Taxes

Tobacco tax increases that significantly increase the prices of tobacco products are the single most effective measure for reducing tobacco use. Large tax and price increases prevent tobacco initiation, promote cessation, and reduce overall tobacco consumption. Tobacco taxes are particularly important during the ongoing COVID-19 pandemic. By reducing tobacco use and tobacco-induced diseases, higher taxes can alleviate the burden on health systems facing increased strain from patients suffering from COVID-19. At the same time, higher tobacco taxes generate new tax revenues that can be used to fund public health systems.

Evidence from every region of the world and from countries at all income levels demonstrates the effectiveness of higher tobacco taxes in reducing tobacco use. On average, tobacco taxes that raise prices by 10% lead to a 4% reduction in overall tobacco use in high-income countries and a 5% reduction in use in low- and middle-income countries. Evidence shows that about half of the overall impact of higher tobacco taxes and prices comes from reductions in the prevalence of tobacco use, with the other half resulting from reduced consumption among continuing users. Higher taxes and prices are particularly effective in reducing tobacco use in more vulnerable populations, including youth and lower-income people, given that these groups are particularly sensitive to price.

How tobacco products are taxed and the frequency with which tobacco taxes are increased are important considerations in maximizing the effectiveness of higher taxes in reducing tobacco use and generating new tax revenue. Experiences in numerous countries have led to the development of several best practices in tobacco taxation that are reflected in the Guidelines for the Implementation of Article 6 of the WHO Framework Convention on Tobacco Control, which calls on governments to implement price and tax measures to reduce tobacco use. Tobacco tax systems should be simple and emphasize taxes based on quantity rather than price to ease tax administration, reduce tax avoidance, and minimize switching down to cheaper brands in response to tax increases. Taxes should also be high enough to make tobacco products costly and account for a large share of retail prices so that governments receive most of the revenue from tobacco product sales. Taxes should be increased frequently and by enough to offset inflation and income growth to reduce the affordability of tobacco products. Finally, taxes should be comparable across products to minimize substitution between products in response to tax increases.

Unfortunately, effective tobacco taxes are the least adopted tobacco control measure globally . The Tobacconomics Cigarette Tax Scorecard demonstrates that governments have considerable room for raising taxes and strengthening tobacco tax systems. The Scorecard uses a five-point scale to assess four key dimensions of countries’ cigarette taxes: cigarette price, the share of cigarette taxes in retail price, tax-driven changes in cigarette affordability over time, and cigarette tax structure, with each country’s overall score an average of the four components. In 2020, the global average total score was 2.28, less than half of the maximum five points, with only eight countries receiving a score of four or higher. There has been limited progress over time, with the average score rising from 1.93 in 2014 and only modest improvement in the components of the overall score.

The lack of progress on tobacco taxation is partly due to the misleading arguments made by the tobacco industry and its allies in opposition to higher taxes. Particularly prominent is the argument that higher tobacco taxes will cause increases in cigarette smuggling, which would negate the positive public health and revenue impacts of tax increases. Numerous independent studies have shown that these claims are greatly exaggerated and that governments can raise taxes, reduce tobacco use, generate new tax revenues, and control illicit trade in tobacco products all at the same time. In fact, while implementing one of the most sustained sets of tax increases globally in recent years that has driven down not only cigarette consumption, the tax authorities also successfully managed to reduce illicit trade through thoughtful tax administration and enforcement. The Protocol to Eliminate Illicit Trade in Tobacco Products provides a strong framework for combatting smuggling, calling for parties to implement proven strategies for strengthening tax administration, enhancing enforcement activities, increasing penalties, and promoting international cooperation, all of which are only modest investments for rich rewards.

Another common industry argument against increasing tobacco taxes is that it would significantly hurt overall employment and the economy, even though the empirical evidence suggests the opposite (e.g., Argentina, Mexico, and Pakistan). While higher prices do lead to a decline in tobacco consumption, which may eventually cause a small number of jobs to be lost in the tobacco sector, there are job gains in other sectors of the economy to which the spending would be shifted.

Similarly, tobacco taxes have been opposed by the industry with an argument that they would hurt the poor, who spend a relatively higher proportion of their income towards the consumption of tobacco products. On the contrary, the available findings from various countries (e.g., Chile, Pakistan, and Turkey) suggest that taxes can result in health and welfare gains without imposing an excessive burden on the poor.