The simultaneous global health and economic crises caused by the COVID-19 pandemic have had devastating impacts on government budgets. Increasing tobacco taxes provides a logical first step for governments to raise much needed revenue for economic recovery while promoting public health. Tobacco use—a slow-moving pandemic in itself—results in more than 8 million deaths every year and costs economies around US$ 1.4 trillion worldwide, with the burden falling heaviest on low- and middle-income countries.
On December 15, 2020, Tobacconomics released the first edition of the international Cigarette Tax Scorecard, assessing the performance of cigarette tax policies in over 170 countries. The Scorecard assessment is based on four key components: cigarette price, changes in the affordability of cigarettes over time, the share of taxes in retail cigarette prices, and the structure of cigarette taxes. Each of the four components is scored using a five-point index, with the total score reflecting an average of the four component scores.
Top honors in this edition of the Scorecard go to Australia and New Zealand. Both countries have high, uniform specific cigarette excise taxes with regular increases that have significantly reduced the affordability of cigarettes. They are reaping the rewards of these policy choices through increasing tax revenues and declining cigarette consumption, which also generate economic rewards through higher productivity and lower health care costs.
Using purchasing power parity dollars to compare price across countries, cigarettes in Australia were an average of $ PPP 14.47 per pack in 2018, while in New Zealand, they were $ PPP 16.08 per pack.
The countries with the most improved cigarette tax policies from 2014-2018 are Bahrain, Saudi Arabia, the United Arab Emirates, Kyrgyzstan, and the Philippines. The improvements in Bahrain, Saudi Arabia, and the United Arab Emirates reflect the introduction of significant cigarette excise taxes, while those in Kyrgyzstan and the Philippines result from the simplification of previously complicated tiered cigarette excise tax structures and large tax increases. Like Australia and New Zealand, these countries are also already reaping the rewards of higher revenues and lives saved.
Globally, the overall performance of cigarette tax policies is quite low—especially given the magnitude of the economic and health losses related to tobacco use. These results show considerable untapped potential for cigarette tax increases to raise revenue for a COVID-19 recovery and importantly, prevent premature deaths and promote a healthy and productive workforce.
All these results beg the question: how do governments improve their scores? The success stories above provide strong guidance and inspiration: improve tax structures and raise taxes on tobacco products. For structure, it is very clear that the highest-performing countries have either a uniform specific excise tax on cigarettes with annual adjustments for inflation and economic growth, or a mixed structure with both specific and ad valorem excises taxes but with a larger specific component, a minimum price and regular adjustments for inflation and growth. In contrast, among the most problematic structures, many countries continued to have tiered systems wherein different classes of the same products are taxed quite differently and this permits smokers to “trade down” to cheaper cigarettes when taxes/prices increase. Also, governments only utilizing ad valorem excise taxes have far less ability to affect price with their policies.
To affect the absolute price as much as possible and to make tobacco products less affordable, governments must increase—in many cases, dramatically— their excise taxes and increase the share of price that is tax (especially excise tax). Even with the best structure in place, if excise taxes remain low, the effects also remain low.
The Philippines case study is instructive. Beginning in January 2013, the government reformed a complicated tiered structure to a uniform specific excise tax. Moreover, they raised these specific taxes spectacularly. The effect has been millions of young people not starting to smoke and millions more quitting, which translates into higher economic productivity (healthier workers are more productive) and lower healthcare costs. At the same time, the government’s tobacco excise tax revenues have increased markedly (because these products are inelastic – the proportion of decrease in consumption is smaller than the tax increase), and the government allocates the majority of these new revenues to providing universal health care to the lowest income Filipinos (which also generates more economic growth).
Governments need to consider their score from this Scorecard and take concrete steps to make cigarettes (and other tobacco products) significantly less affordable to save lives and promote economic growth.
See the scorecard here.