Taxes

When thinking about stopping an epidemic, tax is usually not the first thing that comes to mind. Yet perhaps the most impactful way to reduce tobacco use is to tax tobacco products. Some countries are already successfully using tax to reduce smoking rates, reaping significant and immediate health and revenue benefits. While there is no maximum tax level, some set ambitious goals, such as New Zealand’s goal to increase the cost of a cigarette pack to 30 New Zealand dollars (ca. 20 USD) through excise taxation. Unfortunately, most of the world, predominantly its poorer parts, still lags in implementing high tobacco taxes .

The mechanisms behind tobacco taxation are simple. A sufficiently large tax increase will raise tobacco product prices. By observing smokers’ behavior, researchers have determined that on average a 10% increase in cigarette prices makes the consumption of cigarettes fall by between 2% and 8%. Higher tobacco prices are especially effective in reducing tobacco use in more vulnerable populations, such as youth and lower-income people, because those groups are particularly sensitive to price increases. Frequent, significant tax increases are especially needed in countries where consumers’ purchasing powers are growing. When incomes rise faster than cigarette prices, smoking becomes more affordable, encouraging consumption. Excise tax increases are a proven and effective way to make cigarettes and other tobacco products less affordable.

Globally, we have yet to realize significant opportunities for improving health from tobacco taxation. For example, using only tobacco taxes, countries could realistically achieve the World Health Organization target of a 30% relative reduction in smoking prevalence by 2025. Unfortunately, many governments are still reluctant to increase taxes, because they often rely on tobacco industry reports that typically suggest that any additional tax increase will cause declines in tax revenue or a massive increase in cigarette smuggling. Independent studies have shown that these claims are usually greatly exaggerated; new tax increases bring in additional revenue for the governments, whereas illicit trade in tobacco products can be controlled while keeping prices high. When in force, the Protocol to Eliminate Illicit Trade in Tobacco Products will provide powerful tools to combat cigarette smuggling globally.

Tobacco prices are central to industry marketing strategies, and it is the tobacco industry that sets the prices of its tobacco products. Cigarettes are a largely uniform product, easily manufactured at low cost on a global scale. Through pricing strategies, the tobacco industry regulates its sales volumes and decides which products and brands will be perceived as “premium” and which will be “economy” brands.

Cheap brands help the industry broaden its customer base because these products are more affordable, particularly to youth. Besides, when a tax increase rises the price of all cigarettes, some consumers will switch to those cheaper brands, instead of quitting.

The gaps in prices between different cigarette brands can be closed though tobacco tax policies. Uniform specific tax structure is particularly effective in reducing variability in cigarette prices.

The Excise Duty Bill introduced in Kenya in 2015 not only increased the tax rates, but also changed the tax structure from an ad valorem tax with a specific floor to a uniform specific tax. This led to increase in cigarette prices and declines in price variability. In 2014, before the bill was introduced, the lowest-cost brand of cigarette was by 40% cheaper than the most-sold brand of cigarettes. In 2016, after the tax structure was changed, the price gap declined to only 27%.

Note: Kenya couldn’t sustain the uniform excise. It moved back to a two-tiered system in 2017 for filtered and non-filtered cigarettes. They did it on equity ground.