
•What? What are they
manufacturing ciagrrets, chewing
and wich tarde marks
•How much? Manufacturing
production
•For whom? destination of products
24
Smuggling tobacco UK 1990s
Tobacco industry
25-30%
UK customs estimated
21%
Taxed cigarettes/lower tax coun.:
9%
Illicit hand rolled tobacco:
49%
Main drivers – lack of control of
international movement of tax free
tobacco, price difference between tax
free and taxed, criminal gangs
Policy measures
1000 extra customs officials
Additional specialist investigators and
intelligence officers
National network of X ray scanners
Tougher sanctions for those caught with
smuggled tobacco
Public awareness campaign
Prominent duty paid marks on packs of
cigarettes and hand-rolling tobacco
EFFECTS
50
Per cent
45
Projected market share if no action taken
40
35
30
25
20
Target
15
10
Smuggling estimate
5
0
1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08
Price rose 28% real terms
Real Cigarette prices at 2009 prices
£5.80
£5.60
£5.40
£5.20
£5.00
£4.80
£4.60
£4.40
£4.20
£4.00
1998
2000
2002
2004
2006
2008
Illicit trade control
Coast line and expansive borders
•Undeclared production
•Unaccounted for exports
•Undeclared imports: raw & finished
•Counterfeited products
•Under declared tax values
•Switched declarations
•
Control measures put in place
• Licencing controls
• Production monitoring, raw materials
• Exports management
• Bilateral information sharing
Track and Tracing solutions
• Tax stamps
• Electronic Cargo Tracking System
Enhanced tax regime
• Paper based stamps 4 security levels
• Central online ordering, packaging, delivery
• RT production data: brand, date & time,
package quantity, production plant & line
• Market surveillance: random verification of
products in industry & verification officers
through login & GPS
• Tax projections from the production data
collected on real time. Accurate tax assess.
Automating Cargo Monitoring
(Electronic Cargo Tracking)
• Electronic Cargo Tracking System
ensures cargo exported exits country
of export or trucked cargo reaches
intended destination before any tax
remissions or refunds are granted.
• Benefits: Increase of up to 30% of
duty paid tobacco
Control of Supply Chain, Tax Stamps and Other Tracking
Technology, and enforcement: The Experience of Kenya
and Relevance for SADC Countries.
Presented to the
World Bank Conference on
Economics of Tobacco Control in Southern Africa:
The issues of Taxation and Smuggling
Gaborone 3-5th June 2012
By
Caxton Masudi Ngeywo
Kenya Revenue Authority
Regressive
Taxing the poor
35
The Poorest smoke most
60% of the 5.7
billion
cigarettes/year
are being
smoked in
developing
countries
45
Smoking prevalence (2004) [%]
40
35
30
25
20
15
10
5
0
Low-income
countries
Lowest household
income quintiles
Lower-middle
Income
Upper-middleincome
Highest household
income quintiles
High-income
Poor and young respond
more to prices
• If 2/3 of the money spent on cigarettes
in Bangladesh were spent on food
instead, it could save more than 10
million people from malnutrition
37
Difficult collect & implement
• Taxes already exist
• Simplify existing administration
complex tobacco tax structures:
Systems that feature multiple tax tiers
for cigarettes; different rates for
filtered and unfiltered cigarettes, for
different lengths of cigarettes, for
‘premium’ versus ‘regular’ brands.
38
How to Do it?
• Comprehensive (all tobacco
products)
• Coherent with countries' tax code
• Coherent with macroeconomic policy
• Simple, implementable, easy to
monitor
• Monitored
• Harmonized within economic regions
Guidelines for the
implementation of Article 6 of
the WHO Framework
Convention on Tobacco
Control
Selected Issues
Ch1: sovereign right of countries
to establish own taxation policies
• “...Should take into account...– both price elasticity and
income elasticity of demand, as well as inflation, to make
tobacco products less affordable over time in order to reduce
consumption and prevalence.... having regular (automatic)
adjustment processes or procedures for periodic revaluation
of tobacco tax levels.
• Parties should implement the simplest and most efficient
system that meets their health and fiscal needs, with the
fewest exceptions and taking into account their national
circumstances. From a budgetary as well as a health point of
view...implement specific or mixed excise systems with a
minimum specific tax floor, as these systems have
considerable advantages over purely ad valorem systems.
Which Simplest Tax System?
• Effective to reach health objectives
• Reduced complexity of tax administration
– Specific system with single rate / tier
– Ad valorem single tier/ rate with a minimum
tax floor
– Mix system with single ad valorem and
specific tax rate/ tier
• Proposal not simple: a mixed system with a
minimum tax floor could be several tiers
rates for specific or ad-valorem.
Ch2. Industry response tax
increase
• Industry contributes data for tax policy:
Market size, illegal trade, employment
levels, tax impact, etc.
• Reduce industry power: independent
sources of information and analysis.
• Standardize minimum data collection for
decision making (international)and
increase capacity to analyze
Ch 3: different tobacco products
similar tax burdens, measurement?
• ..to avoid negative consequences, such
as product substitution or an increase
in illicit trade, all tobacco products
should be taxed in a comparable way,
with a similar tax burden, and should
be accompanied by strong policies and
measures against illicit trade in tobacco
products
Tax different products equally
• Consumer will substitute “down” to
cheaper tobacco products with
similar nicotine levels.
• Taxing that other products with
similar nicotine equally will reduce
substitution down
• Health system to investigate
nicotine equivalence for tax levels
Ch 5: Revenue earmarking
• About 100 issues , interest groups
asking for earmarking
• MOF loses its soveraigne mandate to
administer revenues
• Perceived as conflict of interest
• Hard earmarking ties your hands
Ch 6-7: assess/present ‘taxfree/duty-free sales’? Art 15?
• Parties should consider prohibiting or
restricting the tax- or duty-free sales of
tobacco products. They should monitor
the extent to which tax- or duty-free
products contribute to illicit trade and
take the necessary measures if such a
link is ascertained.
Ch 6-7: assess/present ‘taxfree/duty-free sales’? Art 15?
• Use the existing language in
Articles 6 and 15
• Clearer
• Coherence
Which Tax levels?
• Level of excise or indirect tax not very
indicative per se. 70% ad valorem < than
40% specific & if start at a very low base, no
difference for health
• Establish tobacco use reduction targets per
capita adult & child (health gains verifiable)
• Structure tax levels on the bases of health on
objectives, be transparent about it.
• Open the dialogue on health objectives in tax
policy and with authorities
Facilitate monitoring of
article 6
• Harmonize the information
collected in tobacco taxes as part
of article 6 guidelines
The WB view
• Total support to FCTC
• Public health measure
• Development issue: micro economic
impact, fiscal impact, productivity
impact, demographic dividend
impact, accelerated aging
• Need for regional harmonization
WB Policy & Actions: Past
•
•
•
•
•
•
•
•
Curbing the epidemic (1998)
No-investment policy (1999), smoke-free
Tobacco economics in developing countries.
Analysis at country and regional level, with WHO
2007 strategy for health results
Towards a Political economy of tobacco control
Chronic NCDs flagship study,
Numerous regional and country specific studies
on NCDs "dying young", Ukraine studies, and
ongoing analysis.
WB Policy & Actions: Future
• Strengthened capacity to provide tobacco tax
advice to countries and make case from the
economic point of view
• Sensitizing our macro and fiscal policy
colleagues
• Entering into partnerships with technical and
financing institutions WHO, CDC, TFK, ACS,
Research centers
• Supporting the FCTC secretariat in the
context of article 6 and 15
World Bank Instruments
• Policy dialogue : CAS, PRSP
(setting priorities)
• Technical assistance
• Economic and sector work (studies)
• Lending: Investment, Policy
HOW TO DO IT?
• Focus on well-defined targets while addressing risk factors
from different angles.
• Give high-profile leaders a central role in driving initiatives
• Reinforce accountability of partner institutions
• Be opportunistic, identify impact on health and optimize
impact
• Identify wins for non stake holders (empower non smokers)
• Engage relevant sectors according to their mandate,
capacity and comparative advantage
• Ensure that different actors focus on what they do best
Lending
• Lending: Traditional Projects
Ukraine
• SWAPS: Kazakstan
• Policy Dialog: DPLS LAC & EAR
How to do it? MOH
• Catalyzers
• Data collection, epidemiology
• Raise awareness of issue
• Do background work
• Identify interventions that work
• Measure impact of policies
Role of Civil Society
• Research, evidence gathering
• Advocacy for increased resources
for health
• Watch dog on implementation
• Monitoring
• Resource mobilization
• Community outreach and
empowerment
Role of Private Sector
(non tobacco industry)
• Worker protection
• Lobbying government for
harmonizing regulation
• Health insurance and long term
care financing
Role of other government
agencies
• MOF/ economy, Customs, Ministry
of Industry and Trade
• Design tax policy, taking into
consideration regional
harmonization are agreements
enforcement and trade control
External organizations
• Respond to count request or
resources: TA, financing.
• Independent assessments of
barriers to tax increase
• Support national and international
commitment mechanisms, policy
conditions international
comparisons
Cigarette tax and illegal cigarette market,
Spain 1991-2008
Spain: Size of contraband cigarette market & total tax level
on cigarette price
77.6%
80%
17.7%
17.0%
13.6%
71.2%
75%
71.4%
70%
71.7%
12.0%
65%
60%
7.0%
59.0%
2.0%
2.7%
55%
1.1%
1.0%
50%
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
20
04
20
05
20
06
20
07
20
08
% of contraband cigarettes in duty
paid sales
22.0%
total tax incidence
% of contraband
-3.0%
45%
Total tax as % of Most Popular Brand
Price
21.2%