Tobacco Taxation
Frank J. Chaloupka, PhD
University of Illinois at Chicago
International Tobacco Evidence Network
 2007 Johns Hopkins Bloomberg School of Public Health
Overview
Why tax tobacco?
Types of tobacco taxes
Impact of tobacco taxes on tobacco product prices
Effects of taxes and prices on cigarette smoking and other tobacco
use
Impact of tobacco taxes on tobacco tax revenues
Conclusions
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Why Tax Tobacco? Revenue Generation
Efficient revenue generation
 Primary motive historically and still true in many countries
today
 Very efficient source of revenue, given:
 Low share of tax in price in most countries
 Relatively inelastic demand for tobacco products
 Few producers and few close substitutes
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Why Tax Tobacco? Revenue Generation
“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, Wealth of Nations, 1776
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Why Tax Tobacco? Promote Public Health
Promote public health
 Increasingly important motive for higher tobacco taxes in
many high-income countries
 Emerging as important factor in some low- and middleincome countries
 Based on substantial and growing evidence on the effects of
tobacco taxes and the prices on tobacco use
 Particularly among young, less-educated, and low-income
populations
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Why Tax Tobacco? Promote Public Health
“The Parties recognize that price and tax measures are an effective
and important means of reducing tobacco consumption by various
segments of the population, in particular young persons.”
— Framework Convention on Tobacco Control, Article 6
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Why Tax Tobacco? External Costs
Cover the external costs of tobacco
 Less frequently used motive
 Account for costs resulting from tobacco use imposed on
nonusers
 Can also include “internalities” that result from addiction and
time-inconsistent preferences
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Industry Perspective
Industry understands the importance of tobacco taxes
 "With regard to taxation, it is clear that in the U.S., and in
most countries in which we operate, tax is becoming a major
threat to our existence”
 "Of all the concerns, there is one—taxation—that alarms us the
most. While marketing restrictions and public and passive
smoking (restrictions) do depress volume, in our experience
taxation depresses it much more severely. Our concern for
taxation is, therefore, central to our thinking . . ."
Source: Philip Morris. (1985). Smoking and Health Initiatives.
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Types of Tobacco Taxes
Variety of tobacco taxes
 Taxes on the value of the tobacco crop
 Customs duties on tobacco leaf imports and/or exports
 Customs duties on tobacco product imports and/or exports
 Sales taxes
 Value-added taxes
 Implicit taxes
 Tobacco excise taxes
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Two Types of Excises
Specific taxes: excises based on quantity or weight (e.g., tax per
pack of 20 cigarettes)
Ad valorem taxes: excises based on value of tobacco products
(e.g., a specific percentage of manufacturer’s prices for tobacco
products)
Some countries use a mix of specific and ad valorem tobacco
excises
Many countries apply different types of taxes and/or tax rates on
different types of tobacco products
 For example: manufactured cigarettes vs. bidis
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Specific vs. Ad Valorem Tobacco Excises
Strengths/weaknesses depend on a variety of factors and goals of
tax
Specific taxes
 Generally produce a more stable stream of revenue
 Real value falls with inflation
 Promote higher “quality” products
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Specific vs. Ad Valorem Tobacco Excises
Ad valorem taxes
 More unstable revenues given that revenues depend on
industry pricing
 Government effectively subsidizes industry price cuts
 Rises with inflation
If reducing tobacco use is a primary goal, a specific tax is generally
preferred
 Particularly when regularly adjusted for inflation
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Taxes and Tobacco Product Prices
Impact of tobacco taxes on tobacco use and other outcomes
depends on the impact of tax on prices of tobacco products
 Impact on prices will vary based on several factors, including
the following:
 Structure of tobacco product market
 Cost of tobacco product production
 Industry price-related marketing efforts
 Potential for individual tax avoidance and larger-scale,
more organized tobacco product smuggling
 Most evidence (largely from the United States) indicates that
tobacco tax increases result in comparable tobacco product
price increases
 That is, tax increases are fully passed on to tobacco users
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Inflation-Adjusted Cigarette Prices, U.S., 1955–2006
-
Source: adapted by CTLT from Tax Burden on Tobacco. (2006); author’s calculations.
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Inflation-Adjusted Cigarette Taxes and Prices: S. Africa
-
Source: adapted by CTLT from Van Walbeek. (2003).
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Tax Levels and Prices Vary Widely across Countries
Source: adapted by CTLT from Chaloupka, et al. (2000).
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Increases in Tobacco Product Taxes and Prices
Induce current users to try to quit
 Many will be successful in long-term
Keep former users from restarting
Prevent potential users from starting
 Particularly effective in preventing transition from
experimentation to regular use
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Increases in Tobacco Product Taxes and Prices
Reduce consumption among those who continue to use
Lead to other changes in tobacco-use behavior, including:
 Substitution to cheaper products or brands
 Changes in buying behavior
 Compensation
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Price and Tobacco Use in High-Income Countries
Well over 100 studies from high-income countries consistently find
that:
 A 10% increase in price reduces overall consumption of
tobacco products by 2.5–5%
 Consensus estimate: 10% price increase reduces
consumption by 4%
 Estimated impact on sales higher in presence of
significant tax avoidance and smuggling
 Long-run impact larger as addicted users respond over
time to permanent increases in taxes and prices
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Cigarette Prices and Consumption: U.K.
Source: adapted by CTLT from Townsend. (1998).
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Cigarette Prices and Sales: U.S.
Source: adapted by CTLT from Tax Burden on Tobacco. (2007); author’s calculations.
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Price and Tobacco Use: Low-/Middle-Income Countries
Growing evidence from low- and middle-income countries suggests
that the impact of tax and price increases is up to twice as large as
in high-income countries
 Consistent with predictions from economic theory that price
sensitivity is greater among those on lower incomes
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Price and Tobacco Use: Low-/Middle-Income Countries
Growing evidence from low- and middle-income countries suggests
that the impact of tax and price increases is up to twice as large as
in high-income countries
 A few estimates
 Southeast Asia: 10% price increase reduced overall
consumption by 6–9%
 China: 10% price increase reduces consumption by
6.5–13%
 South Africa: 10% price increase reduces consumption by
6–7%
 Morocco: 10% price increase reduces consumption by
5–15%
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Cigarette Prices* and Consumption: South Africa
Source: adapted by CTLT from Van Walbeek. (2003).
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Cigarette Prices* and Consumption: Morocco
Source: adapted by CTLT from Aloui. (2003).
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Price, Smoking Prevalence, and Cessation
Estimates suggest that about half of the impact of price on overall
tobacco use result from changes in prevalence
 Implies that a 10% price increase reduces prevalence
by:
 1–2.5% in high-income countries
 2.5–5% in low- middle-income countries
 Changes in prevalence in response to price increase largely
result from cessation among current users
 U.S. estimates suggest 10% price increase increases
number of smokers trying to quit by more than 10%, with
about 2% successful in long-term
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Cigarette Prices and Adult Smoking Prevalence: U.S.
Source: adapted by CTLT from Tax Burden on Tobacco. (2007); U.S. National Health Interview, various years; author’s
calculations.
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Cigarette Prices and Quitting Smoking: U.S.
Sources: adapted by CTLT from Tax Burden on Tobacco. (2006); U.S. Behavioral Risk Factor Surveillance System.
(2005); author’s calculations.
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Price Sensitivity and Age
Growing evidence that tobacco use among younger persons is two
to three times more responsive to price than tobacco use among
older persons
 Largely based on studies from the United States, but there is
growing evidence from other countries
 Consistent with economic theory, given:
 Lower incomes of youth
 Greater importance of peer influences on youth
 Influence of addiction
 Greater preference for the present among youth
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Price Sensitivity and Age
Growing evidence that tobacco use among younger persons is two
to three times more responsive to price than tobacco use among
older persons
 Changes in youth prevalence largely result from reductions in
initiation of tobacco use
 Evidence suggests that higher taxes and prices are most
effective in preventing youth from moving beyond
experimentation and into regular tobacco use and addiction
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Youth Smoking Prevalence and Cigarette Price: U.S.
Source: adapted by CTLT from Tax Burden on Tobacco. (2006); U.S. Monitoring the Future Surveys;
author’s calculations.
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Price Sensitivity and Income/Education
A growing number of studies find that tobacco use among lesseducated and/or lower-income persons is more responsive to price
 Economic theory implies that lower-income persons are
generally more responsive to changes in prices for goods or
services they consume than are higher-income persons
 U.K.: lowest socioeconomic group is very responsive to price,
while highest socioeconomic group virtually unresponsive to
price*
* Source: Townsend, J. (1994).
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Price Sensitivity and Income/Education
A growing number of studies find that tobacco use among lesseducated and/or lower-income persons is more responsive to price
 U.S.: smoking in households below median income level are
about four times more sensitive to price than smoking in
households above median*
 Similar evidence emerging from low- and middle-income
countries
* Source: Farrelly, M. (2001).
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Dedicated Tobacco Taxes
A growing number of governments are using dedicated tobacco
taxes (also called hypothecated or earmarked tobacco taxes) to
support tobacco control activities
 Include “health promotion foundations” and “comprehensive
tobacco control programs”
Research evidence, largely from high-income countries, shows that
funding for tobacco control programs:
 Reduces overall tobacco consumption
 Increases adult cessation and prevents youth initiation
 Reduces tobacco use in other high-risk populations
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Tobacco Taxes and Deaths Caused by Tobacco
Given the evidence on the impact of tobacco taxes and prices on
tobacco use, large increases in taxes globally would significantly
reduce premature deaths caused by tobacco use
 Short-run reductions in deaths result from increased cessation
 Significant health benefits of cessation
 Long-run reductions result from preventing initiation
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Tobacco Deaths and Tobacco Control
Source: adapted by CTLT from Jha, et al. (2006).
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Tobacco Taxes and Revenues
Increases in tobacco taxes lead to increases in tobacco tax
revenues, despite reductions in tobacco use
 Low share of tax in price in most countries
 Implies large tax increase will raise price by smaller
percentage
 Less than proportionate fall in consumption in response to
given percentage price increase in most countries
 Revenues rise even in presence of tax avoidance and smuggling
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Federal Cigarette Tax and Tax Revenues, U.S.
Source: adapted by CTLT from Tax Burden on Tobacco. (2006); author’s calculations.
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Cigarette Taxes* and Tax Revenues*: South Africa
Source: adapted by CTLT from Van Walbeek. (2003).
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Cigarette Taxes* and Tax Revenues*: Indonesia
Source: adapted by CTLT from Djutaharta, et al. (2005).
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What Is the “Right” Level of Tobacco Taxes?
This is a complex question that depends on a variety of factors,
including the following:
 Motives for tobacco taxation
 Improving public health vs. generating revenue? (taxes
can accomplish both)
 Tax rates in neighboring countries
 Potential for tax avoidance and smuggling
World Bank suggests that a useful yardstick is two-thirds to fourfifths of the price accounted for by tax in countries that have
taken a comprehensive approach to reducing tobacco use
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Summary
Higher tobacco taxes will lead to higher tobacco product prices
Increases in tobacco taxes and prices will reduce tobacco use and
the disease and death it causes
 Increase cessation among current users
 Prevent relapse among former users
 Prevent initiation of regular tobacco use
 Reduce consumption among those who continue to use
Higher tobacco taxes raise revenues
 New revenues can be used to support comprehensive tobaccocontrol efforts that would further reduce tobacco use
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Additional Resources
International Tobacco Evidence Network
 www.tobaccoevidence.net
World Bank tobacco page
 www.worldbank.org/tobacco
World Health Organization’s Tobacco-Free Initiative
 www.who.int/tobacco/en/
Research for International Tobacco Control
 www.idrc.ca/en/ev-83280-201-1-DO_TOPIC.html
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Additional Resources
Jha, P., Chaloupka, F.J. (1999). Curbing the Epidemic:
Governments and the Economics of Tobacco Control. Washington
D.C.: World Bank.
Jha, P., Chaloupka, F.J., eds. (2000). Tobacco Control in
Developing Countries. Oxford: Oxford University Press.
Chaloupka, F.J., Warner, K.E. (2000). “The Economics of Smoking.”
In Handbook of Health Economics. New York: North Holland.
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Additional Resources
Ross, H., Chaloupka, F.J. (2006). Economic Policies for Tobacco
Control in Developing Countries. Revista de Salud Pública de
México, 48(S1):S113-120.
Jha, P., Chaloupka, F.J., et al. (2006). “Tobacco Addiction.” In
Disease Control Priorities in Developing Countries, 2nd Edition.
Washington D.C.: Oxford University Press and the World Bank.
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