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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
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
Evidence from the 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) 1983
Office (1965-93) 1986 1989 1992 1995
Ye ar
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 Taxes-
Important source of revenue!
Cigarette Tax as % of Total Government Tax Revenue for
9.4%
Selected EU Countries in 1990s
4.5%
3.7%
2.9% 3.3%
2.5% 2.6%
2.0% 2.1% 2.1%
1.2% 1.6% 1.9%
Belgium 98
Italy 99
Austria 99
Finland 98
Ireland 97
Spain 97
Denmark 99
Portugal 98
Netherlands
Germany 98
UK 99
France 97
Greece 98
97
Tobacco Taxes-
Important source of revenue!
Tobacco tax revenue as % of total tax
revenue in Mediterranean countries
1998-1999
11%
5% 5%
4% 4%
1% 1%
Syria Lebanon Tunisia Algeria Egypt Morocco Turkey
98 98 98 99 99 99 99
Tobacco Tax Revenues:
How Much?
Cigarette Tax Revenue in EU Countries, 1999
20000
18000 (Million US $)
16000
14000
12000
10000
8000
6000
4000
2000
0
ria
UK
ly
m
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s
k
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Ita
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an
la
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Sp
rtu
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la
lg
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m
nl
Au
Ire
Fr
Sw
er
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Be
Fi
G
Po
De
th
G
Ne
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
3500 30
Tax per pack in local
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
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
Cigarette Consumption in 1999 and
% increase 1990-1999 in Mediterranean
Countries
Million Pieces
100000 -13% 9% -3%
80000 14%
60000 4%
40000 10% 6% 19%
20000 32% 59% 59% 37%
0
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G ia
Po co
Tu ia
M sia
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Al l
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Fr t
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yp
by
ec
ai
Ita
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r
ge
oc
an
rd
Sy
ni
rt u
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Sp
Li
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Jo
or
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
3.00 0.80
0.70
Average Price and Tax/pack
2.50
0.60
% of tax per pack
2.00
0.50
US $
1.50 0.40
0.30
1.00
0.20
0.50
0.10
0.00 0.00
EU EU Med Other Med
Average Price Average Tax % tax per pack
EU Med: Greece, France, Italy, Portugal, Spain
Other Med: Algeria, Egypt, Cyprus,Lebanon, Morocco, Syria, Turkey
Total Tobacco Taxes as % of Retail Price
in Mediterranean Countries
Average Retail Price and Total Tax as % of Average Retail
Average price/pack US$ and % of tax
Price in Mediterranean Countries 1999
3.0 76%
2.5 75% 67%
73% 33% 80%
2.0
30%
share
1.5 77% 61% 71%
1.0 61%
22%
19%
0.5
0.0
t
co
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ria
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Po a
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ga
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Eg
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Sp
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Tu
Jo
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Tu
Fr
Al
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Retail Price per pack (US$) 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 change as % of
employment in base year
Net Exporters US (1993) 0%
UK (1990) 0.5%
Zimbabwe (1980) -12.4%
Balanced Tobacco South Africa (1995) 0.4%
Economies
Scotland (1989) 0.3%
Net Importers 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
0.40
Smuggling as a share of consumption
Cambodia
0.35
0.30 Pakistan
y = - 0.02x + 0.2174
0.25
R2 = 0.2723
(%)
0.20
0.15 Brazil Austria
0.10
0.05 Indonesia
Sweden
0.00
0 2 4 6 8 10
Transparency index for country
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
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
Gre e ce 711
France 644
Italy 571
Spain 310
Turk e y 134
Tunis ia 96
Alge ria 52
Jordan 46
M orocco 43
Egypt 24
Syria 19
Le banon 10
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
