Tobacco Taxes by HC120730093158

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									        Tobacco Control Policy
The Challenge of Raising Tobacco Taxes


 Global, Regional and Hungarian
           Experience
                        By
        Ayda A. Yurekli, Ph.D
                 World Bank
Tobacco Dissemination Meeting, Budapest, Hungary 2001
Why is Raising Tobacco Taxes a
       Policy Challenge?

   Tobacco taxes are NOT new taxes
   Challenging, because
       Public health wants higher taxes, and
       Policy makers are worried about the
        consequences of higher taxes to the
        economy as a whole.
        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 reduce 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 Evidence
                                     As tax increases, consumption decreases
                                            Evidence from South Africa


                                  0.09                                                       1.3
Cigarette consumption per adult




                                                                  Real Price
                                                                                             1.2
                                  0.08




                                                                                                   Real Price
                                                                                             1.1
            (in packs)




                                  0.07
                                                                                             1

                                  0.06                                                       0.9

                                                                Consumption                  0.8
                                                                  per adult
                                  0.05                                                       0.7
                                         1970 1972 1974 1976 1978 1980 1982 1984 1986 1988
                                                                Year
                                    Source: Saloojee 1995
It works for other countries:
                                                Evidence from UK
                                Real Price and Consumption of Cigarettes
                 Real price and consumption of cigarettes in the UK
                                            in the UK--1971-96
                                               1971-1996

                            17000

                                                                     CONSUMPTION                                              £ 2.65
                            16000

                                                                                                                              £ 2.45
                            15000
Cigarette C on su mp tion




                            14000                                                                                             £ 2.25




                                                                                                                                       Price (£) 1994 valu e
   1994 p rice s (£m)




                            13000                                                                                             £ 2.05


                            12000                                                                                             £ 1.85

                            11000                                                                                             £ 1.65

                            10000                                   PRICE                                                     £ 1.45

                             9000                                                                                             £ 1.25
                                  1971        1974         1977
                                Source: Townsend J 1998, Central Statistical1980 (UK) (1965-93)
                                                                            Office    1983        1986   1989   1992   1995
                                                                                        Ye ar
                                  Does it work for Hungary?
                                      Real Cigarette Price and Consumption Per 15+ in
                                                     Hungary, 1987-1999
                     110                                                                             180




                                                                                                           Consumption Per Person 15+
                     105                                                                             170
Real Cigarette Price (1995




                     100
                                                                                                     160
                                     Consumption
        HUF/pack)




                             95




                                                                                                                    (Packs)
                                                                                                     150
                             90
                                                                                                     140
                             85
                                                   Price                                             130
                             80

                             75                                                                      120

                             70                                                                      110
                                  1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
High opportunity cost for smokers and
            their families
        m ker's M n ly C arette E en itu inA
       S o       o th ig         xp d re verage
                o th ab r co e      ug
              M n ly L o In m inH n ary,
                        1991-1999

                                                  .2
                                                 9 %
                                                         .4
                                                        8 %
         .4
        6 % 5 % 6 %
             .8  .1 5 % 5 %
5 % 5 %
 .5  .6              .7  .5




1991   1992   1993   1994   1995   1996   1997   1998   1999
Allocating Tobacco Expenditure to Other Goods
                 and Services
          Better Nutrition, Better Health


    In 1999, a Hungarian smoker's weekly cigarette expenditure can
                                 buy
   30
         Kg / Week                                             25.6
   25
                                                    21.0
   20

   15
                                          9.8
   10

    5                           3.1
          2.0        2.1

    0
          Pork       Beef    Chicken     Apple     Potato     Flour
        Why do policy makers worry?
              Will increasing tobacco taxes:
   reduce revenues?
       Tobacco is a good source of generating
        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


                                                                                          11%
                                                                                  10% 11%
                                                                        9%   9%
                                                                  7%
                                                             6%
                                                  5%   5%
                                            4%
                            3%    3%   3%
                 2%    3%
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                  Tobacco Taxes-
            Important source of revenue!
        Cigarette Tax Revenue as % of Total Government Tax Revenues in Selected
                                      EU Countries




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                                                                                                                             Cigarette Tax Revenue as % of Total Government Tax Revenues in 1999




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                                                                                                                                                                                                   Important source of revenue!




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            Tobacco Tax Revenues:
                Who Earns, How Much?


     Cigarette Tax Revenue and its share in Government Tax Revenue
                         in ECA Countries, 1999
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               Tobacco Tax Revenues:
                      Who Earns, How Much?

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




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      Tobacco Tax Revenue Per Capita

       Per Capita Cigarette Tax for Hungary and Selected EU Countries, 1999

400        US$                                                                                              343
350
                                                                                              287 300
300                                                                                     257
250
200                                  160 178 192
                     131 133 144 147
150          105 119
100   53
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Revenue Generating Potential of Tobacco
                     Taxes
              Economic Argument
   Production, distribution, and sales can be
    closely supervised by the government.
   Demand is price-inelastic (i.e., as price rises,
    consumption falls by less than the
    percentage rise in the price).
   The income elasticity of demand is greater
    than one, meaning higher the income,
    higher the consumption, and greater the
    revenue.
  Revenue Generating Potential of Tobacco
                  Taxes
                   Empirical Argument


Depends on several factors.
     Consumption level
     Tobacco tax rates,
     Retail price of cigarettes
     Income
     Control for smuggling activities
                   Tobacco Tax Rates and Prices:
                           Where ECA fits in the Globe!

                                 Cigarette Prices and Taxes, 1999


           3.5                                Average Price Per Pack (US$)            75%




                                                                                            Tax as % of retail price
                                              Average Tax Per Pack (US$)              70%
           3.0
                                              Tax as % of Retail Price                65%
           2.5
US$/pack




                                                                                      60%
           2.0                                                                        55%
           1.5                                                                        50%
                                                                                      45%
           1.0
                                                                                      40%
           0.5                                                                        35%
           0.0                                                                        30%
                 High Income   Upper Middle     ECA       Lower Middle   Low Income
                                 Income                     Income
                 Tobacco Tax Rates and Prices
                   Where Hungary fits in the Globe!

                            Cigarette Prices and Taxes, 1999


           3.5                          Average Price Per Pack (US$)            75%




                                                                                      Tax as % of retail price
                                        Average Tax Per Pack (US$)              70%
           3.0
                                        Tax as % of Retail Price                65%
           2.5
US$/pack




                                                                                60%
           2.0                                                                  55%
           1.5                                                                  50%
                                                                                45%
           1.0
                                                                                40%
           0.5                                                                  35%
           0.0                                                                  30%
                 High Income Upper Middle   Hungary   Lower Middle Low Income
                               Income                   Income
                        Global (European) Evidence:
                  Total and Excise Tobacco Taxes as % of Retail Price 2000



                                 Excises            Total
                 110
                 100
                                                          79 80 81 82
% share of RSP




                  90
                                  73 73 74 74 75 76 76
                  80    69 70 71                            65 66 62
                  70 55                                62
                             57 58 57 57 57 58 58 58
                  60      50
                  50
                  40
                  30
                  20
                  10
                   0




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Total tobacco tax= Excise+VAT, Excise = (Specific+Ad Valorem)
                                                            Regional Evidence:
Total and Excise Tobacco Taxes as % of Retail Price


                                                            Central European Countries, 2000
                                  100
                                  90
% of total and excise tax rates




                                  80
                                                                                                                                                                          67
                                  70                                                                                                                          63
                                                                                                                             60          61         61
                                  60                                                         54        55          55
                                                                                   49                                                                                          50
                                  50                                                                                               42                    43
                                                                       39                         38                    40                     41
                                  40                                                    34                   37
                                                            31                                                                                                       32
                                  30                                          24
                                                  21
                                  20                              15
                                        88
                                  10                   5
                                   0
                                                                                             Romania




                                                                                                                                          Hungary
                                                                                                                   Estonia




                                                                                                                                                                          Crotia
                                                   Russia




                                                                       Lithuania




                                                                                                        Bulgaria




                                                                                                                                                    Poland
                                                                                   Latvia
                                        Moldova




                                                             Ukraine




                                                                                                                                                              Slovenia
                                                                                                                             CzechRep.

                                                      Total Tax Incidence                                                    Excise incidence
                                                      Hungarian Evidence:
                 Total and Excise Tobacco Taxes as % of Retail Price

                                                                  Hungary, 1991-1999

                                                               % tax in RSP    % of excise in RSP
% of Total and Excise Share in RSP




                                     61%      61%                                              60%          60%      61%
                                                       57%                            59%
                                                                          56%
                                                                 52%

                                        41%      41%                                                  40%      40%      41%
                                                          37%                   36%      39%
                                                                    32%




                                      1991     1992     1993      1994        1995     1996         1997     1998     1999
   Li
     th




                   0.00
                          1.00
                                 2.00
                                        3.00
                                               4.00
                                                      5.00
                                                             6.00
                                                                        7.00
        ua
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K
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           tv
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                                                                               Cigarette Prices Per Pack for ECA Countries, 1999




      ov
                                                                                                                                   Average Price of Cigarettes




          en
              ia
       C
         ze
             ch
       Average Price of Cigarettes

            Cigarette Prices Per Pack for EU Countries, 1999

7.00   US$/Pack
6.00
5.00
4.00
3.00
2.00
1.00
0.00
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                     D
                   et
               0.00
                      1.00
                             2.00
                                    3.00
                                           4.00
                                                  5.00
                                                         6.00
                                                                      7.00
  Lithuania

    Belarus

 Kazakhstan

      Latvia




                                                         US$ / Pack
    Ukraine

   Bulgaria

     Russia

    Hungary

     Estonia

     Turkey

   Romania

     Poland

     Spain

     Croatia

     Cyprus

   Slovenia

   Portugal

      Czech

        Italy

    Greece

    Austria

   Germany
                                                                             Retail Prices Per Pack for ECA and EU Countries, 1999




Netherlands

     France

   Belgium

    Finland
                                                                                                                                     Average Price of Cigarettes




   Sweden

     Ireland

  Denmark

        UK
                Hungarian Evidence:
Tobacco Excise Revenues and % Share in Total Tax
                    Revenues

       Cigarette Excise Tax Revenue and Its Share in Total Tax Revenue in
                              Hungary, 1991-1999

      90000                                                                               3%
              Million HUF                                             2.6%
      80000                    2.4%          2.4%
               2.2%                   2.2%            2.2% 2.1%                           3%
      70000
                       2.4%                                                   2.1%
      60000                                                                               2%

      50000
                                                                                          2%
      40000

      30000                                                                               1%

      20000
                                                                                          1%
      10000

         0                                                                                0%
              1991    1992     1993   1994   1995    1996     1997     1998        1999

              tob. excise revenue             % tob. excise in Total tax revenue
         Has the tobacco tax revenue been
              increasing in Hungary?
                   Nominal vs. Real Revenue

             Real and Nominal Tobacco Tax Revenue in Hungary, 1991-1999,
                                   (CPI 1995=100)
250000

            Million HUF

200000



150000



100000



50000



    0
          1991     1992        1993      1994        1995   1996    1997      1998     1999

                          Nominal Tob. Tax Revenue             Real Tob. Tax Revenue
    Impact of Increased Taxes
        to the Economy

   Higher and increasing revenues
   Not necessarily increasing Smuggling,
   Unemployment?
       Check other factors
As Cigarette Tax Rises Revenue Increases

                          Tax per pack and cigarette tax revenues in
                                                 Norway, 1990-1998
                                4000                                                                     35
    local currency (millions)
    Cigarette tax revenue in




                                                                                                              Tax per pack in local
                                3500                                                                     30




                                                                                                                   currency
                                3000                                                                     25

                                2500                                                                     20


                                2000                                                                     15
                                         1990
                                                1991
                                                       1992
                                                              1993
                                                                     1994
                                                                            1995
                                                                                   1996
                                                                                           1997
                                                                                                  1998
                                       Cigarette tax revenues                             Tax per pack

  Source: World bank 1999
Evidence from Hungary: Since 1997 higher the
       real tax rate, higher the revenue

                                                                                     Real Tobacco Tax Revenue, Tax Per Pack and
                                                                                      Real Tobacco Tax Revenue, Real Tax Per Pack and
                                                                                            Real Tobacco Hungary, CPI, Hungary,
                                                                                        Consumption inTax Revenue in1995=100, 1991-1999
                                                                                         Consumption Trends in Hungary, 1991-1999
                              100000                                                                   1991-1999                      100

                                                     100000100000                                                                                        100
                                                                                                                                                           90
                                                                                      Consumption
Million Pieces, Million HUF




                                                                                                                                                         90
                          Real Revenue Million HUF




                                            80000                                                                                                             80
                                                        Real Revenue Million HUF




                                                      80000 80000                                                                                        80




                                                                                                                                                                              Tax/pack, HUF
                                                                                                                                                              70




                                                                                                                                                               Tax/Pack HUF
         Revenue




                                                                                                                                                         70
                                            60000                                                                                                             60
                                                      60000 60000                                                                                        60

                                                                                                                                                         50 50
                                                             Real Tobacco Tax Revenue
                                                       Real Tobacco Tax Revenue                                               Real Tax Per Pack
                                              40000 40000 Tobacco Tax Revenue
                                            40000     Real                                                                    Real Tax Per Pack          40 40

                                                                                                                                                         30
                                                                                                                                                              30
                                              20000 20000                                                                                                20
                                            20000     1991                                    1991
                                                                                              1992    1992
                                                                                                     1993             19941996
                                                                                                               1993 1995
                                                                                                             1994                      1998 1997
                                                                                                                                1997 1996
                                                                                                                             1995            1999           20
                                                                                                                                                         1998                  1999
                                                                                    1991     1992    1993    1994   1995   1996   1997   1998     1999
                                                                                           real tobacco tax revenue real tobacco tax revenue per pack
                                                                                                                                     real tax
                                                                                   consumption          real tobacco tax revenue         real tax per pack
               Smuggling:
    Large scale organized smuggling
   Tends to avoid taxes not invades
   Grows due to
       Public tolerance
       Lack of control
       Corruption level of the country
       The complicity of the industry
   Finds presence of organized crime
   Uses internationally well-known brands
                             Smuggling: What is the Solution?
      Canadian Government reduced tobacco tax rates
              dramatically in February 1993

                                                                   Tax
                            12                                                                 100
                                                               reduced in




                                                                                                     Annual cigarette consumption per
                                                               an attempt                      90
                            10
                                                               to counter                      80
Real price per pack (USD)




                                                               smuggling                       70




                                                                                                              capita (in packs)
                            8
                                                                    I
                                                                                               60
                                                                    V
                            6                                                                  50
                                                                                               40
                            4
                                                                                               30
                                                                                               20
                            2
                                                                                               10
                            -1                                                                 0
                                 1989



                                        1990



                                               1991



                                                            1992



                                                                     1993



                                                                                 1994



                                                                                        1995
                                               Real Price          Consumption
                                                 Smuggling
              Sweden decreased cigarette taxes (17%)
                 due to fear of smuggling in 1998

                   Cigarette Tax Revenue and
                Consumption in Sweden, 1970-1998
              7000                                                                          80

              6000                                                                          70
                                                                                            60
              5000
Million SKE




                                                                                                 pack/capita
                                                                                            50
              4000
                                                                                            40
              3000
                                                                                            30
              2000
                                                                                            20
              1000                                                                          10
                0                                                                           0
                     1970

                            1973

                                   1976

                                          1979

                                                  1982

                                                         1985

                                                                1988

                                                                       1991

                                                                              1994

                                                                                     1997
                            TaxesMillion SKE                             cigarette/pack
                        Smuggled cigarettes in
                             Hungary
                  Cigarette supply, demand and the difference in Hungary
                                        1990-1999
                                consumption          Total Supply           difference


                2000
                1500
million packs




                1000
                 500      43     30
                   0
                                                                                                 -15
                 -500                  -110    -49    -115
                                                              -437                       -318
                                                                               -479
                -1000                                                 -651
                        1990   1991   1992    1993   1994    1995    1996     1997    1998      1999
                              Smuggling, revenues, consumption
                                 Real Tobacco Tax Revenue, Tax Per Pack, Consumption
                                         and Smuggling in Hungary, CPI, 1995=100,
                                                      1991-1999
                              100000                                                                           100

                                           Consumption                                                         90
Million Pieces, Million HUF




                                                                  -115
                                                         -49             -437
                              80000                                                                            80
                                                  -110
                                                                                        -479




                                                                                                                     Tax/pack, HUF
                                                                                -651              -318         70
         Revenue




                              60000                                                                            60
                                                                                                         -15   50
                                          Real Tobacco Tax                       Real Tax Per Pack
                              40000                                                                            40
                                          Revenue
                                                                                                               30

                              20000                                                                            20
                                        1991   1992   1993     1994   1995   1996      1997    1998   1999

                                       consumption       real tobacco tax revenue              real tax per 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.
                       Tobacco Employment

                        Number of Employees in the Tobacco Manufacturing
                                 Industry in Hungary, 1975-1999

                      7000
                             5908
Number of Employees




                      6000           5430     5312
                                                      4705
                      5000
                      4000
                      3000                                     2456
                                                                       2018
                      2000
                      1000
                         0
                             1975    1980     1985    1990     1995    1999
  Tobacco Trade and Production
     Tobacco Leaf Production, Export, Import and Domestic
                 Production in Hungary, 1961-1998
40000   Metric tons
30000

20000

10000
    0
        1961     1966       1971   1976   1981    1986     1991   1996

               Production                 Export
               Import                     Domestic Consumption
       Trade Earnings from Tobacco

                Tobacco Trade (Export-Import) Hungary, 1975-1997
110

90
             Million US$
70

50

30                                                                                 17
10                                                                         -1
-10

-30    -17       -16       -12    -10            -15
                                         -26             -20       -26                   -32
-50
      1975     1980    1985      1990   1991   1992    1993    1994      1995   1996    1997


                       Total Tobacco Imports ( Million US$)
                       Total Tobacco Exports ( Mil. US$)
                       Total Tobacco Trade Surplus (million US$)
                       Summary
    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 the employment
       Won’t necessarily increase smuggling

								
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