Tobacco Control Policy
The Challenge of Raising Tobacco Taxes
Global, Regional and Country Experience
Joy de Beyer
Tobacco Control Coordinator
World Bank
Meeting of Mediterranean Countries, Malta, September 2001
Why is Raising Tobacco Taxes a
Policy Challenge?


Tobacco taxes are NOT new taxes
The challenge:
higher taxes are good for public health
but
 Policy makers worry about the economic
consequences of higher taxes

Why do higher taxes reduce tobacco use?

Tax increases raise prices
A 10% price increase reduces consumption by
 4% in developed countries
 8% in developing countries

Poor and Youth are more price-sensitive


A 10% price increase reduces smoking as much
as 10% among youth and the poor.
High prices deter youth from starting to smoke
Price Elasticity Evidence
As real price decreases, consumption increases
Evidence from South Africa
1.3
Real Price
0.08
1.2
1.1
0.07
1
0.9
0.06
Consumption
per adult
0.05
1970 1972 1974 1976 1978 1980 1982 1984 1986 1988
Year
Source: Saloojee 1995
0.8
0.7
Real Price
Cigarette consumption per adult
(in packs)
0.09
Evidence from the UK
Real Price and Consumption of Cigarettes
in the UK, 1971-96
Real price and consumption of cigarettes in the UK
1971-1996
17000
£ 2. 65
CONSUMPTION
£ 2. 45
Cigarette Consumption
1994 prices (£m)
15000
14000
£ 2. 25
13000
£ 2. 05
12000
£ 1. 85
11000
£ 1. 65
10000
PRICE
£ 1. 45
9000
£ 1. 25
1971Townsend
1974
1977
Source:
J 1998, Central
Statistical1980
Office (UK) 1983
(1965-93)
Year
1986
1989
1992
1995
P rice (£) 1994 value
16000
Why do policy makers worry?
Will higher tobacco taxes:
Reduce revenues ?
Tobacco is a good source of revenue

Excise +VAT tax revenues, import tariffs
Income tax and profit taxes

Cause job losses ?
Farmers, tobacco industry workers, others

Increase smuggling ?
smuggling loses revenues, and is a crime

Hurt poor smokers ?
Tobacco TaxesImportant source of revenue!
Cigarette Tax as % of Total Government Tax Revenue for
Selected EU Countries in 1990s
9.4%
4.5%
Greece 98
Ireland 97
Portugal 98
UK 99
Finland 98
Spain 97
Germany 98
Belgium 98
Denmark 99
France 97
Austria 99
Italy 99
Netherlands
97
3.3% 3.7%
2.9%
2.5% 2.6%
2.1%
2.1%
2.0%
1.9%
1.6%
1.2%
Tobacco TaxesImportant source of revenue!
Tobacco tax revenue as % of total tax
revenue in Mediterranean countries
1998-1999
11%
4%
1%
Syria
98
4%
5%
5%
1%
Lebanon Tunisia
98
98
Algeria
99
Egypt
99
Morocco
99
Turkey
99
Tobacco Tax Revenues:
How Much?
Cigarette Tax Revenue in EU Countries, 1999
20000
18000
16000
14000
12000
10000
8000
6000
4000
2000
0
UK
Fr
an
ce
G
er
m
an
y
Ita
ly
ai
n
Sp
G
re
ec
Ne
e
th
er
la
nd
s
Fi
nl
an
d
Sw
ed
en
Ire
la
nd
Po
rtu
ga
l
Au
st
ria
De
nm
ar
k
Be
lg
iu
m
(Million US $)
As Cigarette Tax Rises Revenue Increases
Tax per pack and cigarette tax revenues in Norway, 1990-
15
Cigarette tax revenues
Source: World bank 1999
Tax per pack
Tax per pack in local
currency
2000
1998
20
1997
2500
1996
25
1995
3000
1994
30
1993
3500
1992
35
1991
4000
1990
Cigarette tax revenue in
local currency (millions)
1998
Revenue Generating Potential of Tobacco
Taxes



As price rises, consumption falls, but by less
than the percentage rise in price (demand is
price-inelastic).
As incomes rise, so does consumption - and
total revenue (the income elasticity of
demand is greater than one).
Production can be closely supervised by the
government – easy to collect taxes.
Revenue Generating Potential of Tobacco
Taxes
Depends on:





Consumption level
Tobacco tax rates
Retail price of cigarettes
Incomes
Control of smuggling activities
Cigarette consumption has been increasing
significantly especially among developing
countries
Million Pieces
Cigarette Consumption in 1999 and
% increase 1990-1999 in Mediterranean
Countries
100000
80000
60000
40000
20000
0
-13% 9% -3%
19% 4%
10%
6%
32% 59% 59% 37%
14%
n ya ria
ia co gal ria ce ypt ce a in ta ly
a
s
I
rd Li b Sy u ni roc rt u lg e ree Eg ran Sp
o
J
A
F
T Mo Po
G
Big Gap between Developing and Developed
World Cigarette Prices and Tax rates
Average Price and Tax per pack and tax share
in average price 1999
0.80
0.70
2.50
0.60
2.00
0.50
1.50
0.40
0.30
1.00
0.20
0.50
0.10
0.00
0.00
EU
Average Price
EU Med
Average Tax
Other Med
% tax per pack
EU Med: Greece, France, Italy, Portugal, Spain
Other Med: Algeria, Egypt, Cyprus,Lebanon, Morocco, Syria, Turkey
% of tax per pack
Average Price and Tax/pack
US $
3.00
Average Retail Price and Total Tax as % of Average Retail
Price in Mediterranean Countries 1999
76%
3.0
2.5
75% 67%
73% 33% 80%
2.0
1.5
1.0
22%
77% 61% 71%
61%
30%
19%
0.5
Retail Price per pack (US$)
Fr
an
ce
ni
si
a
Tu
Ita
ly
Sy
ria
Jo
rd
an
Tu
rk
ey
Eg
yp
t
Sp
ai
n
M
or
oc
co
G
re
ec
e
Al
ge
ri
Po a
rtu
ga
l
n
0.0
Le
ba
no
Average price/pack US$ and % of tax
share
Total Tobacco Taxes as % of Retail Price in
Mediterranean Countries
Total tax as % of retail price
Impact of Increased Taxes
on the Economy


Higher total tobacco tax revenue
Job losses and gains – net effect on
employment?
Studies on the employment effects of dramatically
reduced or eliminated tobacco consumption
Type of Country
Name and year
Net Exporters
US (1993)
0%
UK (1990)
0.5%
Zimbabwe (1980)
Balanced Tobacco
Economies
Net Importers
Net change as % of
employment in base year
-12.4%
South Africa (1995)
0.4%
Scotland (1989)
0.3%
Bangladesh (1994)
18.7%
Source:Buck and others, 1995; Irvine and Sims, 1997; McNicoll and Boyle 1992,
van der Merwe and others, background paper; Warner and others 1996
What about Smuggling?

More smuggling if :





Public is tolerant
Controls are weak
corruption in the country is high
tobacco industry is complicit
organized crime plays a big role
Tobacco smuggling tends to rise in line with the
degree of corruption
Smuggling as a function of transparency index
Smuggling as a share of consumption
(%)
0.40
Cambodia
0.35
0.30
Pakistan
y = - 0.02x + 0.2174
R2 = 0.2723
0.25
0.20
0.15
Brazil
Austria
0.10
0.05
Indonesia
Sweden
0.00
0
2
4
6
Transparency index for country
8
10
Smuggling: What is the Solution?
Canadian Government reduced tobacco tax rates
dramatically in February 1993
Tax
reduced in
an attempt
to counter
smuggling
I
V
8
100
90
80
70
60
6
50
40
4
30
20
2
Real Price
Consumption
1995
1994
1993
1992
1991
-1
1990
10
0
Annual cigarette consumption per
capita (in packs)
10
1989
Real price per pack (USD)
12
Smuggling
Sweden decreased cigarette taxes (17%) due to
fear of smuggling in 1998
7000
80
6000
70
50
4000
40
3000
30
2000
pack/capita
60
5000
20
1000
10
TaxesMillion SKE
1997
1994
1991
1988
1985
1982
1979
1976
0
1973
0
1970
Million SKE
Cigarette Tax Revenue and
Consumption in Sweden, 1970-1998
cigarette/pack
What about the impact on
poor smokers?





Poor smokers tend to spend the highest
% of income on tobacco
How do they react to a tax/price rise ?
more likely to quit/reduce consumption, which will
improve health outcomes, release income for other
uses
increased tax revenue can be used in ways that
benefit poor
Help smokers who want to quit
Annual Cigarette Taxes Paid per Smoker in
Mediterranean Countries in 1999
Mediterranean Governments tobacco tax
revenues per smoker US $ 1999
Portugal
778
711
Gre e ce
644
France
571
Italy
310
Spain
Turk e y
134
96
Tunis ia
Alge ria
52
Jordan
46
M orocco
43
Egypt
24
Syria
19
10
Le banon
0
200
400
600
800
1000
Summary
Why increase tobacco taxes

Good for public health



Less tobacco use = better health outcomes
Youth and the poor are more price-sensitive
Good for economy



Will generate tax revenues
May increase employment, as spending is
switched to other goods and services
Won’t necessarily increase smuggling