Economic slowdown and financial shocks: Can tobacco tax increases help?

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Photo by: Patricio V. Marquez


A Financial Times article this past week focused on IMF Managing Director Christine Lagarde’s call on policymakers to reform the global economy’s system for coping with financial shocks. She said the world must prepare for looming crises in emerging and low-income economies, and their negative spillover impact on the rest of the world, caused by tumbling commodity prices.  

We would like to argue that this is the time to seriously re-examine the role of corrective taxation, such as taxes on tobacco, which can generate positive social benefits while raising much-needed fiscal revenue. Let us make the case. 

Tobacco use is a leading global disease risk factor and underlying cause of ill health, preventable death, and disability. With around 6 million lives lost annually, tobacco-related diseases claim more lives than HIV/AIDS, malaria, and tuberculosis combined.

It is a widely accepted fact that raising taxes on tobacco products is one of the most cost-effective measures to reduce their consumption and save lives. Indeed, research from high-income countries finds that a 10% price increase will reduce overall tobacco use by between 2.5% and 5%.  International experience, however, indicates that tax rate increases should be high enough to reduce the affordability of tobacco products, offsetting growth in real incomes. 

Tobacco taxes can also generate substantial domestic revenue which could then be allocated to fund essential services that benefit the entire population. To this end, strong tax administration is critical to minimize tax avoidance and tax evasion (mainly in the form of illicit trade). Regional agreements on tobacco tax harmonization can also be effective in reducing cross-border tax and price differentials, and in minimizing opportunities for individual tax avoidance and larger scale illicit trade.

Equally important, governments must resist interference with tobacco control from the tobacco industry, which continues to expand its business in poorer countries with less educated and younger populations, to compensate for lower consumption in high-income countries.

There are positive trends on this front across the world. According to the 2015 WHO Global Tobacco Report, 106 countries have increased their tobacco taxes in various ways. In the United States, for example, cigarette prices rose 350% between 1990 and 2014, due to a five-fold increase in average state cigarette taxes and a six-fold increase in the federal cigarette tax. The 156% increase in the federal excise tax on tobacco over a four-year period adopted by the U.S. government in 2009 (taking it from 39 cents per pack to $1, not counting state taxes which average over $1 a pack) helps pay for the coverage of millions of low-income children under the State Children's Health Insurance Program.

The 2012 Sin Tax Reform Law in Philippines simplified the excise tax system on alcohol and tobacco, made the tax system more buoyant by indexing tax rates to inflation, and funded increased enrollment of the poor to the national health insurance program using tobacco and alcohol tax revenue. Excise taxes as a percentage of the price of the most-sold cigarette brand in some Latin American and Southern African countries have increased to levels that vary from 52% to 68%. In 2015, albeit still at a relatively low tax rate level, China increased tobacco excise taxes as a percentage of cigarette retail price, from about 33% to 38%.

Although several low- and middle-income countries have increased tobacco excise tax rates, overall they remain substantially below tax rates in high-income countries, even when adjusting for differences in purchasing power. This shows that low- and middle-income countries can increase their excise taxes further to effectively make cigarettes more expensive, reduce consumption, and mobilize fiscal revenue.
 
Over the past decade, a “call to arms” to accelerate the implementation of the Framework Convention on Tobacco Control, including tobacco taxation, has consistently being made by WHO, former New York City Mayor Michael Bloomberg, Bill and Melinda Gates, and yes, the World Bank Group. The international community has now a window of opportunity to advance the tobacco tax policy agenda within the broader framework offered by the Financing for Development Addis Ababa Action Agenda adopted in 2015.  Indeed, as stated in clause 32 of this agenda, price and tax measures on tobacco should be seen as effective and important means to reduce tobacco consumption and health care costs, and as a revenue stream for financing for development in many countries.
 
Under the World Bank Group’s Tobacco Control Program, a multisectoral initiative funded with the support of the Bill & Melinda Gates Foundation and the Bloomberg Philanthropies, work is under way in several countries across regions combining public health, macroeconomics, tax policy, and tax administration expertise, as well as know-how on reforming the customs systems, to assist in the design and implementation of tobacco tax policy and administration reforms.
                                            
In times of crises, unconventional measures help. So, let’s make sure to include tobacco taxation as part of the policy arsenal for countries to use to deal with the stark new reality of budget shortfalls and faltering economic growth, while contributing to keeping the population healthy by controlling a preventable disease risk factor.

 
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Authors

Patricio V. Marquez

Former World Bank Group (WBG) Lead Public Health Specialist

Blanca Moreno-Dodson

Former Manager of the Center for Mediterranean Integration (CMI)