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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) real price 22000 30000 20000 25000 18000 16000 20000 14000 15000 12000 10000 10000 1992 1993 1994 1995 1996 1997 1998 1999 real price/pack TL consumption million pieces Consumption Price Elasticity Evidence As tax increases, consumption decreases Evidence from Hungary 180 105 170 Real Cigarette Price (1995 HUF/pack) 110 100 95 Consumption 160 150 90 140 85 Price 80 130 75 120 70 110 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 Consumption Per Person 15+ (Packs) Real Cigarette Price and Consumption Per 15+ in Hungary, 1987-1999 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% 10% 10% 7% 0% 1996 If smoke only domestic brands 1999 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% 3.6% 4% 3.1% 3% 2% 1.8% 1.6% 1.1% 1% 0% as % of gross income Low Middle as% of w ages & salaries 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 TaxesImportant source of revenue! Cigarette Tax Revenue as % of Total Government Tax Revenues in Selected ECA Countries, 1999 11% 10% 11% 9% 5% 2% 3% 3% 3% 3% 5% 6% 9% 7% 4% 1% Li th ni a u a S lo a ni e v a vi t La a y a us us si tia r ni ar r s a p o g a u y ro st el R C un E C B H y e a a n ch nd ri in ni ta ke e a a r a a s l z g o C m kr Tu kh ul P o U a B R az K Tobacco TaxesImportant source of revenue! Cigarette Tax Revenue as % of Total Government Tax Revenues in Selected EU Countries 9% 5% G re ec e Ire la nd UK 3% 4% 4% Po rtu ga l 2% Sp ai n nl an d Fi Au st ri 2% Ne th er la nd s G er m an y De nm ar k 2% 2% a 2% Fr an ce ly Ita Sw ed en Be lg iu m 1% 2% 2% 3% Tobacco Tax Revenues: Who Earns, How Much? Cigarette Tax Revenue and its share in Government 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 $) Tobacco Tax Revenues: Who Earns, How Much? Cigarette Tax Revenue and its share in Government Tax Revenue in ECA Countries, 1999 20000 18000 16000 14000 12000 10000 8000 6000 4000 2000 0 Li th u an i a La tv i Es a to ni Cy a pr us Be Ka la za rus kh s Sl tan ov en Bu ia lg ar i Cr a oa Hu tia ng ar y Cz ec Uk h ra Ro ine m an ia Ru ss Po ia la nd Tu rk ey (Million US $) Revenue Generating Potential of Tobacco Taxes Empirical Arguments Depends on several factors. – – – – – – Consumption level Tobacco tax rates Retail price of cigarettes Income Price and income elasticity of demand Control of smuggling activities As Cigarette Tax Rises Revenue Increases 15 Cigarette tax revenues Source: World bank 1999 Tax per pack Tax per pack in local currency 2000 1998 20 1997 2500 1996 25 1995 3000 1994 30 1993 3500 1992 35 1991 4000 1990 Cigarette tax revenue in local currency (millions) Tax per pack and cigarette tax revenues in Norway, 1990-1998 Evidence from Hungary: Since 1997 the tax rate has increased, and so has total revenue (in real terms) Real Tobacco Tax Revenue, Tax Per Pack and Real Tobacco Tobacco Tax Tax Revenue, Revenue in Hungary, Real Real Tax Per1991-1999 Pack and Consumption in Hungary, CPI, 1995=100, Consumption Trends in Hungary, 1991-1999 1991-1999 100 90 Consumption 90 80000 80000 80000 80 80 70 70 60000 60000 60000 60 Tax/Pack HUF Real RealRevenue RevenueMillion Million HUF HUF Million Pieces, Million HUF Revenue 100000 100 60 50 50 40000 40000 40000 Real Tobacco Tobacco Tax Tax Revenue Revenue Real Real Tobacco Tax Revenue Real Tax Per Pack Real Tax Per Pack 40 40 30 20000 20000 20000 1991 1991 1991 1992 1993 1993 1994 19941995 1995 1992 1996 1996 1997 1992 1993 1994 1995 1996 1997 1997 1998 1998 1998 1999 30 20 1999 20 1999 real tobacco tax revenue real tobacco tax revenue real tax per pack consumption real tobacco tax revenue real tax per pack Tax/pack, HUF 100000 Tobacco Tax Rates and Prices: Where ECA fits in the Globe! 3.5 US$/pack 3.0 Average Price Per Pack (US$) 75% Average Tax Per Pack (US$) 70% Tax as % of Retail Price 65% 2.5 60% 2.0 55% 1.5 50% 45% 1.0 40% 0.5 35% 0.0 30% High Income Upper Middle Income ECA Lower Middle Income Low Income Tax as % of retail price Cigarette Prices and Taxes, 1999 Global (European) Evidence: Total and Excise Tobacco Taxes as % of Retail Price 2000 Total 110 100 90 79 80 81 82 76 76 75 74 74 73 73 80 69 70 71 65 66 62 62 70 55 57 58 57 57 57 58 58 58 50 60 50 40 30 20 10 0 G er m a Sw ny ed en Sp a G in re ec e Ne t Au h. st ria Be lg . Ita Fi ly nl nd Fr nc e Ir e ln d U Po K r tu De g. nm rk % share of RSP Excises 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 80 70 60 50 39 40 30 67 63 61 50 38 37 40 42 41 43 32 24 21 15 20 10 34 31 61 60 55 55 54 49 88 5 Total Tax Incidence Excise incidence Crotia Slovenia Poland Hungary CzechRep. Estonia Bulgaria Romania Latvia Lithuania Ukraine Russia 0 Moldova % of total and excise tax rates 90 Do high tax rates mean high prices? Not in ECA countries! Cigarette Prices Per Pack for ECA Countries, 1999 7.00 US$/Pack 6.00 5.00 4.00 3.00 2.00 1.00 Li th ua n B ia el K az aru ak s hs ta n La tv U ia kr ai B ne ul ga ri R a us si H un a ga Es ry to ni Tu a rk e R om y an Po ia la n C d ro at i C a yp Sl rus ov en ia C ze ch 0.00 Prices of Cigarettes and Other Consumer Commodities in Bulgaria, 1997 845% 905% 707% Pork Tomato Butter Milk Veal 46% 106% 161% Banana 43% 514% Rice 35% Appl e % higher than cigarette price Chicken 3500 3000 2500 2000 1500 1000 500 0 Cigarettes Levs/pack for cigarettes, Levs/Litre for milk, and Levs/500 grams for others Cigarette prices lower than most food products in Bulgaria High tax rates and high average prices of cigarettes in EU Cigarette Prices Per Pack for EU Countries, 1999 7.00 US$/Pack 6.00 5.00 4.00 3.00 2.00 1.00 K U l G y re ec A e us G tria e N r ma et he ny r la nd s Fr an B ce el gi um Fi nl an Sw d ed en Ir e la n D en d m ar k Ita Sp a Po i n rt ug al 0.00 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 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 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 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 Employment 11000 11024 11315 11238 10433 10574 10000 9933 9000 8495 8000 7338 7018 7000 6535 6000 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 6519 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 ?