Tobacco Control Policy The Challenge of Raising Tobacco Taxes by hcj

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									       Tobacco Control Policy
The Challenge of Raising Tobacco Taxes


Global and Regional Experience
                  by
      Ayda A. Yurekli, Ph.D
            World Bank
 World 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 Evidence
                       As 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)

                                      Consumption       real price

                      22000                                             30000
consumption million




                                                                                real price/pack TL
                      20000
                                                                        25000
                      18000
      pieces




                      16000                                             20000
                      14000
                                                                        15000
                      12000
                      10000                                             10000
                              1992 1993 1994 1995 1996 1997 1998 1999
                                        Price Elasticity Evidence
                                    As tax increases, consumption decreases
                                            Evidence from 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

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

 50%                                                    42%
                           37%
 40%
 30%
 20%
               7%                          10%
 10%
  0%
                    1996                         1999

       If smoke only domestic brands   If smoke only foreign brands
     High Opportunity Cost in
            Bulgaria
       Tobacco e xpe nditure as % of gross
     income and wage s&salarie s in Bulgaria
                      1997

6%
                              4.9%
5%

4%                                   3.6%
                                            3.1%
3%
        1.8%
2%             1.6%
                      1.1%
1%

0%
      as % of gross income    as% of w ages &
                                 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


                                                                                          11%
                                                                                  10% 11%
                                                                        9%   9%
                                                                  7%
                                                             6%
                                                  5%   5%
                                            4%
                            3%    3%   3%
                 2%    3%
            1%
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                 Tobacco Taxes-
           Important source of revenue!
        Cigarette Tax Revenue as % of Total Government Tax Revenues in Selected
                                      EU Countries




                                                                                                                 9%




                                                                                                       5%
                                                                                      4%        4%
                                                                   3%     3%
                                                    2%   2%   2%
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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
20000
18000       (Million US $)
16000
14000
12000
10000
 8000
 6000
 4000
 2000
    0
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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
20000       (Million US $)
18000
16000
14000
12000
10000
 8000
 6000
 4000
 2000
    0
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  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 Increases
 Tax per pack and cigarette tax revenues in Norway, 1990-1998




   local currency (millions)   4000                                                                     35
   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 the tax rate has
 increased, and so has total revenue (in real terms)

                                                                 Real Tobacco Tax Revenue, Tax Per Pack and
                                                                  Real Tobacco Tax Revenue Real Tax Per Pack and
                                                                  Real Tobacco Tax Revenue, in Hungary, 1991-1999
                                                                    Consumption in Hungary, CPI, 1995=100,
                                                                     Consumption Trends in Hungary, 1991-1999
                               100000                                             1991-1999                                               100

                                                       100000                                                                        100
                                                                                                                                       90
                                                                  Consumption
 Million Pieces, Million HUF




                                                                                                                                     90
                            Real Revenue Million HUF
                           Real Revenue Million HUF




                                             80000                                                                                        80
                                                       80000
                                                       80000                                                                         80




                                                                                                                                                          Tax/pack, HUF
                                                                                                                                          70




                                                                                                                                           Tax/Pack HUF
          Revenue




                                                                                                                                     70
                                             60000
                                               60000                                                                                      60
                                                       60000                                                                         60

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

                                                                                                                                     30
                                                                                                                                          30
                                                       20000
                                                       20000                                                                         20
                                             20000               1991
                                                                 1991      1992 1993
                                                                          1992            1994
                                                                                  1993 1994         1996 1996
                                                                                             1995 1995    1997       1997
                                                                                                                      1998   1998
                                                                                                                             1999     1999
                                                                                                                                        20
                                                                1991     1992   1993   1994    1995   1996    1997    1998    1999
                                                                                          real tobacco tax revenue
                                                                       real tobacco tax revenue                  real tax per pack
                                                            consumption             real tobacco tax revenue           real tax per pack
                     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
                          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
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Total tobacco tax= Excise+VAT, Excise = (Specific+Ad Valorem)
                                                   Regional Evidence: ECA
                                  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
Do high tax rates mean high prices?
      Not in ECA countries!

         Cigarette Prices Per Pack for ECA Countries, 1999


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




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  K
 Cigarette prices lower than most
    food products in Bulgaria
                                       Prices of Cigarettes and Other Consumer Commodities in
                                                             Bulgaria, 1997
Levs/pack for cigarettes, Levs/Litre
 for milk, and Levs/500 grams for




                                       3500                                                                          845% 905%
                                       3000                                                                   707%
                                       2500                    % higher than
                                                                                                    514%
                                                               cigarette price
               others




                                       2000
                                       1500
                                       1000                                         106% 161%
                                                           35%      43%    46%
                                        500
                                          0
                                                           Appl e


                                                                    Milk




                                                                                    Rice

                                                                                           Banana




                                                                                                                     Butter
                                                                           Tomato




                                                                                                    Chicken




                                                                                                                              Pork
                                              Cigarettes




                                                                                                              Veal
High tax rates and high average prices of
            cigarettes in EU

              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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                                        Will higher taxes lead to 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
              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
   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

              12000

                                               11024
              11000     11315 11238
                                                        10433
                                      10574
              10000                                             9933
 Employment




              9000
                                                                       8495
              8000
                                                                                 7338
                                                                                        7018
              7000

                                                                                               6535    6519
              6000
                       1988   1989    1990    1991   1992   1993   1994   1995     1996   1997        1998
             Recommendations
              Increasing 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 ?

								
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