Tobacco Control PolicyThe Challenge of Raising Tobacco Taxes

Global and Regional Experience

by

Ayda A. Yurekli, Ph.D

World BankWorld Bank ECA Regional PCU Conference,

Warsaw, Poland September 9, 2001

Why is Raising Tobacco Taxes a Policy Challenge?

• Tobacco taxes are NOT new taxes

• Challenging, because– higher taxes improve public health, but– Policy makers worry about the economic

consequences of higher taxes

Why increase tobacco taxes

• Good for public health– Improve health outcomes

• Change smoking behavior• Youth and the poor are more sensitive• Increase budget share for other goods and services

• Good for economy– Generate revenues– Won’t necessarily reduce employment– Won’t necessarily increase smuggling

Why are higher taxes good for public health?

• Change Smoking Behavior– As tax increases consumption decreases

• A 10% increase in price reduces consumption by:

– 4% in developed countries,

– 8% in developing countries

– Poor and Youth are more sensitive• A 10% price increase reduces smoking as much as 10% among

youth and the poor.

• Deter youth taking up smoking

– High opportunity costs• Higher budget share for other goods and services

Price Elasticity EvidenceAs tax increases, consumption decreases

Evidence from Turkey

Trend in real price and consumption of the most popular domestic brand, Tekel 2000 in

Turkey (CPI, 1995=100)

10000

12000

14000

16000

18000

20000

22000

1992 1993 1994 1995 1996 1997 1998 1999

co

nsu

mp

tio

n m

illi

on

pie

ces

10000

15000

20000

25000

30000

real

pri

ce/p

ack T

L

Consumption real price

Price Elasticity EvidenceAs tax increases, consumption decreases

Evidence from Hungary

Real Cigarette Price and Consumption Per 15+ in Hungary, 1987-1999

70

75

80

85

90

95

100

105

110

1987 1988 19891990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Rea

l Cig

aret

te P

rice

(199

5 H

UF/

pack

)

110

120

130

140

150

160

170

180

Con

sum

ptio

n P

er P

erso

n 15

+ (P

acks

)

Price

Consumption

High opportunity cost for smokers and their families

Smoking Expenditure as % of Total Income for a Typical Belarus Smoker

7% 10%

37%42%

0%

10%

20%

30%

40%

50%

1996 1999

If smoke only domestic brands If smoke only foreign brands

High Opportunity Cost in Bulgaria

Tobacco expenditure as % of gross income and wages&salaries in Bulgaria

1997

1.8%

4.9%

1.6%

3.6%

1.1%

3.1%

0%

1%

2%

3%

4%

5%

6%

as % of gross income as% of wages &salaries

Low Middle High

Will higher tobacco taxes be good for the economy?

Why do policy makers worry?

• reduce revenues? – Tobacco generates revenues

• Excise +VAT tax revenues• Import tariffs• Income taxes

• cause job losses?– Create employment opportunities

• In agriculture- farmers- and industry

• accelerate smuggling activities?– Means less revenues, – more criminal activities

Tobacco Taxes-

Important source of revenue! Cigarette Tax Revenue as % of Total Government Tax Revenues in Selected

ECA Countries, 1999

1%2% 3% 3% 3% 3%

4%5% 5%

6%7%

9% 9%

10% 11% 11%

Tobacco Taxes- Important source of revenue!

Cigarette Tax Revenue as % of Total Government Tax Revenues in Selected EU Countries

1% 2% 2% 2% 2% 2% 2% 2% 3% 3%4% 4%

5%

9%

Tobacco Tax Revenues: Who Earns, How Much?

Cigarette Tax Revenue and its share in Government Tax Revenue in EU Countries, 1999

02000400060008000

100001200014000160001800020000

(Million US $)

Tobacco Tax Revenues: Who Earns, How Much?

Cigarette Tax Revenue and its share in Government Tax Revenue in ECA Countries, 1999

02000400060008000

100001200014000160001800020000 (Million US $)

Revenue Generating Potential of Tobacco Taxes

Empirical Arguments

Depends on several factors. – Consumption level– Tobacco tax rates– Retail price of cigarettes– Income – Price and income elasticity of demand– Control of smuggling activities

As Cigarette Tax Rises Revenue IncreasesTax per pack and cigarette tax revenues in Norway, 1990-1998

2000

2500

3000

3500

4000

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

Cig

are

tte

ta

x r

ev

en

ue

in

loc

al

cu

rre

nc

y (

mil

lio

ns

)

15

20

25

30

35

Ta

x p

er

pa

ck

in

lo

ca

l

cu

rre

nc

y

Cigarette tax revenues Tax per pack

Source: World bank 1999

Evidence from Hungary: Since 1997 the tax rate has increased, and so has total revenue (in real terms)

Real Tobacco Tax Revenue in Hungary, 1991-1999

20000

40000

60000

80000

100000

1991 1992 1993 1994 1995 1996 1997 1998 1999

Real

Reven

ue M

illi

on

HU

F

real tobacco tax revenue

Real Tobacco Tax Revenue

Real Tobacco Tax Revenue, Real Tax Per Pack and Consumption Trends in Hungary, 1991-1999

20000

40000

60000

80000

100000

1991 1992 1993 1994 1995 1996 1997 1998 1999

Real

Reven

ue M

illi

on

HU

F

20

30

40

50

60

70

80

90

100

Tax/P

ack H

UF

real tobacco tax revenue real tax per pack

Real Tax Per Pack Real Tobacco Tax Revenue

Real Tobacco Tax Revenue, Tax Per Pack and Consumption in Hungary, CPI, 1995=100,

1991-1999

20000

40000

60000

80000

100000

1991 1992 1993 1994 1995 1996 1997 1998 1999

Mil

lio

n P

ieces,

Mil

lio

n H

UF

Reven

ue

20

30

40

50

60

70

80

90

100

Tax/p

ack,

HU

F

consumption real tobacco tax revenue real tax per pack

Consumption

Real Tax Per Pack Real Tobacco Tax Revenue

Tobacco Tax Rates and Prices: Where ECA fits in the Globe!

Cigarette Prices and Taxes, 1999

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

High Income Upper MiddleIncome

ECA Lower MiddleIncome

Low Income

US

$/pa

ck

30%

35%

40%

45%

50%

55%

60%

65%

70%

75%

Tax

as %

of r

etai

l pric

e

Average Price Per Pack (US$)

Average Tax Per Pack (US$)

Tax as % of Retail Price

Global (European) Evidence: Total and Excise Tobacco Taxes as % of Retail Price 2000

Total tobacco tax= Excise+VAT, Excise = (Specific+Ad Valorem)

6569 70 71 73 73 74 74 75 76 76 79 80 81 82

5550

57 58 57 57 57 58 58 58 62 6266

0102030405060708090

100110

% s

har

e o

f R

SP

Excises Total

Regional Evidence: ECATotal and Excise Tobacco Taxes as % of Retail Price

Central European Countries, 2000

8

21

31

39

4954 55 55

60 61 61 6367

8 5

15

24

3438 37

40 42 41 43

32

50

0

10

20

30

40

50

60

70

80

90

100

Mo

ldo

va

Ru

ssia

Ukra

ine

Lit

hu

an

ia

Latv

ia

Ro

man

ia

Bu

lgari

a

Esto

nia

Czech

Rep

.

Hu

ng

ary

Po

lan

d

Slo

ven

ia

Cro

tia

% o

f to

tal an

d e

xcis

e t

ax r

ate

s

Total Tax Incidence Excise incidence

Do high tax rates mean high prices? Not in ECA countries!

Cigarette Prices Per Pack for ECA Countries, 1999

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00 US$/Pack

Cigarette prices lower than most food products in Bulgaria

Prices of Cigarettes and Other Consumer Commodities in Bulgaria, 1997

35% 43% 46% 106% 161%

514%

707%845% 905%

0500

100015002000250030003500

Cig

are

ttes

App

le

Milk

To

ma

to

Ric

e

Ban

ana

Chic

ken

Veal

Butt

er

Pork

Lev

s/p

ack

for

cig

aret

tes,

Lev

s/L

itre

fo

r m

ilk, a

nd

Lev

s/50

0 g

ram

s fo

r o

ther

s

% higher than cigarette price

High tax rates and high average prices of cigarettes in EU

Cigarette Prices Per Pack for EU Countries, 1999

0.00

1.00

2.00

3.00

4.00

5.00

6.00

7.00 US$/Pack

Will higher taxes lead to smuggling: What is the Solution?

Canadian Government reduced tobacco tax rates dramatically in February 1993

Tax reduced in an attempt to counter smuggling

IV

-1

2

4

6

8

10

12

1989

1990

1991

1992

1993

1994

1995

Real p

rice p

er

pack (

US

D)

0

10

20

30

40

50

60

70

80

90

100

An

nu

al cig

are

tte c

on

su

mp

tio

n p

er

cap

ita (

in p

acks)

Real Price Consumption

Sweden decreased cigarette taxes (17%) due to fear of smuggling in 1998

Cigarette Tax Revenue and Consumption in Sweden, 1970-1998

0

1000

2000

3000

4000

5000

6000

7000

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

Mil

lio

n S

KE

0

10

20

30

40

50

60

70

80

pack/c

ap

ita

TaxesMillion SKE cigarette/pack

Recommendations to control smuggling

• Require that all cigarette exporters, manufacturers and distributors have a license and keep detailed records

• Make cigarette exporters post a bond that will only be returned when it is proven that the cigarettes have reached their final destination: and

• Require that unique markings be placed on cigarette packages so that smuggled cigarettes can be traced back to their source.

Employment is decreasing for several

reasons: Efficiency, technology and privatization Employment in Tekel Cigarette Factories in Turkey, 1987-1998

10433

9933

8495

11315 11238

10574

11024

73387018

6535 65196000

7000

8000

9000

10000

11000

12000

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998

Em

plo

ym

en

t

RecommendationsIncreasing taxes:

Win win situation for both public health and the economy.

• Higher taxes will generate higher revenues while reducing consumption

• There is still room to increase cigarette taxes in ECA countries due to inelastic demand, and low tax rates

• Reducing tax rates is not a solution for smuggling • Employment in cigarette manufacturing is reduced

for different reasons other than reduced consumption ?