Tobacco Control Policy The Challenge of Raising Tobacco Taxes

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Tobacco Control PolicyThe Challenge of Raising
Tobacco Taxes
Global, Regional and Hungarian Experience By
Ayda A. Yurekli, Ph.D World Bank Tobacco
Dissemination Meeting, Budapest, Hungary 2001
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Why is Raising Tobacco Taxes a Policy Challenge?

• Tobacco taxes are NOT new taxes
• Challenging, because
• Public health wants higher taxes, and
• Policy makers are worried about the consequences
  of higher taxes to the economy as a whole.

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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 reduce 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

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Price Elasticity EvidenceAs tax increases,
consumption decreasesEvidence from South Africa
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It works for other countries Evidence from UK
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Does it work for Hungary?
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High opportunity cost for smokers and their
families
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Allocating Tobacco Expenditure to Other Goods and
ServicesBetter Nutrition, Better Health
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Why do policy makers worry?Will increasing
tobacco taxes

• reduce revenues?
• Tobacco is a good source of generating 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

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Tobacco Taxes- Important source of revenue!
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Tobacco Taxes- Important source of revenue!
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Tobacco Taxes- Important source of revenue!
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Tobacco Tax Revenues Who Earns, How Much?
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Tobacco Tax Revenues Who Earns, How Much?
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Tobacco Tax Revenues Who Earns, How Much?
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Tobacco Tax Revenue Per Capita
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Revenue Generating Potential of Tobacco Taxes
Economic Argument

• Production, distribution, and sales can be
  closely supervised by the government.
• Demand is price-inelastic (i.e., as price rises,
  consumption falls by less than the percentage
  rise in the price).
• The income elasticity of demand is greater than
  one, meaning higher the income, higher the
  consumption, and greater the revenue.

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Revenue Generating Potential of Tobacco
TaxesEmpirical Argument

• Depends on several factors.
• Consumption level
• Tobacco tax rates,
• Retail price of cigarettes
• Income
• Control for smuggling activities

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Tobacco Tax Rates and Prices Where ECA fits in
the Globe!
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Tobacco Tax Rates and Prices Where Hungary fits
in the Globe!
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Global (European) Evidence Total and Excise
Tobacco Taxes as of Retail Price 2000
Total tobacco tax ExciseVAT, Excise
(SpecificAd Valorem)
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Regional Evidence Total and Excise Tobacco
Taxes as of Retail Price
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Hungarian Evidence Total and Excise Tobacco
Taxes as of Retail Price
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Average Price of Cigarettes
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Average Price of Cigarettes
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Average Price of Cigarettes
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Hungarian Evidence Tobacco Excise Revenues and
Share in Total Tax Revenues
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Has the tobacco tax revenue been increasing in
Hungary? Nominal vs. Real Revenue
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Impact of Increased Taxesto the Economy

• Higher and increasing revenues
• Not necessarily increasing Smuggling,
• Unemployment?
• Check other factors

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As Cigarette Tax Rises Revenue Increases
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Evidence from Hungary Since 1997 higher the
real tax rate, higher the revenue
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Smuggling Large scale organized smuggling

• Tends to avoid taxes not invades
• Grows due to
• Public tolerance
• Lack of control
• Corruption level of the country
• The complicity of the industry
• Finds presence of organized crime
• Uses internationally well-known brands

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Smuggling What is the Solution?Canadian
Government reduced tobacco tax rates dramatically
in February 1993
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Smuggling Sweden decreased cigarette taxes (17)
due to fear of smuggling in 1998
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Smuggled cigarettes in Hungary
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Smuggling, revenues, consumption
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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.

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Tobacco Employment
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Tobacco Trade and Production
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Trade Earnings from Tobacco
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SummaryWhy 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
• Wont necessarily reduce the employment
• Wont necessarily increase smuggling