The Economics of Tobacco
Control – What Have We
Learned and What Do
We Need to Know
Frank J. Chaloupka
Chair, WHO Collaborating Centre on the
Economics of Tobacco & Tobacco Control
Distinguished Professor, UIC
Research Conference on Tobacco Control in Africa
Cape Town, South Africa, 16 July, 2014
2
21
The
Economics
of
Tobacco
Control
3
Overview

What have we learned about the
economics of tobacco control

What do we still need to know about the
economics of tobacco control
• Draws on WHO’s NCD research priorities

How can we apply the lessons learned to
other public health problems
Tobacco Taxes, Prices, and
Tobacco Use
Taxes, Prices and Tobacco Use

Increases in tobacco taxes that increase
tobacco product 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
• 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, and
6
compensation
Taxes, Prices and Tobacco Use
Cigarette Prices and Cigarette Consumption,
Guatemala, Inflation Adjusted, 2002-2010
17.3
3,950.0
3,750.0
16.3
15.8
3,550.0
15.3
3,350.0
14.8
14.3
3,150.0
13.8
2,950.0
2002
2003
2004
2005
2006
Consumption
2007
Price
2008
2009
2010
13.3
7
Price (inflation adjusted, 2010)
Consumption (million sticks)
16.8
Elasticity Estimates
Aggregate Demand Studies
Low/Middle-Income
0
0
-0.2
-0.2
-0.4
-0.4
Short-run price elasticity of demand
Short-run price elasticity of demand
High-Income, Non-US
-0.6
-0.8
-1
-0.8
-1
-1.2
-1.2
-1.4
1900
-0.6
-1.4
1910
1920
1930
1940
1950
1960
1970
1980
1990
2000
Midpoint of period over which study was performed
-1.6
1970
1975
1980
1985
1990
Midpoint of period over which study performed
Source: IARC Handbook 14, 2011
1995
2000
2005
8
Adult Prevalence & Price, Brazil
Adult Smoking Prevalence and Cigarette Price
Brazil, Inflation Adjusted, 2006-2013
16
5.4
16
15
4.9
14
14
4.4
13
13
3.9
12
12
11
3.4
2006
2007
2008
2009
2010
2011
2012
2013
9
Sources: Ministry of Health, Brazil; EIU; World Bank
Price per Pack, 2013 BRL
Adult Smoking Prevaleence
15
Monthly Quit Line Calls, United States
11/04-11/09
200,000
4/1/09 Federal Tax Increase
150,000
1/1/08 WI Tax Increase
100,000
50,000
0
2004
2005
2005
2005
2006
2006
2006
2007
2007
2007
2008
2008
2008
2009
2009
10
2009
Cigarette Prices and Cessation
US States & DC, 2009
% Ever Smokers Who Have Quit
70
65
y = 0.0283x + 43.083
R² = 0.371
60
55
50
45
350
400
450
500
550
600
650
700
750
Average price (in cents)
Source: BRFSS, Tax Burden on Tobacco, 2010, and author’s calculations
800
850
Cigarette Price and Youth Smoking Prevalence,
United States, 1991-2010
36
$5.50
$4.75
26
21
$4.00
16
$3.25
11
$2.50
6
1991
1993
1995
1997
1999
2001
2003
2005
2007
Year
Cigarette Price
12th grade prevalence
10th grade prevalence
Source: MTF, Tax Burden on Tobacco, 2011, and author’s calculations
8th grade prevalence
12
Smoking Prevalence
Price per pack (8/11 dollars)
31
Taxes, Prices and Health:
France, 1980-2010
# cigarettes/adult/day
300
5.5
5.0
4.5
Lung cancer death rates per 100,000 (divided
by four): men age 35-44
250
4.0
200
3.5
3.0
150
2.5
Relative price
2.0
100
1.5
1.0
50
1980
1985
1990
1995
Year
Source: Jha, et al., in progress
2000
2005
2010
Price (% relative to 1980)
Number/adult/day and death rates
6.0
15
Qatar
UAE
Luxembourg
Saudi Arabia
Switzerland
Korea, Republic of
Japan
Austria
Denmark
US
Israel
Hong Kong
Sweden
Belgium
Netherlands
Germany
Finland
Norway
Italy
Canada
Greece
Singapore
Spain
Australia
Hungary
France
Czech Republic
Ireland
Portugal
Poland
UK
New Zealand
Iran
Argentina
Colombia
Mexico
Brazil
Chile
China
Malaysia
Tunisia
Panama
Thailand
South Africa
Paraguay
Egypt
Indonesia
Guatemala
Vietnam
Pakistan
India
Sri Lanka
Cote d'Ivoire
Cameroon
Papua New Guinea
Bangladesh
Kenya
Relative Income Price (Percentage of Annual per capita GDP
required to buy 100 packs of cigarettes)
Relative Income Price for Cigarettes,
Selected Countries, 2011
25%
20%
15%
10%
5%
0%
Source: Chaloupka, et al., in progress
Percentage Change in the Relative Income Price, 1996-2011
-10%
-30%
-50%
Saudi Arabia
Qatar
Denmark
Norway
Sweden
Austria
Luxembourg
Ireland
UAE
Hong Kong
Finland
Korea, Republic of
Belgium
Czech Republic
Greece
Australia
Hungary
Singapore
Canada
UK
Israel
Germany
Netherlands
New Zealand
Switzerland
Portugal
Italy
Poland
US
France
Spain
Japan
China
Colombia
Mexico
Brazil
Tunisia
Panama
Chile
Thailand
South Africa
Malaysia
Egypt
Vietnam
Paraguay
Pakistan
Indonesia
Sri Lanka
India
Guatemala
Cote d'Ivoire
Cameroon
Papua New Guinea
Bangladesh
Kenya
Percentage Change in the Relative
Income Price of Cigarettes, Selected
Countries, 1996-2011
110%
90%
70%
50%
30%
10%
-70%
-90%
Source: Chaloupka, et al., in progress
16
Affordability & Sales, Brazil
Cigarette Affordability and Sales, Brazil, 2003-2013
2.5%
93,000
2.4%
Cigarette Sales, Million Sticks
91,000
2.3%
89,000
87,000
2.2%
85,000
2.1%
83,000
81,000
2.0%
79,000
1.9%
77,000
75,000
1.8%
2003
2004
2005
2006
2007
2008
Sales, Million Sticks
Sources: Euromonitor; EIU; World Bank
2009
2010
Affordability
2011
2012
2013
17
Affordability - % of Per Capita Income to buy 100 Packs
95,000
Taxes, Prices and Tobacco Use

What do we need to know?
• More country-specific evidence from LMICs



Lack of overall price, income elasticity of demand
estimates for most low and middle-income countries
Even less known about differential impact of price by
age, socioeconomic status, gender, and other factors
Limited evidence from LMICs on impact of taxes and
prices on transitions in tobacco use
• Non-linearities in effects of taxes/prices



Changes in elasticity over time, as taxes & prices
increase, as incomes rise, etc.
Differential impact of incremental vs. large tax and
price increases
Interactions between tax/price and tobacco control
policies
18
Taxes, Prices and Tobacco Use

What do we need to know?
• More evidence on the demand for other
tobacco products



Own price and income elasticities
Cross-price elasticities
Changes in elasticities in response to new nicotine
products
• More evidence on interactions between tobacco
use and other health-related behaviors


Alcohol, illicit drug use
Diet, activity and obesity
19
Disposable Electronic Cigarettes
Sales Volume and Price: Total US 2010 - 2012
18
4,500
16
3,500
3,000
14
2,500
2,000
12
1,500
1,000
10
500
8
2010
Q1
2010
Q2
2010
Q3
2010
Q4
2011
Q1
2011
Q2
2011
Q3
Real Sales Price
2011
Q4
2012
Q1
Sales Volume
2012
Q2
2012
Q3
2012
Q4
Sales Volume (thousands of pieces)
Sales Price (in real 2011 Q4 dollars)
4,000
Reusable Electronic Cigarettes
40
600
35
500
30
400
25
300
20
200
15
100
10
2010
Q1
2010
Q2
2010
Q3
2010
Q4
2011
Q1
2011
Q2
Real Sales Price
2011
Q3
2011
Q4
2012
Q1
Sales Volume
2012
Q2
2012
Q3
2012
Q4
Sales Volume (thousands of pieces)
Sales Price (in real 2011 Q4 dollars)
Sale Volume and Price: Total US 2010 - 2012
Importance of Tobacco
Tax Structure
Types of Taxes

Variety of tobacco taxes
• Taxes on value of production
• Customs duties on tobacco leaf, tobacco products
imports and/or exports
• Sales taxes/Value added taxes
• Implicit taxes when government monopolizes
production and/or distribution
• Excise taxes (or similar taxes)


Many of these are applied to variety of agricultural and/or
consumer goods and services
Excise taxes are of most interest given specificity to
tobacco products
23
Types of Taxes

Excise Taxes
• 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
products (e.g. a specific percentage of
manufacturer’s prices for tobacco products)
Variety of tax systems/structures



Uniform systems
Mixed systems
Tiered systems
24
Excise systems on cigarettes
Number of countries,
2012
Total covered
186
Specific excise only
56
Ad valorem excise only
50
Mixture of both excises
60
No Excise
20
Source: WHO 2013
Excise systems on cigarettes
Base of tiers
Country
# of countries
Retail price
Bangladesh, Mozambique, Philippines, Belarus,
Indonesia, Pakistan
6
High, standard and low end
cigarettes
Burkina Faso, Senegal
2
Producer price
China
1
Production volume
Indonesia
1
filter/non filter
Armenia, Belarus, India, Nepal, Georgia,
Kazakhstan, Kyrgyzstan, Moldova, Papua New
Guinea, Tajikistan, Ukraine
11
hand/machine made
Indonesia, India, Philippines
3
kretek/white
cigarette,
cheerot/cigarette
Indonesia, Myanmar
2
Tobacco content
(dark/blonde or
dark/light)
Andorra, Algeria
2
soft/hard
Brazil, Mozambique, Uganda
3
Cigarette length
India, Nepal, Hong Kong, Sri Lanka
4
Trade (domestic/imported)
Andorra, Uzbekistan
2
Weight (tobacco content in
cigarette)
Belize, New Zealand
2
Leaf content (domestic/imported)
Fiji
1
Type
Packaging
Source: WHO 2013
Average price and excise tax
by tax structure, 2012
Excise tax structure
Average price
PPP
Average excise
PPP
Specific only
3.73
1.57
Ad valorem only
2.50
1.28
Mixed system
2.86
1.32
Relying more on specific
3.84
1.67
Relying more on ad
2.29
1.11
1.70
-
valorem
No excise
Source: WHO 2013
Cigarette Tax Structure & Prices
Standard Deviation, Prices of Top 5 Brands
0.60
Selected Countries, 2009-10
0.50
0.40
0.30
0.20
0.10
0.00
28
Source: Chaloupka, et al., 2014
WHO’s Best Practices in
Tobacco Taxation

Simpler is better
• Complex tax structures more difficult to
administer
• Greater opportunities for tax evasion and
tax avoidance under complex tax
structures
• Where existing structure is more complex,
simplify over time with goal of achieving
single uniform tax
29
Simplifying the Excise Tax
System: Egypt
2009: Tiered specific
Net of tax price
per pack (P.T.)
GST/pac
k (P.T.)
Less than 65
108
More than 65 to 73
112
More than 73 to 84
125
More than 84 to 95
140
More than 95 to
106
153
More than 106 to
300
175
More than 300 to
425
315
More than 425
325
Mixed system


2010 cigarette excise
system: mixture of ad
valorem (40% of retail
price) and specific (EP
1.25/pack)
2011 cigarette excise
system: mixture of ad
valorem (50% of retail
price) and specific (EP
1.35/pack)
Source: WHO and Ministry of Finance, Egypt.
Simplifying the Excise Tax
System: Indonesia
Production tier Production capacity
2009
2010
Machine-made kreteks SKM
I
II
HJE (Rp/stick)
660> 2 billion
630-660
600-630
430> 500 million to 2 billion 380-430
374-380
290
280
260
210
175
135
310
300
280
230
195
155
590> 2 billion
550-590
520-550
379> 500 million to 2 billion
349-379
336-349
> 6 million to 500 million 234-
200
150
130
90
80
75
40
215
165
145
105
95
90
65
550> 2 billion
430-550
375-430
300> 500 million to 2 billion 254-300
217-254
290
230
185
170
135
80
310
275
225
200
165
105
Specific excise / stick (Rp)
2011
2012
HJE (Rp/stick)
325 660315 630-660
295 600-630
245 430210 374-430
170
2013
HJE (Rp/stick)
355 669345 631-669
325
270 549235 440-549
375
355
285
245
Hand-made kreteks SKT
I
II
III
White cigarettes SPM
I
II
Source: WHO and Ministry of Finance, Indonesia.
590520-590
325
295
245
215
175
110
255 749195 550-749
275
205
125
115
105
75 250-
130
120
110
80
365 680365
365
235 444190 345-444
125
380
245
195
WHO’s Best Practices in
Tobacco Taxation

Rely more on specific tobacco excises
as the share of total excises in prices
increases
• Greater public health impact of specific excises
given reduced opportunities for switching down in
response to tax/price increases
• Sends clear message that all brands are equally
harmful
• Produces more stable, higher revenues stream less
susceptible to industry price manipulation
32
Increasing Emphasis on
Specific Excise Tax: Mexico

2009:
• Ad valorem tax of 150% of pre-tax price to retailer

November 2009:
• Added specific tax of 0.80 pesos/pack in 2010
• Increased specific tax by 0.40 pesos each year
through 2013 (2.00 pesos/pack)

2010 legislation, effective 2011:
• Increased ad valorem tax to 160% of pre-tax price
• Raised specific tax immediately to 7 pesos/pack
Source: Cherukapalli, 2013; Waters, et al., 2010
Mexico
Source: Tobacco-Free Kids, 2012
Adoption of Uniform Specific
Excise Tax: Philippines
Cigarette (machine packed) excise tax rate
Net retail price per pack
(excluding VAT and excise)
2007
2008
2009
2010
2011
2012
More than Ps. 10
26.1
26.1
27.2
27.2
28.3
28.3
Ps. 6.50 - Ps. 10
10.9
10.9
11.4
11.4
12
12
Ps. 5 - Ps. 6.50
6.7
6.7
7.1
7.1
7.6
7.6
Below Ps. 5
2.2
2.2
2.5
2.5
2.7
2.7
2017
2018
SIN TAX REFORM ACT, 2012
Net retail price per pack
(excluding VAT and excise)
More than Ps. 11.50
Ps. 11.50 and below
2013
2014
2015
2016
25
27
28
29
12
17
21
25
Source: WHO and Ministry of Finance, Philippines.
30
Annual
4%
increase
WHO “Best Practices” for
Tobacco Excise Taxes

Adopt comparable taxes and tax
increases on all tobacco products
• Maximizes public health impact of
tobacco tax increases by minimizing
opportunities for substitution
36
WHO’s Best Practices in
Tobacco Taxation

Set tobacco excise tax levels so that
they account for at least 70 percent of
the retail prices for tobacco products
• Update of World Bank ‘yardstick’ of any taxes
accounting for 2/3 to 4/5 of retail prices
• Well above where most countries are currently
• Further increases in countries that do reach
this target
37
Average Price of the Most Sold Brand &
Excise Tax per pack, and Total Tax Share
By Income Group 2012
65.90%
63.34%
5.82
58.40%
48.72%
50.31%
PPP
40.76%
3.12
3.29
3.00
2.67
1.65
1.57
0.97
0.61
High income
Upper middle
Lower middle
Retail price, PPP
Source: WHO 2013
1.35
1.18
Low income
Excise tax PPP
0.31
China
Total tax share (%)
All
Tobacco Tax Structure

What do we need to know?
• More evidence on the impact of tobacco tax
structure on prices, tobacco use


Relative prices within/across product categories
Substitution between brands/products
• Evidence on industry responses to alternative
tax structures and changes in tax structures


Pricing strategies
Product characteristics, product mix
• Optimal tax structure for harm minimization

Differential taxes based on relative risk?
39
Globalization of the
Tobacco Industry
Globalization of Tobacco Industry
• Opening of markets through bilateral,
regional, and global trade agreements
• Loosening of restrictions on foreign
direct investment
• Privatization of government run
tobacco companies

A few significant exceptions
• Consolidation among multinational
tobacco companies
41
Trade in Tobacco Products

Impact of freer trade on tobacco use
• Growing evidence that reduction in barriers to
trade increase tobacco use
• Impact greater on lower income countries
• Results from increased competition, lower
prices, and increased use of sophisticated
marketing strategies by multinational tobacco
companies
42
Source: Chaloupka & Laixuthai, 1996; Taylor, Chaloupka, Guindon & Corbett, 2000; Perucic, et al., in progress
Direct Investment & Privatization

Opening of markets has also resulted in increased
openness to direct investment
• Investment in new production facilities/capacity owned and
operated by multinational tobacco companies


By far the most widespread
Facilitated by Bilateral Investment Treaties
• Privatization of government owned tobacco companies


for example, Turkish TEKEL acquired by BAT in 2008 after
being on the market for many years)
Partial privatization of Egypt Tobacco Company (government
still retains controlling interest)
• Joint ventures between local monopoly and multinational
tobacco companies

For example, PMI and China National Tobacco company
43
Direct Investment & Privatization

Can be good or bad for public health – depends
on how it’s done; “best practices” for public
health
• Agreements with multinational tobacco companies can
inhibit government’s ability to adopt strong tobacco
control policies

E.g. experiences in former Soviet republics where agreements
with MTCs prevented significant tax increases and strong tobacco
control measures
• Can eliminate conflict of interest between government
tobacco production/distribution and tobacco control

E.g. Turkey where sale of TEKEL followed by aggressive
implementation of FCTC, including significant regular tax
increases, comprehensive smoke-free policy, comprehensive
TAPS ban, and more
44
Source, Yurekli, Shin &Chaloupka, in press
Mergers & Acquisitions

Considerable consolidation among tobacco
companies
• Acquisition of local cigarette companies by MTCs


Acquisition of popular local brands
For example, BAT acquisition of Protabaco - 2nd largest
Colombian company - in 2011
• Mergers between local tobacco companies and MTCs

For example, Philip Morris International and Fortune Tobacco
Company merge in 2010, creating Philip Morris Fortune
Tobacco Company that nearly monopolizes Philippine cigarette
market
• Acquisition of one MTC by another MTC

For example, Imperial Tobacco Group’s acquisition of Altadis
in 2008
45
Mergers & Acquisitions

Has led to consolidation/centralization of production
in regional production hubs
• Capitalize on significant economies of scale in production of
tobacco products
• Take advantage of regional trade agreements that greatly
reduce or eliminate barriers to trade in tobacco products
• Generally located in:


Large consuming country within region
Country where labor, tobacco leaf, other costs are low
• Case study - Central America



BAT Caribbean and Central America hub in Honduras supplies
others in region
Philip Morris International subsidiary Tabacalera
Centroamericana in Guatemala does the same
46
Together, 2 companies control nearly all of the market
Cigarette Company Market Shares
1985-2011, Selected Years
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1985
1990
1995
CNTC
PMI
BAT
2000
JTI
ITG
2006
2011
Others
Source: Maxwell Tobacco Fact Book, various years; Euromonitor, 2013; note: PMI
includes Philip Morris International and Altria Group Inc.
Mergers & Acquisitions

Increasingly, consolidation across products
• Altria, US’ largest cigarette company,
acquisition of US Smokeless Tobacco Company
in 2008, largest smokeless company in the US
• Lorillard Inc. acquisition of Blu, a leading ecigarette company
• JTI’s acquisition of Gryson, a leading RYO/MYO
manufacturer in Western Europe
• PMI’s purchase of Jed Rose’s patent for a
nicotine inhaler
48
Mergers & Acquisitions

Combined with development and marketing
of new products
• Altria, RJR and others develop and market
variety of dissolvable products, extending brands
across products
• 2011 - BAT creates Nicoventures to develop
reduced risk tobacco products, other nicotine
delivery products
• 2012 - Altria markets Verve – a non-tobacco,
nicotine lozenge
• 2012 – Swisher launches e-cigarettes, e-cigars
49
Marlboro
50
Camel
51
52
Globalization and Tobacco Control

Increasing challenges to national tobacco
control policies under trade and investment
agreements
• Investor-state disputes being brought under Bilateral
Investment Treaties

E.g Philip Morris Asia v. Australia under bilateral investment
treaty between Hong Kong & Australia; PMI v. Uruguay under
bilateral investment treaty between Switzerland & Uruguay
• State-state disputes being brought in World Trade
Organization

E.g. Indonesia v. United States; multiple countries v. Australia
• Challenges in national courts

E.g. Australia, United States
53
Trade Disputes

US-Thailand and GATT/WTO
• After relatively easy success in Japan, Taiwan, and
South Korea, US tried to open Thai cigarette markets
• Thai government fought back
• Key issues:



Near total ban on cigarette imports
Differential taxes on foreign and domestically produced
cigarettes
Comprehensive ban on advertising and promotion
• Dispute brought before GATT in 1990



Ban, differential taxes are violations of agreement
Ad/promo ban is allowable
Decision depends on whether or not measures are applied
equally to domestic and foreign products
54
Source: Chaloupka & Laixuthai, 1996
Trade Disputes

US-Thailand and GATT/WTO
• Article XX of GATT allows for protection of public health
over interests in trade:
• “Subject to the requirement that such measures are
not applied in a manner which would constitute a
means of arbitrary and unjustifiable discrimination
between countries where the same conditions prevail,
or a disguised restriction on international trade,
nothing in this Agreement shall be construed to
prevent the adoption or enforcement by any
contracting party of measures…necessary to protect
human ….health (or) necessary to secure compliance
with the laws or regulations which are not inconsistent
with the provisions of this Agreement”
55
Source: Chaloupka & Laixuthai, 1996
Trade Disputes

Trade dispute between Indonesia and US over
clove cigarettes
• US FDA banned flavored cigarettes (except menthol)
under the US Family Smoking Prevention and Control
Act
• Indonesia leading exporter of clove cigarettes (kreteks)
brought challenge saying ban is discriminatory and
unnecessary
• Sept. 2011 – WTO rules that the ban is discriminatory,
but not unnecessary given evidence that availability of
flavored cigarettes contributes to youth smoking
uptake


Calls on US to bring policy into compliance with trade
agreements
US appealed, lost; unclear how it will comply
56
Trade Disputes

Norway’s ban on retail tobacco product displays
• Challenged by Philip Morris Norway arguing that display
ban violated Article 11 of European Economic Area by
‘hindering the free movement of goods’
• European Free Trade Agreement court ruled that the ban
effectively restricted imports, but left it to Norway’s
court to determine whether or not the public health
objective was likely to be met and could not be achieved
by less trade restrictive measure
• September 14, 2012, Oslo district court upheld ban:
“there exist no other measures that will have an effect
equivalent to that of the Display Ban.”
“Absence of visible tobacco products in shops will be vital
both in terms of the absence of advertising effect, and as a
part of de-normalisation.”
57
Trade and Investment Disputes

Australia’s Plain Packaging Policy







Announced April 29, 2010
Legislation introduced April 7, 2011
Passed House August 24, 2011, Senate November 2,
2011
Phased in by December 1, 2012
Prohibits use of trade marks, symbols, graphics or
images on pack
Allows brand, business/company name, variant
name in standard font/position
Coupled with other provisions



Graphic warnings expanded (75% front, 90% back)
Pack/cigarette specifications
Similar details for other tobacco products
59
Plain Packaging

Multiple challenges from tobacco industry

Constitutional challenge brought by BAT,
PMI, ITG, JTI and others
•
•


Claimed government was taking intellectual property
without proper compensation
Government responded that it was regulating
packaging, not acquiring trademarks
Case heard in Australia high court, Spring
2012
August 2012 decision dismissed tobacco
company challenge, 6-1 decision
•
Found that plain packaging controlled tobacco company
marketing and did not involve acquisition of trademarks
60
Plain Packaging

Multiple challenges from tobacco industry

Pending WTO challenges brought by
Ukraine, Indonesia, Dominican Republic,
Honduras and Cuba
•
•
•

Trade-Related aspects of Intellectual Property
Rights (TRIPS) Agreement
Technical Barriers to Trade (TBT) Agreement
Harm to domestic industry due to
commoditization of product, falling prices, and
increased illicit trade
1993 Hong Kong – Australia Bilateral
Investment Treaty challenge
•
PM-Asia acquisition of PM-Australia in Feb. 2011
61
Investment Disputes

PMI 2012 challenge to Uruguay tobacco control
law under bilateral investment treaty between
Uruguay and Switzerland
• Three regulations originally at issue:



Health warnings covering 80% of cigarette pack
“Repulsive and shocking” images used in graphic
warnings (subsequently dropped)
“Single presentation” - permission to sell only one
variation per brand (current focus)
• PMI argues that these “deprive the company of its
ability to use its legally-protected trademarks and
brands”
• Uruguay argues that these are necessary to protect
public health
62
Trade/Investment Disputes
Controversy over whether or not public
health interests take precedence over
trade and/or investment interests

GATT decision in US/Thai case indicates that public
health concerns trump trade issues
• Key is uniform application to all tobacco products
regardless of origin, even if effect may be uneven

Recent decisions suggest that this principle is
being applied in other decisions
• European Free Trade Association Court and Oslo District Court
on Philip Morris challenge to Norway’s tobacco products display
ban
• WTO panel decision in Indonesia case
• Australia High Court decision on industry challenges to plain 63
packaging legislation
Globalization

What do we need to know?
• Impact of globalization on tobacco use and its
consequences


Pricing and marketing strategies
Product innovation/diffusion
Research to counter industry challenges to
national tobacco control policies under bilateral,
regional, and global agreements
• Research on the effects of globalization on
tobacco control policies
•


Political economy of tobacco control policies
Consequences of delayed, weakened policies
64
Oppositional Arguments
Tobacco Taxes & Tax Revenues

Myth: increases in tobacco taxes
will lead to lower tobacco tax
revenues given reductions in
tobacco use
66
Tobacco Taxes & Tax Revenues

Fact: tobacco tax increases lead to
increased tax revenues
• Tobacco taxes account for a fraction of
tobacco prices

Increase in tax leads to smaller increase in
price
• Reductions in tobacco use less than
proportionate to price increase
67
South Africa
Taxes, Prices, and Tax Revenues, 1970-2012
Inflation Adjusted
25
9000
8000
20
6000
15
5000
4000
10
3000
2000
5
1000
0
0
1970
1975
1980
1985
Industry Price
1990
Excise Tax
1995
VAT
2000
2005
Excise Tax Revenues
2010
Tax Revenues, Million Rand
Rand per Pack
7000
Tobacco Taxes & the Poor

Myth: tobacco tax increases
harm the poor
69
Tobacco Taxes & the Poor

Fact: tobacco use harms the
poor
70
Tobacco and Poverty
Family falls into
poverty
Forgone income 3:
Breadwinner dies
prematurely
Forgone income 2:
Treatment cost &
Lost working days &
income
Breadwinner gets
sick due to
tobacco use
Source: Yurekli, 2007
Cycle of
tobacco and
poverty
Poor men
smoke
Forgone income 1:
More money spent
Less money spent
on tobacco:
on education, nutrition, etc
High opportunity cost
Poverty and Tobacco Use
Burdens of poverty are compounded by
tobacco use
•
Responsible for impoverishment of over 50
million in China and over 15 million in India
•
Crowding out of other spending:
•
Bangladesh: tobacco money spent
equivalent to:
•
Males = 1402 calories of rice per day
•
Females = 770 calories of rice per day
Sources: Hu, et al., 2008; John, et al., 2011; Efroymson, et al., 2001
72
Tobacco Taxes & the Poor

Fact: tobacco tax increases can
be progressive
• Tobacco use among low-income
populations more responsive to
price


Pay smaller share of tax increase
Receive greater share of health
benefits from higher tax
73
Who Pays& Who Benefits
Turkey, 25% Tax Increase
9.7%
8.5%
9%
4%
-1%
-2.2%
-6%
-11%
-16%
-18.5%
-21%
-20.4%
-26%
-31%
-36%
-35.3%
Change in Consumption
Change in Taxes Paid
Source: Adapted from Önder & Yürekli, 2014
Who Pays& Who Benefits
Impact of Federal Tax Increase, U.S., 2009
70.0%
67.4%
60.0%
50.0%
46.3%
40.0%
29.5%
30.0%
24.2%
20.7%
20.0%
11.9%
10.0%
0.0%
<poverty line
1-2* poverty line
Share of Tax Increase
>2* poverty line
Share of Reduced Deaths
Source: Chaloupka et al., in progress; assumes higher income smokers smoke more expensive brands
Impact on the Poor
• Also need to consider overall fiscal
system




Key issue is what’s done with the revenues
generated by the tax
Greater public support for tobacco tax
increases when revenues are used for tobacco
control and/or other health programs
Net financial impact on low income
households can be positive when taxes are
used to support programs targeting the poor
Concerns about regressivity offset by use of
revenues for programs directed to poor
Tobacco Control & Employment

Myth: tobacco control will result
in significant job losses as
tobacco use falls
77
Tobacco Taxes & Employment

Fact: tobacco control results in
net increase in jobs in most
countries
78
Impact on Jobs

Tobacco tax increases will lead to decreased
consumption of tobacco products
• Small loss of jobs in tobacco sector

Money not spent on tobacco products will be
spent on other goods and services
• Gains in jobs in other sectors

Increase in tobacco tax revenues will be
spent by government
• Additional job gains in other sectors

Net increase in jobs in most countries
Tobacco Control & Illicit Trade

Myth: tobacco tax increases and
other tobacco control policies
will lead to increases in illicit
trade, eliminating the public
health and revenue benefits of
higher taxes
80
Tobacco Taxes & Illicit Trade


Fact: tobacco use falls and tax
revenues increase following tax
increases even in the presence of
illicit tobacco trade
Fact: no evidence that other
tobacco control policies lead to
increase in illicit trade
81
Tax Avoidance & Evasion Do NOT Eliminate
Health Impact of Higher Taxes
Source: Schroth, 2014
82
Tax Avoidance & Evasion Do NOT Eliminate
Revenue Impact of Higher Taxes
Cook County Cigarette Tax and Tax Revenues - FY01-FY06
$225,000,000
$1.75
$205,000,000
$1.55
Tax per Pack
$1.35
$165,000,000
$1.15
$145,000,000
$0.95
$125,000,000
Chicago tax up
to 68 cents, 1/1/06
Chicago smoking
ban, 1/16/06
$0.75
$0.55
Chicago tax rises
from 16 to 48 cents
$0.35
$105,000,000
$85,000,000
$65,000,000
$45,000,000
$0.15
$25,000,000
2001
2002
2003
2004
2005
2006
Fiscal Year
Tax
Revenues
83
Tax Revenues
$185,000,000
Tobacco Taxes & Illicit Trade

Fact: other factors more
important than tobacco taxes
and tobacco control policies in
explaining illicit trade
84
Determinants of Tax Avoidance
& Evasion
• Tax and price differentials
More important for individual tax
avoidance and bootlegging
 Larger scale efforts avoid all taxes

85
Illicit Cigarette Market Share
& Cigarette Prices, 2012
Latvia
50.00%
45.00%
y = -0.0076x + 0.1752
R² = 0.0496
Illicit trade share as % of legal cigarette consumption
Lithuania
Dominican Republic
40.00% Pakistan
Malaysia
Bolivia
35.00%
30.00%
Iran
25.00%
Egypt
PeruEcuador
Brazil
Ireland
South Africa
Poland
Bulgaria
Tunisia
Nigeria
Estonia
Venezuela
Slovakia
Canada
Uruguay
Mexico
UAE Costa Rica
Austria
Croatia
Cameroon India
France
Colombia
Bosnia
Philippines Kenya
Saudi Arabia Romania
15.00%
Guatemala
United Kingdom
Vietnam
Turkey
Greece
Serbia
Netherlands
Sweden
Indonesia
Georgia
Portugal
AlgeriaMorocco Slovenia
10.00%
Ukraine China Azerbaijan
Spain USA
Germany Switzerland
Finland
Argentina
Singapore
Uzbekistan
Hungary
Italy
5.00% Macedonia
Chile
Begium
Israel
New Zealand
Russia Thailand
Denmark
Kazakhstan
South Korea
Japan
0.00%
Belarus
0
2
4
6
8
10
12
20.00%
Price USD
Sources: Euromonitor, WHO
Norway
Australia
14
Determinants of Avoidance &
Evasion
• Corruption
• Weak tax administration

Absence of tax stamps; weak or non-existent
physical controls; unlicensed manufacturers,
distributors, retailers; weak customs
authorities
• Poor enforcement

Limited resources for border patrols, customs
authorities, etc; low penalties
87
Smuggling and Corruption, 2011
Latvia
0.5
0.45
Malaysia
Dominican Republic
0.4
Lithuania
y = -0.0131x + 0.2028
R² = 0.0815
Bolivia
illicit cigarette trade volume
0.35
Ecuador
Pakistan
Ireland
0.3
Bulgaria
Brazil
Iran
0.25
Peru
South Africa
Poland
Estonia
Mexico
Nigeria Guatemala
United Arab Emirates
Slovakia
Canada
Croatia
Egypt
Uruguay
0.16
India Romania
Philippines
Saudi Arabia
Turkey
Hungary
Vietnam
Kenya
France
Austria
Sweden
Algeria
United Kingdom
Costa Rica
Netherlands
Morocco Georgia
Uzbekistan
Portugal
Germany
Indonesia
Azerbaijan
Greece
United States
Bosnia China
Ukraine
Slovenia
Macedonia
Singapore
Argentina
Belgium
Norway
Serbia
Tunisia
Switzerland
Finland
Italy
Spain
Colombia
Israel
Russia
Thailand
Chile
Australia
New Zealand
South Korea
Japan
Kazkhstan
Denmark
Belarus
0.2
Venezuela
0.15
0.1
0.05
0
1
2
3
4
5
6
Transparency Index
Sources: Euromonitor, Transparency International
7
8
9
88
10
Determinants of Avoidance &
Evasion
• Presence of informal distribution
channels

e.g. Street vendors, unlicensed distributors
• Presence of criminal networks

e.g. Organized crime, terrorist organizations
• Access to cheaper sources

e.g. reservations, duty free, cross border
89
Tobacco Taxes & Illicit Trade

Fact: there exist effective
interventions to reduce illicit
trade in tobacco products
90
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%
Combating Tax Avoidance & Evasion

Illicit trade protocol to the WHO FCTC
• Adopted November 2012; currently in process
of being signed/ratified; provisions calling for:
• Strong tax administration




Prominent, high-tech tax stamps and other pack
markings
Licensing of manufacturers, exporters, distributors,
retailers
Export bonds
Unique identification codes on packages
• Better enforcement


Increased resources
Focus on large scale smuggling
• Swift, severe penalties
• Multilateral/intersectoral cooperation
92
Oppositional Arguments

What do we need to know?
• Research to assess the economic impact of
tobacco use and to evaluate the economic impact
of tobacco control


On jobs, businesses, productivity, and economic
development
On health care costs
• Research on developing economically viable
alternatives to tobacco growing and
manufacturing

Viable alternatives appear highly specific to local
context
93
Oppositional Arguments

What do we need to know?
• Research on the interrelationships between
tobacco use and poverty
•
•
the role of tobacco use in causing poverty and compromising
other spending
the differential effect of tobacco control policies & programmes
on the poor
• Research on tobacco tax avoidance/evasion


Measurement, determinants, and consequences
Effectiveness of alternative approaches to
strengthening tax administration
94
Oppositional Arguments

What do we need to know?
• Research on the cost-effectiveness of
tobacco control policies, programs and
other interventions

To identify the ‘optimal policy mix’ called for in
1998 conference
95
Key Tobacco Control Policies
Cost-Effectiveness
$6,000
Cost per DALY Averted
$5,000
$4,000
$3,000
$2,000
$1,000
$0
Increased taxation
High Income
Comprehensive
advertising ban
Clean indoor air
laws
Upper Middle Income
Source: WHO, unpublished data
Information and
labelling
Lower Middle Income
Nicotine
Replacement
therapy
Low Income
96
Applying Lessons from the
Economics of Tobacco Control
to Other Health-Related Behaviors
"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
98
NCDs: 60% Global Deaths
Major NCD
Major modifiable causative Risk Factors
Tobacco Use
Unhealthy
Diet
Physical
Inactivity
Harmful Use
of Alcohol
Heart Disease
& Stroke
√
√
√
√
Diabetes
√
√
√
√
Cancer
√
√
√
√
Chronic Lung
Disease
√
Source: WHO, 2010; Mackay, 2012
Alcohol Prices and Drinking
Extensive econometric and other research shows that
higher prices for alcoholic beverages significantly reduce
drinking:
• 10 percent price increase would reduce:
• Beer consumption by 1.7 to 4.6 percent
• Wine consumption by 3.0 to 6.9 percent
• Spirits consumption by 2.9 to 8.0 percent
• Overall consumption by 4.4 percent
• Heavy drinking by 2.8 percent
• Generally larger effects on youth and young adults
Source: Wagenaar et al., 2009; Xu & Chaloupka, 2013
Beer Tax and Binge Drinking Prevalence
US States, 2010
Source: Xuan et al., 2013
Alcohol Prices and Consequences
Extensive econometric and other research shows that
higher prices for alcoholic beverages significantly reduce:
• Drinking and driving, traffic crashes, and motor-vehicle
accident fatalities
• Deaths from liver cirrhosis, acute alcohol poisoning,
alcohol-related cancers, cardiovascular diseases, and
other health consequences of excessive drinking
• Violence, including spouse abuse, child abuse, and
suicides
• Other consequences of drinking, including work-place
accidents, teenage pregnancy, and incidence of
sexually transmitted diseases
Alcohol Prices and Alcohol-Related
Traffic Fatalities, US, Ages 16-20, 19871993
20.7
19.7
1.035
18.7
1.025
17.7
1.015
16.7
15.7
1.005
14.7
0.995
13.7
0.985
12.7
1987
1988
1989
Alcohol Price Index
1990
1991
1992
1993
Alcohol-Involved Motor Vehicle Fatalities
Source: NHTSA, BLS, and author’s calculations
Deaths per 100,000
Alcoholic Beverage Price Index
1.045
State Cigarette & Beer Tax Increases, 2000-2013
20
15
10
5
0
2000
2001
2002
2003
2004
2005
2006
Cigarettes
2007
2008
2009
2010
2011
Alcohol
Sources: Campaign for Tobacco Free Kids; NIAAA Alcohol Policy Information System; Brewers Almanac;
2012
2013
Decade of Last Permanent Beer Tax
Increase
WA
MT
VT
ND
OR
ME
MN
ID
WY
NV
WI
SD
MI
CO
AZ
OH
IL IN
UT
CA
PA
IA
NE
KS
KY
MO
WV
OK
AK
AL
NJ
DE
CT
MD
D.C.
GA
LA
2000s
FL
HI
MA
RI
SC
AR
MS
TX
VA
NC
TN
NM
NH
NY
1990s
1980s
1970s
1960s
1950s
105
1940s or earlier
Average Beer & Cigarette Taxes
United States, Inflation Adjusted 1973-2012
Tax Per Pack of 20 Cigarettes & 6 Pack of Beer, 2012
dollars
$2.00
$1.50
$1.00
$0.50
$0.00
1973
1976
1979
1982
1985
1988
1991
1994
1997
Beer Tax
Cigarette Tax
2000
2003
2006
2009
Sources: Campaign for Tobacco Free Kids; NIAAA Alcohol Policy Information System; Brewers Almanac; Bureau
of Labor Statistics; and authors calculations. Note: 2012 beer tax is through June 2012
2012
Alcoholic Beverage & Tobacco
Product Prices, Relative to CPI,
1953-2010
3.35
2.85
2.35
1.85
1.35
0.85
1953
1958
1963
1968
1973
1978
Alcoholic Beverages
1983
1988
1993
1998
2003
2008
Tobacco Products
Source: Tax Burden on Tobacco, 2011, and author’s calculations
Public Health Rationale for SSB Taxes
•
Link to obesity
• Several meta-analyses conclude that increased
SSB consumption causes increased weight,
obesity
• Increased calories from SSBs not offset by
reductions in calories from other sources
•
Other health consequences
• type 2 diabetes, lower bone density, dental
problems, headaches, anxiety and sleep
disorders
Soda Consumption & Obesity
California Counties, 2005
70
%O
v
o e
f r
w
A e
d i
u g
l h
t t
s
o
W r
h
o O
b
A e
r s
e e
65
60
55
50
y = 16.44ln(x) + 6.1142
R² = 0.6656
45
40
10
15
20
25
30
% Adults Drinking One or More Sodas per Day
Source: Babey, et al., 2009 and authors' calculations.
35
40
Evidence on SSB Taxes/Prices
& Obesity
• Growing literature demonstrating the higher
prices for SSBs lead to reductions in SSB
consumption
• Powell et al. (2013) review finds greater impact
of SSB only prices; elasticity of -1.2
• Limited, mixed evidence on impact of
taxes/prices on weight outcomes
•
•
•
Small, less than comprehensive sales taxes
Substitution to untaxed products, larger volumes
Some effects among most at-risk populations
Carbonated Beverage Prices & Youth Obesity
1995-2009, Inflation Adjusted
155
13
153
12.5
151
12
149
11.5
147
11
145
10.5
143
10
1999
2001
2003
Carb. Bev.
Source: BLS; YRBS
2005
2007
Obese
2009
States with Sales Taxes on Regular Soda (as of January 1, 2014)
States with Sales Taxes on Bottled Water (Jan. 1, 2014)
Source: Bridging the Gap Research Program, University of Illinois at Chicago, 2014
Importance of Tax Structure

From a public health and revenue perspective, specific
excise tax (tax based on quantity/volume) preferable to
sales tax or ad valorem excise tax (taxes based on price)
for several reasons:
• Included in shelf price, so more apparent to consumer
• Easier administratively
• Reduce incentives for switching to cheaper brands, larger
quantities
• Revenues more stable, less subject to industry price
manipulation
• Disadvantage of specific tax: need for inflation adjustment
Counterarguments

Same as have been raised against
tobacco taxes
• Employment impact


Recently published research assessing impact of
reduced SSB consumption on employment
Forthcoming research assessing impact of
reduced alcohol consumption on employment
• Impact on the poor
• Tax avoidance/evasion
115
Summary
Counterarguments


Much has been learned about the economics of
tobacco and tobacco control over the past decade
• Particularly rapid growth in research from LMICs
• Key factor in significant tax increases, stronger
tobacco control policies, and implementation of
programs and other interventions to reduce tobacco
use and its consequences
However, much remains to be learned
•

Particularly in some regions, including Africa
Many lessons learned can be applied to other
health behaviors that contribute to NCDs
117
For more information:
Bridging the Gap
http://www.bridgingthegapresearch.org
Tobacconomics
http://www.tobacconomics.org
@BTGResearch
@tobacconomics
fjc@uic.edu