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Taxation & price issues
Burke Fishburn
Technical Adviser
International Union Against Tuberculosis & Lung
Disease
April 2011
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Sources
 Campaign
for Tobacco-free Kids International
Resource Center/Taxation & Price website
http://tobaccofreecenter.org/resources/taxation_pri
ce/fact_sheets
 The Tobacco
Atlas
http://www.tobaccoatlas.org/pricesandtaxes.html
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Increased prices of tobacco
through taxes reduce consumption
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Increasing the price of tobacco through tax increases will:
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Higher tobacco prices
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Decrease its consumption
Save lives
Raise tax revenue.
Encourage cessation among existing tobacco users;
Prevent initiation among potential users; and
Reduce the quantity of tobacco consumed among continuing users.
Higher taxes are particularly effective in reducing smoking
among vulnerable populations:
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youth
pregnant women
low-income smokers
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World Bank recommendations
 World
Bank recommends adopting tax policies of
countries with comprehensive tobacco control
policies where tobacco consumption has fallen.
 Such
countries have tobacco taxes between twothirds to four-fifths of retail price.
 Few
low- and middle-income countries achieve
this level of taxation, and most can significantly
increase their tax levels.
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Higher tobacco taxes decrease
consumption
 Increasing
tobacco taxes to achieve a 10%
increase in tobacco prices will decrease tobacco
consumption by
 ~4% in high-income countries
 ~ 8% in low- and middle-income countries.
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Higher tobacco taxes save lives
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If tax increases result in a 10% increase in cigarette prices,
the number of smokers worldwide would decline by 42
million
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38 million in low/middle-income countries
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4 million in high-income countries
This would save 10 million lives:
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9 million in low/middle-income countries
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1 million in high-income countries.
A 70% increase in the price of tobacco could prevent up to a
quarter of all deaths caused by smoking worldwide.
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Higher tobacco taxes help the young
and the poor
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Youth and low-income people are much more sensitive to the
price of goods than those with higher incomes.
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Youth have less money to spend, and higher tobacco taxes make
tobacco products less affordable for them
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People with low incomes spend a larger percentage of their
income on tobacco than those in higher income brackets.
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Tobacco tax increases can help motivate low-income groups to
reduce the amount of tobacco consumed or to stop using
tobacco
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BUT they also spend this money on other things: food, shelter,
education and health care….
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Higher tobacco taxes increase
government revenue
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Every nation and sub-national entity with an efficient tax system
that has significantly increased its cigarette tax has enjoyed
substantial increases in revenue, even while reducing smoking.
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In South Africa
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every 10• % increase in excise tax on cigarettes has been associated
with an approximate 6% increase in cigarette excise revenues.
From 1994 to 2001, excise revenues more than doubled as a result of
tobacco tax increase in South Africa.
In Thailand tax increases between 1994 and 2007
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raised cigarette excise taxes from 60% to 80% of wholesale price,
increasing tax revenue from 20,002 million THB in 1994 to 41,528
million THB in 2007 even as consumption decreased
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Key components
 Increase tobacco taxes to international standards.
 All countries should attain tax rates of at least two-thirds to four-fifths of the retail price of
tobacco products.
 Tax all tobacco products equally.
 All products must be taxed at equivalent rates to prevent tobacco users from switching
tobacco brands and types due to price differences.
 Ensure that tobacco taxes are passed on to the consumer in the form of
increased prices.
 Tie tobacco tax to the rate of inflation and consumer purchasing power.
 Adjust taxes so that retail prices of tobacco products increase by at least the sum of the
inflation rate and the per capita GDP growth.
 Allocate tobacco tax revenues to tobacco control or other health programs.
 High income countries have found that the public will supports tobacco tax increases
more strongly when the tax revenue is directed towards tobacco prevention or other
health programs.
 By supporting programs that prevent youth from starting to use tobacco and help people
quit, countries can further reduce tobacco use and save lives.
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WHO FCTC Art. 6
 Recommends
parties take into account tax
policies and price polices as a part of their
overall national health policy
 More
precise guidelines may be
forthcoming
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Types of taxes
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3 different types of taxes generally
applied to tobacco products:
 Specific excise
 Ad valorem excise
 Value-added tax (VAT)
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Excise tax
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Tax on selected goods which are produced within a country, or
imported and sold in that country.
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Tax can be collected from the producer, manufacturer,
wholesaler, importer, or at the point of final sale to the
consumer.
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Excise taxes can be either specific or ad valorem.
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Specific excise taxes
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Charged per quantity, such as per cigarette, pack, or kilogram (e.g.,
$1.50 per pack regardless of price).
Ad valorem excise taxes
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Charged as a percentage of the value of the product. The value of
the product is measured by the manufacturer’s price (e.g., 80% of the
manufacturer’s price) or by the price paid by consumers (e.g., 70% of
retail price).
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SPECIFIC EXCISE TAX: Advantages
 Predictable.
 Because the tax is not sensitive to changes in price, tax revenues do not change when
manufacturers change prices.
 The government revenue is therefore protected against industry’s price wars or price
manipulations.
 Government can predict tobacco tax revenue based on tobacco demand.
 Raises all product prices.
 Specific taxes are fixed and do not depend on tobacco industry pricing strategy
 Since the tax is, in most cases, applied to all products at the same rate, a higher tax
usually results in similar prices increase across the board, regardless of product.
 Easier to administer.
 Costs of administering specific excise taxes are low because it is easier to count the
number of products than to estimate their value.
 Unlike the VAT tax, which is collected at many points of production, specific taxes are
only collected once, either from producers/importers or from retailers, thus making tax
evasion less likely and collection more efficient.
 Easy to determine value.
 It only requires a precise definition of what constitutes “one unit” or quantity.
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SPECIFIC EXCISE TAX: Disadvantages
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Inflation erodes its value.
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Because the tax rate is not tied to the product price, it does not
automatically adjust with inflation.
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Instead, the government must periodically implement additional
rate increases, or add into the tax law that the specific excise tax
rate will automatically adjust with inflation.
Can be reduced by changing products characteristics
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Tobacco industry can reduce the impact of specific taxes on
consumption
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For example, producing bigger or longer size cigarettes if the tax
is applied per stick, or by increasing the size of a pack if the tax is
per pack.
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AD VALOREM EXCISE TAX: Advantages
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Automatic adjustment for inflation.
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Since the tax is tied to the product price, the tax automatically
adjusts with inflation.
Higher profit margin is taxed.
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Ad valorem tax reduces the industry profit margin since a part of
any price/profit increase goes to the government as tax revenue.
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AD VALOREM EXCISE TAX:
Disadvantages
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Less predictable revenue stream.
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Difficult to determine value.
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There is an incentive for manufacturers to produce low-priced products because ad valorem taxes are tied
to product prices. This, in turn, makes the products more accessible to youth and other low-income
populations.
Leads to large price differences between products.
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As opposed to specific taxes, which can easily be applied to products merely by determining the quantity,
ad valorem taxes require more effort to calculate the payment. Manufacturers can easily manipulate their
product prices to avoid higher tax payments.
Low prices.
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As ad valorem taxes are based on value, it is difficult to predict tax revenue over time.
Ad valorem taxation widens the gap in prices between cheap products and more expensive products. More
smokers may purchase cheaper products or switch from the more expensive products to cheaper ones, and
this may reduce the impact of higher tax on consumption.
Difficult to administer.
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Auditing the value of multiple types of tobacco products declared by the manufacturers requires strong tax
administration capacity. In countries where tax administration may be weak, the full tax revenue potential
may not be realized if the market prices are not well established or verified.
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Value added tax
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General tax on consumption of products and it is applied
proportionally to their prices.
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VAT is charged as a percentage of the value
added/generated at each stage of production.
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For instance, tobacco growers and cigarette manufacturers are
each charged a tax on the value they add/generate to the total
value of a cigarette.
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Total taxes and retail price
 Total
taxes = Excise + VAT+ Import
Duty + Other Taxes
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Retail Price = Total Taxes+ Producer's
Price+ Retailers and Wholesalers'
Margin (Profit)
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Conclusion
 In
most low/middle-income countries, specific
taxes that automatically adjust for inflation are
preferred to ad valorem taxes
 Specific taxes
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Minimize substitution and are more effective than ad
valorem taxes at reducing consumption after a tax
increase.
Easier to administer and assures a predictable income
for the government.
Should be adjusted such that the nominal retail price of
cigarettes increases by at least the sum of the inflation
rate and the per capita income growth rate.
+ Countering industry
claims
against tobacco price and tax
increases
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Claim: Higher tobacco taxes will
hurt the economy.
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They say: Tax increases will lead to significant reductions in
employment in tobacco growing and manufacturing, as well as more
general wholesale, retail, and other economic sectors. Consequently,
increases will have an adverse impact on the entire economy.
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TRUTH
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Farming and manufacturing account for a small and, in most countries,
declining share of economic activities.
Decline in the demand will be gradual allowing farmers time to transition from
tobacco to alternative crops
Tobacco manufacturing generates very few jobs, and those jobs are declining
due to the tobacco industry’s automation / mechanization of the manufacturing
Positive impacts on other sectors as the money smokers
would have spent on tobacco products will be spent on other goods and
services. The net employment effect of this shift in consumers’ preferences will
most likely be positive, producing more jobs in other sectors
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Claim: Higher tobacco taxes will
increase smuggling.
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They say: Tax increases on tobacco products will lead to
increased smuggling, illegal cigarette production, and related
criminal activity.
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TRUTH:
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Tobacco taxes are not the primary reason for cigarette smuggling and
cigarette tax avoidance. The World Bank has demonstrated that levels
of smuggling tend to increase with the degree of corruption in a
country.
Smuggling can be controlled by legal means (e.g. tax stamps, serial
numbers, special package markings, health warning labels in local
languages) and by law enforcement (e.g. improving corporate
auditing, better tracking systems, and good governance). Revenue
generated by a tax increase can finance these activities.
Higher taxes reduce consumption and increase government revenue,
even in the presence of cigarette smuggling.
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Claim: Higher tobacco taxes will
reduce tax revenues
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They say: reductions in tobacco sales caused by tax
increases will be so large that it will offset the impact of the
increased tax rate
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TRUTH
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Higher tobacco taxes produce higher tax revenues. The demand
for tobacco products is inelastic which means that the
proportionate reduction in demand for tobacco is smaller than
the proportionate size of tax increase
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Even though demand is reduced when taxes and prices increase,
the higher tax rate will result in overall increases in tax revenues.
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Claim: Higher tobacco taxes will
hurt the poor
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They say: Tobacco tax increases are regressive and fall
disproportionately on the poor. Poor people have only few
pleasures, and higher taxes will make tobacco unaffordable
to them.
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TRUTH
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Tobacco industry aggressively targets the poor with its
advertising (and pricing)
Rates of tobacco use are higher among low-income groups
Lower income populations are more responsive to increases in
tobacco prices than people with higher income. Increased
tobacco taxes will reduce tobacco use among lower income
people, therefore reducing the burden tobacco disproportionally
imposes on the poor
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Claim: Higher cigarette taxes will
encourage smokers to switch to
cheaper brands
or other tobacco products
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They say: Smokers will switch to cheaper brands or cheaper
tobacco products. There will be no overall reduction in tobacco
use.
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TRUTH
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Some will switch, but not all AND…
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Higher taxes will still prevent most from starting to smoke, encourage
them to quit, and reduce the quantity of cigarettes smoked
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Specific excise taxes reduce price differences among the various
brands, thus limiting substitution among tobacco products when taxes
go up
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Claim: Tax rates are already too
high
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They say: Most countries already have very high rates of
taxes on tobacco products.
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TRUTH
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NOT TRUE! Taxes remain low and tobacco is cheap.
Tobacco products in many countries have become more
affordable over time as economies have grown and household
incomes have increased, even when prices, adjusted for inflation,
have remained stable or increased
Tobacco taxes are not high enough to cover the huge costs
tobacco imposes on individuals, families and countries, including
health care costs for tobacco related diseases, lost productivity
due to premature deaths, fires due to tobacco use, and
environmental deforestation for tobacco farming
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Claim: Higher tobacco taxes
punish tobacco users
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They Say: Tobacco is a pleasure to use. Raising tobacco taxes
means tobacco users will pay more money for their pleasure
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TRUTH
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Tobacco use kills. Most tobacco users start using and become
addicted to tobacco before the age of 20 when they are too young
to realize the risks of tobacco use.10
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Among tobacco users who understand the risks of tobacco, a
majority report wanting to quit however the addictive nature of
tobacco makes this difficult.
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Tobacco taxes encourage tobacco users to quit, positively
impacting their health.
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Claim: Taxes interfere with
consumers’ freedom of choice
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They say: Governments’ responsibility should end with making
the risks of tobacco use widely known to people
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TRUTH
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Many tobacco users underestimate the risks of tobacco or are
unaware of them
When used as intended, tobacco kills
Tobacco is an addictive substance and, by the time users try to quit,
they are addicted
Tobacco use imposes costs on families and governments in the form
of health care costs for tobacco-related diseases and lost productivity
due to pre-mature deaths
Smoking imposes costs on nonsmokers who develop diseases and/or
die prematurely due to secondhand smoke exposure
Therefore, Government has responsibility to act