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Tobacco Control PolicyThe Challenge of Raising Tobacco Taxes
Global and Regional Experience
by
Ayda A. Yurekli, Ph.D
World BankWorld 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 EvidenceAs 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)
10000
12000
14000
16000
18000
20000
22000
1992 1993 1994 1995 1996 1997 1998 1999
co
nsu
mp
tio
n m
illi
on
pie
ces
10000
15000
20000
25000
30000
real
pri
ce/p
ack T
L
Consumption real price
Price Elasticity EvidenceAs tax increases, consumption decreases
Evidence from Hungary
Real Cigarette Price and Consumption Per 15+ in Hungary, 1987-1999
70
75
80
85
90
95
100
105
110
1987 1988 19891990 1991 1992 1993 1994 1995 1996 1997 1998 1999
Rea
l Cig
aret
te P
rice
(199
5 H
UF/
pack
)
110
120
130
140
150
160
170
180
Con
sum
ptio
n P
er P
erso
n 15
+ (P
acks
)
Price
Consumption
High opportunity cost for smokers and their families
Smoking Expenditure as % of Total Income for a Typical Belarus Smoker
7% 10%
37%42%
0%
10%
20%
30%
40%
50%
1996 1999
If smoke only domestic brands If smoke only foreign brands
High Opportunity Cost in Bulgaria
Tobacco expenditure as % of gross income and wages&salaries in Bulgaria
1997
1.8%
4.9%
1.6%
3.6%
1.1%
3.1%
0%
1%
2%
3%
4%
5%
6%
as % of gross income as% of wages &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
1%2% 3% 3% 3% 3%
4%5% 5%
6%7%
9% 9%
10% 11% 11%
Tobacco Taxes- Important source of revenue!
Cigarette Tax Revenue as % of Total Government Tax Revenues in Selected EU Countries
1% 2% 2% 2% 2% 2% 2% 2% 3% 3%4% 4%
5%
9%
Tobacco Tax Revenues: Who Earns, How Much?
Cigarette Tax Revenue and its share in Government Tax Revenue in EU Countries, 1999
02000400060008000
100001200014000160001800020000
(Million US $)
Tobacco Tax Revenues: Who Earns, How Much?
Cigarette Tax Revenue and its share in Government Tax Revenue in ECA Countries, 1999
02000400060008000
100001200014000160001800020000 (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 IncreasesTax per pack and cigarette tax revenues in Norway, 1990-1998
2000
2500
3000
3500
4000
19
90
19
91
19
92
19
93
19
94
19
95
19
96
19
97
19
98
Cig
are
tte
ta
x r
ev
en
ue
in
loc
al
cu
rre
nc
y (
mil
lio
ns
)
15
20
25
30
35
Ta
x p
er
pa
ck
in
lo
ca
l
cu
rre
nc
y
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 in Hungary, 1991-1999
20000
40000
60000
80000
100000
1991 1992 1993 1994 1995 1996 1997 1998 1999
Real
Reven
ue M
illi
on
HU
F
real tobacco tax revenue
Real Tobacco Tax Revenue
Real Tobacco Tax Revenue, Real Tax Per Pack and Consumption Trends in Hungary, 1991-1999
20000
40000
60000
80000
100000
1991 1992 1993 1994 1995 1996 1997 1998 1999
Real
Reven
ue M
illi
on
HU
F
20
30
40
50
60
70
80
90
100
Tax/P
ack H
UF
real tobacco tax revenue real tax per pack
Real Tax Per Pack Real Tobacco Tax Revenue
Real Tobacco Tax Revenue, Tax Per Pack and Consumption in Hungary, CPI, 1995=100,
1991-1999
20000
40000
60000
80000
100000
1991 1992 1993 1994 1995 1996 1997 1998 1999
Mil
lio
n P
ieces,
Mil
lio
n H
UF
Reven
ue
20
30
40
50
60
70
80
90
100
Tax/p
ack,
HU
F
consumption real tobacco tax revenue real tax per pack
Consumption
Real Tax Per Pack Real Tobacco Tax Revenue
Tobacco Tax Rates and Prices: Where ECA fits in the Globe!
Cigarette Prices and Taxes, 1999
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
High Income Upper MiddleIncome
ECA Lower MiddleIncome
Low Income
US
$/pa
ck
30%
35%
40%
45%
50%
55%
60%
65%
70%
75%
Tax
as %
of r
etai
l pric
e
Average Price Per Pack (US$)
Average Tax Per Pack (US$)
Tax as % of Retail Price
Global (European) Evidence: Total and Excise Tobacco Taxes as % of Retail Price 2000
Total tobacco tax= Excise+VAT, Excise = (Specific+Ad Valorem)
6569 70 71 73 73 74 74 75 76 76 79 80 81 82
5550
57 58 57 57 57 58 58 58 62 6266
0102030405060708090
100110
% s
har
e o
f R
SP
Excises Total
Regional Evidence: ECATotal and Excise Tobacco Taxes as % of Retail Price
Central European Countries, 2000
8
21
31
39
4954 55 55
60 61 61 6367
8 5
15
24
3438 37
40 42 41 43
32
50
0
10
20
30
40
50
60
70
80
90
100
Mo
ldo
va
Ru
ssia
Ukra
ine
Lit
hu
an
ia
Latv
ia
Ro
man
ia
Bu
lgari
a
Esto
nia
Czech
Rep
.
Hu
ng
ary
Po
lan
d
Slo
ven
ia
Cro
tia
% o
f to
tal an
d e
xcis
e t
ax r
ate
s
Total Tax Incidence Excise incidence
Do high tax rates mean high prices? Not in ECA countries!
Cigarette Prices Per Pack for ECA Countries, 1999
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00 US$/Pack
Cigarette prices lower than most food products in Bulgaria
Prices of Cigarettes and Other Consumer Commodities in Bulgaria, 1997
35% 43% 46% 106% 161%
514%
707%845% 905%
0500
100015002000250030003500
Cig
are
ttes
App
le
Milk
To
ma
to
Ric
e
Ban
ana
Chic
ken
Veal
Butt
er
Pork
Lev
s/p
ack
for
cig
aret
tes,
Lev
s/L
itre
fo
r m
ilk, a
nd
Lev
s/50
0 g
ram
s fo
r o
ther
s
% higher than cigarette price
High tax rates and high average prices of cigarettes in EU
Cigarette Prices Per Pack for EU Countries, 1999
0.00
1.00
2.00
3.00
4.00
5.00
6.00
7.00 US$/Pack
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
IV
-1
2
4
6
8
10
12
1989
1990
1991
1992
1993
1994
1995
Real p
rice p
er
pack (
US
D)
0
10
20
30
40
50
60
70
80
90
100
An
nu
al cig
are
tte c
on
su
mp
tio
n p
er
cap
ita (
in p
acks)
Real Price Consumption
Sweden decreased cigarette taxes (17%) due to fear of smuggling in 1998
Cigarette Tax Revenue and Consumption in Sweden, 1970-1998
0
1000
2000
3000
4000
5000
6000
7000
1970
1973
1976
1979
1982
1985
1988
1991
1994
1997
Mil
lio
n S
KE
0
10
20
30
40
50
60
70
80
pack/c
ap
ita
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
10433
9933
8495
11315 11238
10574
11024
73387018
6535 65196000
7000
8000
9000
10000
11000
12000
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
Em
plo
ym
en
t
RecommendationsIncreasing 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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