Tobacco taxation purpose and myths the role of the WB

HealthBecause high tobacco prices CAN: •Reduce the % of people that use tobacco products prevalence.. Smuggling tobacco UK 1990sUK customs estimated 21%Taxed cigarettes/lower tax coun.:

• 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

• 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

poor

Chalupka 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 outcomes

6

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

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

Cigarette consumption in SA, 1946 - 2011

11

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

12

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,

increases by 249%

18

Fall in consumption, real excise &

industry revenues increased

19

Percentage changes in important

variables since 1993

20

Destroy jobs, hurt farmers

•Tobacco Leaf production

Global : 6 million tons

Zimbabwe: 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

manufacturing ciagrrets, chewing and wich tarde marks

production

Smuggling tobacco UK 1990s

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

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 measures

1000 extra customs officials

Additional specialist investigators and

intelligence officers

National network of X ray scanners

Tougher sanctions for those caught with

smuggled tobacco

Public awareness campaign

Prominent duty paid marks on packs of cigarettes and hand-rolling tobacco

Price rose 28% real terms Price 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 sharing

Track 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 the World Bank Conference on

Economics of Tobacco Control in Southern Africa:

The issues of Taxation and Smuggling

Gaborone 3-5 th June 2012

By

Caxton Masudi Ngeywo Kenya Revenue Authority

Regressive Taxing the poor

35

Lower-middle Income

income

income quintiles Highest household income quintiles

The Poorest smoke most

60% 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

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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

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

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 free/duty-free sales’? Art 15?

‘tax-• 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 analy sis.

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

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)

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