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%