tobacco control lec4.2 chaloupka · specific vs. ad valorem tobacco excises ad valorem taxes...

Tobacco Taxation: Frank J. Chaloupka, PhD

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© 2007 Johns Hopkins Bloomberg School of Public Health

Tobacco Taxation

Frank J. Chaloupka, PhDUniversity of Illinois at ChicagoInternational Tobacco Evidence Network

2© 2007 Johns Hopkins Bloomberg School of Public Health

Overview

Why tax tobacco?

Types of tobacco taxes

Impact of tobacco taxes on tobacco product prices

Effects of taxes and prices on cigarette smoking and other tobaccouse

Impact of tobacco taxes on tobacco tax revenues

Conclusions


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Why Tax Tobacco? Revenue Generation

Efficient revenue generation− Primary motive historically and still true in many countries

today− Very efficient source of revenue, given:

Low share of tax in price in most countries Relatively inelastic demand for tobacco products Few producers and few close substitutes


Why Tax Tobacco? Revenue Generation

“Sugar, rum, and tobacco are commodities which are no wherenecessaries of life, which are become objects of almost universalconsumption, and which are therefore extremely proper subjects oftaxation.”

— Adam Smith, Wealth of Nations, 1776


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Why Tax Tobacco? Promote Public Health

Promote public health− Increasingly important motive for higher tobacco taxes in

many high-income countries Emerging as important factor in some low- and middle-

income countries− Based on substantial and growing evidence on the effects of

tobacco taxes and the prices on tobacco use Particularly among young, less-educated, and low-income

populations


Why Tax Tobacco? Promote Public Health

“The Parties recognize that price and tax measures are an effectiveand important means of reducing tobacco consumption by varioussegments of the population, in particular young persons.”

— Framework Convention on Tobacco Control, Article 6


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Why Tax Tobacco? External Costs

Cover the external costs of tobacco− Less frequently used motive− Account for costs resulting from tobacco use imposed on

nonusers− Can also include “internalities” that result from addiction and

time-inconsistent preferences


Source: Philip Morris. (1985). Smoking and Health Initiatives.

Industry Perspective

Industry understands the importance of tobacco taxes− "With regard to taxation, it is clear that in the U.S., and in

most countries in which we operate, tax is becoming a majorthreat to our existence”

− "Of all the concerns, there is one—taxation—that alarms us themost. While marketing restrictions and public and passivesmoking (restrictions) do depress volume, in our experiencetaxation depresses it much more severely. Our concern fortaxation is, therefore, central to our thinking . . ."


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Types of Tobacco Taxes

Variety of tobacco taxes− Taxes on the value of the tobacco crop− Customs duties on tobacco leaf imports and/or exports− Customs duties on tobacco product imports and/or exports− Sales taxes− Value-added taxes− Implicit taxes− Tobacco excise taxes


Two Types of Excises

Specific taxes: excises based on quantity or weight (e.g., tax perpack of 20 cigarettes)

Ad valorem taxes: excises based on value of tobacco products(e.g., a specific percentage of manufacturer’s prices for tobaccoproducts)

Some countries use a mix of specific and ad valorem tobaccoexcises

Many countries apply different types of taxes and/or tax rates ondifferent types of tobacco products− For example: manufactured cigarettes vs. bidis


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Specific vs. Ad Valorem Tobacco Excises

Strengths/weaknesses depend on a variety of factors and goals oftax

Specific taxes− Generally produce a more stable stream of revenue− Real value falls with inflation− Promote higher “quality” products


Specific vs. Ad Valorem Tobacco Excises

Ad valorem taxes− More unstable revenues given that revenues depend on

industry pricing− Government effectively subsidizes industry price cuts− Rises with inflation

If reducing tobacco use is a primary goal, a specific tax is generallypreferred− Particularly when regularly adjusted for inflation


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Taxes and Tobacco Product Prices

Impact of tobacco taxes on tobacco use and other outcomesdepends on the impact of tax on prices of tobacco products− Impact on prices will vary based on several factors, including

the following: Structure of tobacco product market Cost of tobacco product production Industry price-related marketing efforts Potential for individual tax avoidance and larger-scale,

more organized tobacco product smuggling− Most evidence (largely from the United States) indicates that

tobacco tax increases result in comparable tobacco productprice increases

That is, tax increases are fully passed on to tobacco users


Inflation-Adjusted Cigarette Prices, U.S., 1955–2006

Source: adapted by CTLT from Tax Burden on Tobacco. (2006); author’s calculations.

-


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Inflation-Adjusted Cigarette Taxes and Prices: S. Africa

Source: adapted by CTLT from Van Walbeek. (2003).

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Source: adapted by CTLT from Chaloupka, et al. (2000).

Tax Levels and Prices Vary Widely across Countries


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Increases in Tobacco Product Taxes and Prices

Induce current users to try to quit− Many will be successful in long-term

Keep former users from restarting

Prevent potential users from starting− Particularly effective in preventing transition from

experimentation to regular use


Increases in Tobacco Product Taxes and Prices

Reduce consumption among those who continue to use

Lead to other changes in tobacco-use behavior, including:− Substitution to cheaper products or brands− Changes in buying behavior− Compensation


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Price and Tobacco Use in High-Income Countries

Well over 100 studies from high-income countries consistently findthat:− A 10% increase in price reduces overall consumption of

tobacco products by 2.5–5% Consensus estimate: 10% price increase reduces

consumption by 4% Estimated impact on sales higher in presence of

significant tax avoidance and smuggling Long-run impact larger as addicted users respond over

time to permanent increases in taxes and prices


Cigarette Prices and Consumption: U.K.

Source: adapted by CTLT from Townsend. (1998).


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Cigarette Prices and Sales: U.S.



Price and Tobacco Use: Low-/Middle-Income Countries

Growing evidence from low- and middle-income countries suggeststhat the impact of tax and price increases is up to twice as large asin high-income countries− Consistent with predictions from economic theory that price

sensitivity is greater among those on lower incomes


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Price and Tobacco Use: Low-/Middle-Income Countries

Growing evidence from low- and middle-income countries suggeststhat the impact of tax and price increases is up to twice as large asin high-income countries− A few estimates

Southeast Asia: 10% price increase reduced overallconsumption by 6–9%

China: 10% price increase reduces consumption by6.5–13%

South Africa: 10% price increase reduces consumption by6–7%

Morocco: 10% price increase reduces consumption by5–15%


Cigarette Prices* and Consumption: South Africa



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Cigarette Prices* and Consumption: Morocco

Source: adapted by CTLT from Aloui. (2003).


Price, Smoking Prevalence, and Cessation

Estimates suggest that about half of the impact of price on overalltobacco use result from changes in prevalence− Implies that a 10% price increase reduces prevalence

by: 1–2.5% in high-income countries 2.5–5% in low- middle-income countries

− Changes in prevalence in response to price increase largelyresult from cessation among current users

U.S. estimates suggest 10% price increase increasesnumber of smokers trying to quit by more than 10%, withabout 2% successful in long-term


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Cigarette Prices and Adult Smoking Prevalence: U.S.

Source: adapted by CTLT from Tax Burden on Tobacco. (2007); U.S. National Health Interview, various years;author’s calculations.


Cigarette Prices and Quitting Smoking: U.S.

Sources: adapted by CTLT from Tax Burden on Tobacco. (2006); U.S. Behavioral Risk Factor Surveillance System.(2005); author’s calculations.


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Price Sensitivity and Age

Growing evidence that tobacco use among younger persons is twoto three times more responsive to price than tobacco use amongolder persons− Largely based on studies from the United States, but there is

growing evidence from other countries− Consistent with economic theory, given:

Lower incomes of youth Greater importance of peer influences on youth Influence of addiction Greater preference for the present among youth


Price Sensitivity and Age

Growing evidence that tobacco use among younger persons is twoto three times more responsive to price than tobacco use amongolder persons− Changes in youth prevalence largely result from reductions in

initiation of tobacco use− Evidence suggests that higher taxes and prices are most

effective in preventing youth from moving beyondexperimentation and into regular tobacco use and addiction


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Youth Smoking Prevalence and Cigarette Price: U.S.

Source: adapted by CTLT from Tax Burden on Tobacco. (2006); U.S. Monitoring the Future Surveys;author’s calculations.


Price Sensitivity and Income/Education

A growing number of studies find that tobacco use among less-educated and/or lower-income persons is more responsive to price− Economic theory implies that lower-income persons are

generally more responsive to changes in prices for goods orservices they consume than are higher-income persons

− U.K.: lowest socioeconomic group is very responsive to price,while highest socioeconomic group virtually unresponsive toprice*

* Source: Townsend, J. (1994).


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Price Sensitivity and Income/Education

A growing number of studies find that tobacco use among less-educated and/or lower-income persons is more responsive to price− U.S.: smoking in households below median income level are

about four times more sensitive to price than smoking inhouseholds above median*

− Similar evidence emerging from low- and middle-incomecountries

* Source: Farrelly, M. (2001).


Dedicated Tobacco Taxes

A growing number of governments are using dedicated tobaccotaxes (also called hypothecated or earmarked tobacco taxes) tosupport tobacco control activities− Include “health promotion foundations” and “comprehensive

tobacco control programs”

Research evidence, largely from high-income countries, shows thatfunding for tobacco control programs:− Reduces overall tobacco consumption− Increases adult cessation and prevents youth initiation− Reduces tobacco use in other high-risk populations


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Tobacco Taxes and Deaths Caused by Tobacco

Given the evidence on the impact of tobacco taxes and prices ontobacco use, large increases in taxes globally would significantlyreduce premature deaths caused by tobacco use− Short-run reductions in deaths result from increased cessation

Significant health benefits of cessation− Long-run reductions result from preventing initiation


Source: adapted by CTLT from Jha, et al. (2006).

Tobacco Deaths and Tobacco Control


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Tobacco Taxes and Revenues

Increases in tobacco taxes lead to increases in tobacco taxrevenues, despite reductions in tobacco use− Low share of tax in price in most countries

Implies large tax increase will raise price by smallerpercentage

− Less than proportionate fall in consumption in response togiven percentage price increase in most countries

− Revenues rise even in presence of tax avoidance andsmuggling


Federal Cigarette Tax and Tax Revenues, U.S.



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Cigarette Taxes* and Tax Revenues*: South Africa



Cigarette Taxes* and Tax Revenues*: Indonesia

Source: adapted by CTLT from Djutaharta, et al. (2005).


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What Is the “Right” Level of Tobacco Taxes?

This is a complex question that depends on a variety of factors,including the following:− Motives for tobacco taxation

Improving public health vs. generating revenue? (taxescan accomplish both)

− Tax rates in neighboring countries− Potential for tax avoidance and smuggling

World Bank suggests that a useful yardstick is two-thirds to four-fifths of the price accounted for by tax in countries that havetaken a comprehensive approach to reducing tobacco use


Summary

Higher tobacco taxes will lead to higher tobacco product prices

Increases in tobacco taxes and prices will reduce tobacco use andthe disease and death it causes− Increase cessation among current users− Prevent relapse among former users− Prevent initiation of regular tobacco use− Reduce consumption among those who continue to use

Higher tobacco taxes raise revenues− New revenues can be used to support comprehensive tobacco-

control efforts that would further reduce tobacco use


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Additional Resources

International Tobacco Evidence Network− www.tobaccoevidence.net

World Bank tobacco page− www.worldbank.org/tobacco

World Health Organization’s Tobacco-Free Initiative− www.who.int/tobacco/en/

Research for International Tobacco Control− www.idrc.ca/en/ev-83280-201-1-DO_TOPIC.html



Jha, P., Chaloupka, F.J. (1999). Curbing the Epidemic:Governments and the Economics of Tobacco Control. WashingtonD.C.: World Bank.

Jha, P., Chaloupka, F.J., eds. (2000). Tobacco Control inDeveloping Countries. Oxford: Oxford University Press.

Chaloupka, F.J., Warner, K.E. (2000). “The Economics ofSmoking.” In Handbook of Health Economics. New York: NorthHolland.


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Ross, H., Chaloupka, F.J. (2006). Economic Policies for TobaccoControl in Developing Countries. Revista de Salud Pública deMéxico, 48(S1):S113-120.

Jha, P., Chaloupka, F.J., et al. (2006). “Tobacco Addiction.” InDisease Control Priorities in Developing Countries, 2nd Edition.Washington D.C.: Oxford University Press and the World Bank.

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