Download Tobacco Control Policy The Challenge of Raising Tobacco Taxes

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
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S
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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
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a
La
tv
i
Es a
to
ni
Cy a
pr
us
Be
Ka la
za rus
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Sl tan
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Bu ia
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Cr a
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Hu tia
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ar
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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$/Pack
6.00
5.00
4.00
3.00
2.00
1.00
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Sl rus
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C
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ch
0.00
Prices of Cigarettes and Other Consumer Commodities in
Bulgaria, 1997
845% 905%
707%
Pork
Tomato
Butter
Milk
Veal
46%
106% 161%
Banana
43%
514%
Rice
35%
Appl e
% higher than
cigarette price
Chicken
3500
3000
2500
2000
1500
1000
500
0
Cigarettes
Levs/pack for cigarettes, Levs/Litre
for milk, and Levs/500 grams for
others
Cigarette prices lower than most
food products in Bulgaria
High tax rates and high average prices of
cigarettes in EU
Cigarette Prices Per Pack for EU Countries, 1999
7.00
US$/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
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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
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D
en d
m
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Sp
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Po i n
rt
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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 ?