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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 Slide 2 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 Slide 3 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 Slide 4 Price Elasticity Evidence As real price decreases, consumption increases Evidence from South Africa Slide 5 Evidence from the UK Slide 6 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 ? Slide 7 Tobacco Taxes- Important source of revenue! Slide 8 Slide 9 Tobacco Tax Revenues: How Much? Slide 10 As Cigarette Tax Rises Revenue Increases Tax per pack and cigarette tax revenues in Norway, 1990- 1998 Slide 11 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. Slide 12 Revenue Generating Potential of Tobacco Taxes Depends on: Consumption level Tobacco tax rates Retail price of cigarettes Incomes Control of smuggling activities Slide 13 Cigarette consumption has been increasing significantly especially among developing countries Slide 14 Big Gap between Developing and Developed World Cigarette Prices and Tax rates EU Med: Greece, France, Italy, Portugal, Spain Other Med: Algeria, Egypt, Cyprus,Lebanon, Morocco, Syria, Turkey Slide 15 Total Tobacco Taxes as % of Retail Price in Mediterranean Countries Slide 16 Impact of Increased Taxes on the Economy Higher total tobacco tax revenue Job losses and gains net effect on employment? Slide 17 Studies on the employment effects of dramatically reduced or eliminated tobacco consumption Type of CountryName and yearNet change as % of employment in base year Net ExportersUS (1993) 0% UK (1990) 0.5% Zimbabwe (1980) -12.4% Balanced Tobacco Economies South Africa (1995) 0.4% Scotland (1989) 0.3% Net ImportersBangladesh (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 Slide 18 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 Slide 19 Tobacco smuggling tends to rise in line with the degree of corruption Smuggling as a function of transparency index Slide 20 Smuggling: What is the Solution? Canadian Government reduced tobacco tax rates dramatically in February 1993 Slide 21 Smuggling Sweden decreased cigarette taxes (17%) due to fear of smuggling in 1998 Slide 22 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 Slide 23 Annual Cigarette Taxes Paid per Smoker in Mediterranean Countries in 1999 Slide 24 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