Montserrat Meiro-Lorenzo The World Bank, [email protected] Tobacco taxation: Purpose and Myths. The Role of the WB.

Montserrat Meiro-LorenzoThe World Bank,

[email protected]

Tobacco taxation:Purpose and

Myths.The Role of the

WB

Outline

•Why?•What to do? Clear•How to do it? Article 6•Key issues•The Word Bank

Four Stages of Tobacco Smoking Epidemic

Source: Lopez AD, Collishaw NE, Piha T. A descriptive model of the cigarette epidemic in developed countries. Tobacco Control, 1994; 3: 242-247.

Why tax tobacco? Economist

"Sugar, rum, and tobacco, are commodities which are no where

necessaries of life, which are become objects of almost universal consumption, and which are therefore extremely proper

subjects of taxation.

Adam Smith, An Inquiry into the Nature and Causes of The Wealth of Nations, 1776

5

Why Tax Tobacco?

•Economic Efficiency• Correct for failures in tobacco product markets• Imperfect information• Externalities

• Increased health care costs, lost productivity• Increased financial costs related to publicly

financed health care used to treat diseases• Can also include “internalities” that result from

addiction and time inconsistent preferences•Other Motives affecting tax structure:

• To protect domestic industry and employment• To keep some brands/products affordable to the poorChalupka 2012

Why Tax tobacco? Health

Because high tobacco prices CAN: •Reduce the % of people that use tobacco products (prevalence).•Reduce the quantity consumed by those that continue to smoke

Improve health outcomes6

7

Taxes, Prices; Health: US, 1980-2005

• 10% price increase reduces tobacco use rates by about 4% among the poor and around 8% among the better off.

• Price-elasticity of demand for cigarettes in LICs and MIC is around -0.6

• Poor and young respond more to prices than the better-off and old

People Respond to Prices

+10%

-4%

-8%

developed countries

developing countries

price change

consumption change

9Source: MTF, Tax Burden on Tobacco, 2011, and author’s calculations

10

Taxes, Prices and Tobacco Use

Source: Aloui, 2003

Cigarette Consumption, Morocco, 1965-2000

Cigarette consumption in SA, 1946 - 2011

11

A very close relationship between cigarette consumption and affordability (r = - 0.98)

12

13

Cigarette Taxes and Prices Globally

Average Price Most Sold Brand, Excise Tax/Pack & Total Share 2010

Source: WHO GTCR III

Tobacco Tax: Time to Abolish Myths

•Will reduce government revenues.•Will destroy jobs / hurt particularly farmers

•Smuggling (Illicit trade) •Difficult to collect and implement •Regressive (against poor)•WTO, investment bilateral, agreements

Will reduce government

revenues

Philippines losses

The South African experience, 1961 - 2011

Big increases in the excise tax have resulted in big increases in tax revenue

Between 1993 and 2011 real excise tax increases by 487% and real excise tax revenue increases by 249%

18

Fall in consumption, real excise & industry revenues increased

19

Percentage changes in important variables since 1993

Variable Percentage

Real excise tax per pack of cigarettes 378%

Real net-of-tax price of cigarettes 153%

Real retail price 212%

Cigarette consumption -33%

Per capita cigarette consumption -51%

Real excise tax revenue 220%

Real industry revenue 69%

Smoking prevalence From about 35% to about 22%

20

Destroy jobs, hurt farmers

•Tobacco Leaf productionGlobal : 6 million tonsZimbabwe: 0.21 Tons (3.5%)Malawi: 0.13 (2.2 %)Where are the subsidies going?Brazil COP4: Farmers demonstrations

Will destroy jobs, will hurt farmers

• Indian and Brazil experience from tobacco farmers and bidi roller's opposition to tough demand reduction measures on WHO-FCTC

• Min of Agriculture initiative engagement with MOH and advocacy to farmers e.g. bamboo as source of energy nets 3000 USD per acre as against 1000 USD rom tobacco

• Min of Labour and Min of Rural Development schemes on alternative livelihood to farmers and bidi rollers

WILL INCREASE SMUGLING &ILLICIT TRADE

23

Mechanisms for Illicit trade control

•Who? Who are the manufacturersWho? Who are the manufacturers•What? What are they What? What are they

manufacturing ciagrrets, chewing manufacturing ciagrrets, chewing and wich tarde marksand wich tarde marks

•How much? Manufacturing How much? Manufacturing productionproduction

•For whom? destination of productsFor whom? destination of products24

Smuggling tobacco UK 1990sSmuggling tobacco UK 1990s

Tobacco industry 25-30%UK customs estimated 21%Taxed cigarettes/lower tax coun.: 9% Illicit hand rolled tobacco: 49% Main drivers – lack of control of international movement of tax free tobacco, price difference between tax free and taxed, criminal gangs

Tobacco industry 25-30%UK customs estimated 21%Taxed cigarettes/lower tax coun.: 9% Illicit hand rolled tobacco: 49% Main drivers – lack of control of international movement of tax free tobacco, price difference between tax free and taxed, criminal gangs

Policy measuresPolicy measures1000 extra customs officialsAdditional specialist investigators and intelligence officersNational network of X ray scannersTougher sanctions for those caught with smuggled tobaccoPublic awareness campaignProminent duty paid marks on packs of cigarettes and hand-rolling tobacco

EFFECTSEFFECTS

0

5

10

15

20

25

30

35

40

45

50

1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 2007/08

Per cent

Projected market share if no action taken

Smuggling estimate

Target

£4.00

£4.20

£4.40

£4.60

£4.80

£5.00

£5.20

£5.40

£5.60

£5.80

1998 2000 2002 2004 2006 2008

Real Cigarette prices at 2009 prices

Price rose 28% real termsPrice rose 28% real terms

Illicit trade control

•Coast line and expansive borders•Undeclared production•Unaccounted for exports •Undeclared imports: raw & finished•Counterfeited products•Under declared tax values•Switched declarations

Control measures put in place• Licencing controls

• Production monitoring, raw materials • Exports management• Bilateral information sharingTrack and Tracing solutions• Tax stamps• Electronic Cargo Tracking System

• Paper based stamps 4 security levels • Central online ordering, packaging, delivery• RT production data: brand, date & time,

package quantity, production plant & line• Market surveillance: random verification of

products in industry & verification officers through login & GPS

• Tax projections from the production data collected on real time. Accurate tax assess.

Enhanced tax regime

Automating Cargo Monitoring(Electronic Cargo Tracking)

• Electronic Cargo Tracking System ensures cargo exported exits country of export or trucked cargo reaches intended destination before any tax remissions or refunds are granted.

• Benefits: Increase of up to 30% of duty paid tobacco

Control of Supply Chain, Tax Stamps and Other Tracking Technology, and enforcement: The Experience of Kenya

and Relevance for SADC Countries.

Presented to theWorld Bank Conference on

Economics of Tobacco Control in Southern Africa:

The issues of Taxation and SmugglingGaborone 3-5th June 2012

By

Caxton Masudi NgeywoKenya Revenue Authority

RegressiveTaxing the poor

35

0

5

10

15

20

25

30

35

40

45

Low-income countries

Lower-middle

Income

Upper-middle-income

High-income

Sm

ok

ing

pre

vale

nc

e (

200

4) [

%]

Lowest household income quintiles

Highest household income quintiles

The Poorest smoke most60% of the 5.7

billion cigarettes/year

are being smoked in developing countries

Poor and young respond more to prices

• If 2/3 of the money spent on cigarettes in Bangladesh were spent on food instead, it could save more than 10 million people from malnutrition

37

Difficult collect & implement • Taxes already exist• Simplify existing administration

complex tobacco tax structures: Systems that feature multiple tax tiers for cigarettes; different rates for filtered and unfiltered cigarettes, for different lengths of cigarettes, for ‘premium’ versus ‘regular’ brands.

38

How to Do it?•Comprehensive (all tobacco products)

•Coherent with countries' tax code•Coherent with macroeconomic policy

•Simple, implementable, easy to monitor

•Monitored•Harmonized within economic regions

Guidelines for the implementation of Article 6 of the WHO Framework Convention on Tobacco

Control

Selected Issues

Ch1: sovereign right of countries to establish own

taxation policies• “...Should take into account...– both price elasticity and income elasticity of demand, as well as inflation, to make tobacco products less affordable over time in order to reduce consumption and prevalence.... having regular (automatic) adjustment processes or procedures for periodic revaluation of tobacco tax levels.

• Parties should implement the simplest and most efficient system that meets their health and fiscal needs, with the fewest exceptions and taking into account their national circumstances. From a budgetary as well as a health point of view...implement specific or mixed excise systems with a minimum specific tax floor, as these systems have considerable advantages over purely ad valorem systems.

Which Simplest Tax System?• Effective to reach health objectives

• Reduced complexity of tax administration

–Specific system with single rate / tier

–Ad valorem single tier/ rate with a minimum tax floor

–Mix system with single ad valorem and specific tax rate/ tier

• Proposal not simple: a mixed system with a minimum tax floor could be several tiers rates for specific or ad-valorem.

Ch2. Industry response tax increase

• Industry contributes data for tax policy: Market size, illegal trade, employment levels, tax impact, etc.

• Reduce industry power: independent sources of information and analysis.

• Standardize minimum data collection for decision making (international)and increase capacity to analyze

Ch 3: different tobacco products similar tax burdens, measurement?

• ..to avoid negative consequences, such as product substitution or an increase in illicit trade, all tobacco products should be taxed in a comparable way, with a similar tax burden, and should be accompanied by strong policies and measures against illicit trade in tobacco products

Tax different products equally• Consumer will substitute “down” to

cheaper tobacco products with similar nicotine levels.

• Taxing that other products with similar nicotine equally will reduce substitution down

• Health system to investigate nicotine equivalence for tax levels

Ch 5: Revenue earmarking• About 100 issues , interest groups

asking for earmarking• MOF loses its soveraigne mandate to

administer revenues • Perceived as conflict of interest• Hard earmarking ties your hands

Ch 6-7: assess/present ‘tax-free/duty-free sales’?

Art 15? •Parties should consider prohibiting or restricting the tax- or duty-free sales of tobacco products. They should monitor the extent to which tax- or duty-free products contribute to illicit trade and take the necessary measures if such a link is ascertained.

Ch 6-7: assess/present ‘tax-free/duty-free

sales’? Art 15? • Use the existing language in Articles 6 and 15

• Clearer

• Coherence

Which Tax levels?• Level of excise or indirect tax not very

indicative per se. 70% ad valorem < than 40% specific & if start at a very low base, no difference for health

• Establish tobacco use reduction targets per capita adult & child (health gains verifiable)

• Structure tax levels on the bases of health on objectives, be transparent about it.

• Open the dialogue on health objectives in tax policy and with authorities

Facilitate monitoring of article 6

•Harmonize the information collected in tobacco taxes as part of article 6 guidelines

The WB view•Total support to FCTC •Public health measure•Development issue: micro economic impact, fiscal impact, productivity impact, demographic dividend impact, accelerated aging

•Need for regional harmonization

WB Policy & Actions: Past •Curbing the epidemic (1998)

• No-investment policy (1999), smoke-free•Tobacco economics in developing countries.•Analysis at country and regional level, with

WHO•2007 strategy for health results•Towards a Political economy of tobacco

control•Chronic NCDs flagship study,• Numerous regional and country specific

studies on NCDs "dying young", Ukraine studies, and ongoing analysis.

WB Policy & Actions: Future

•Strengthened capacity to provide tobacco tax advice to countries and make case from the economic point of view

•Sensitizing our macro and fiscal policy colleagues

•Entering into partnerships with technical and financing institutions WHO, CDC, TFK, ACS, Research centers

•Supporting the FCTC secretariat in the context of article 6 and 15

World Bank Instruments

•Policy dialogue : CAS, PRSP (setting priorities)

•Technical assistance

•Economic and sector work (studies)

•Lending: Investment, Policy

HOW TO DO IT? • Focus on well-defined targets while addressing risk

factors from different angles.

• Give high-profile leaders a central role in driving initiatives

• Reinforce accountability of partner institutions

• Be opportunistic, identify impact on health and optimize impact

• Identify wins for non stake holders (empower non smokers)

• Engage relevant sectors according to their mandate, capacity and comparative advantage

• Ensure that different actors focus on what they do best

Lending

•Lending: Traditional Projects Ukraine

•SWAPS: Kazakstan

•Policy Dialog: DPLS LAC & EAR

How to do it? MOH

•Catalyzers•Data collection, epidemiology•Raise awareness of issue•Do background work•Identify interventions that work

•Measure impact of policies

Role of Civil Society

•Research, evidence gathering •Advocacy for increased resources for health

•Watch dog on implementation•Monitoring•Resource mobilization•Community outreach and empowerment

Role of Private Sector (non tobacco industry)

•Worker protection•Lobbying government for harmonizing regulation

•Health insurance and long term care financing

Role of other government agencies

•MOF/ economy, Customs, Ministry of Industry and Trade

•Design tax policy, taking into consideration regional harmonization are agreements enforcement and trade control

External organizations•Respond to count request or resources: TA, financing.

•Independent assessments of barriers to tax increase

•Support national and international commitment mechanisms, policy conditions international comparisons

Cigarette tax and illegal cigarette market, Spain 1991-2008

Spain: Size of contraband cigarette market & total tax level on cigarette price

59.0%

71.7%

71.2% 71.4%

77.6%17.7%

13.6%

2.7%

1.1% 1.0%

21.2%

-3.0%

2.0%

7.0%

12.0%

17.0%

22.0%

% o

f co

ntr

ab

an

d c

igare

ttes i

n d

uty

paid

sale

s

45%

50%

55%

60%

65%

70%

75%

80%

To

tal

tax a

s %

of

Mo

st

Po

pu

lar

Bra

nd

Pri

ce

total tax incidence

% of contraband