Are Tobacco Taxes Regressive? The Global Evidence Frank J. Chaloupka, University of Illinois at Chicago Tobacco Taxation: Win-Win for Public Health & Resource Mobilization World Bank, Washington DC, 18 April 2017

Large and growing evidence base on the economics of tobacco and tobacco control In the process of finalizing joint NCI/WHO monograph that summarizes/synthesizes this evidence and provides the base for our presentation www.tobacconomics.org

Regressivity of Tobacco Use

Figure 16.1. Prevalence of Current Tobacco Use Among Adults Age 15 and Older, by Wealth Quintile, 2008–2010 Source: NCI & WHO 2016 www.tobacconomics.org

Tobacco Use & Equity Health consequences of tobacco use Generally “regressive” with greater share of burden of tobacco caused disease falling on lower income populations Greater use of tobacco among lower SES groups in most countries Less access to health care to treat diseases caused by tobacco use

Source: Jha et al, 2006 6

Poverty and Tobacco Use Health and economic burdens of poverty are compounded by tobacco use Responsible for impoverishment of over 50 million in China and over 15 million in India Crowding out of other spending: Bangladesh: tobacco money spent equivalent to: Males = 1402 calories of rice per day Females = 770 calories of rice per day The burdens of poverty are compounded by chronic tobacco use. Its health burdens, and its concomitant loss of income and need for catastrophic health care spending, have a significant impact on poor households (de Beyer et al. 2001), while Liu et al. (2006) note that excess medical expenses due to smoking are responsible for the impoverishment of over 50 million people in China. Poor families are often caught in a vicious cycle of tobacco use and poverty, as spending on tobacco products crowds out spending on food, housing, clothing, education, health care, combined with the loss of household income from tobacco-related mortality and morbidity. According to Efroymson et al. (2001), the average male smoker could have afforded an extra 1402 calories of rice per day using the money spent on tobacco, while the average female smoker could have afforded 770 calories. Sources: Hu, et al., 2008; John, et al., 2011; Efroymson, et al., 2001 www.tobacconomics.org 7

Crowding Out 17 ITC Countries Spending on tobacco crowds out spending on essentials. – Greater crowding out in LMICs Source: ITC Project, 2012

Tobacco & Poverty Source: NCI & WHO 2016 www.tobacconomics.org

Tobacco Use and Poverty Chapter 16, Conclusion 2: Tobacco use in poor households exacerbates poverty by increasing health care costs, reducing incomes, and decreasing productivity, as well as diverting limited family resources from basic needs. @tobacconomics

Effectiveness of Tobacco Taxes Chapter 4, Conclusion 1: A substantial body of research, which has accumulated over many decades and from many countries, shows that significantly increasing the excise tax and price of tobacco products is the single most consistently effective tool for reducing tobacco use. @tobacconomics

Tobacco Taxes and Equity

Impact of Tobacco Taxes on the Poor July 23, 2010 – San Francisco Examiner “Democrats are relying more heavily in their midterm 2010 election message that Republicans care nothing about the poor. Conveniently absent from this analysis is Republican opposition to President Barack Obama’s cigarette tax increase…… While higher cigarette taxes do discourage smoking, they are highly regressive. Analyzing a slightly less severe proposal in 2007, the Tax Foundation noted that ‘no other tax hurts the poor more than the cigarette tax.’” Peyton R. Miller, special to the Examiner. @tobacconomics

Tobacco Taxes & Equity Tobacco taxes are clearly regressive in high income countries Given greater prevalence of smoking in lower income populations Taxes are likely to be regressive in most low/middle income countries Depends on distribution of tobacco use by income level and tax structure Less regressive in countries where differences in prevalence by income level are smaller; even less where prevalence/consumption rises with income Less regressive in countries with ad valorem taxes and/or tiered taxes where tax as share of price increases with price

Impact of Tobacco Tax Increases on the Poor Tobacco taxes are regressive, but tax increases can be progressive Greater price sensitivity of poor – relatively large reductions in tobacco use among lowest income populations, small reductions among higher income populations Health benefits that result from tax increase are progressive @tobacconomics

Who Pays& Who Benefits Impact of Federal Tax Increase, U.S., 2009 Compared with lower-income individuals (whose income is below FPL or 100-200% below FPL), higher-income individuals (whose income is greater than 200% FPL) have a larger share of the tax increase and smaller share of reduced deaths. This is because lower-income tobacco users are more price sensitive and they quit or reduce tobacco consumption more than the higher-income tobacco users. Source: Chaloupka et al., in progress; assumes higher income smokers smoke more expensive brands

Who Pays & Who Benefits Turkey - 25% Tax Increase Source: Adapted from Önder & Yürekli, 2014 @tobacconomics

People’s Republic of China Distribution of marginal taxes and health benefits by SES Lowest SES group: Pays 6.4% of increased taxes but receives 32.1% of health benefits: hence, health/tax ratio: 5.02 Source: ADB 2013 www.tobacconomics.org

Tobacco Taxes & Equity Need to consider overall fiscal system Key issue with tobacco taxes is what’s done with the revenues generated by the tax Greater public support for tobacco tax increases when revenues are used for tobacco control and/or other health programs Net financial impact on low-income households can be positive when taxes are used to support programs targeting the poor Concerns about regressivity offset by use of revenues for programs directed to poor

Philippines ‘Sin Tax’ Reform www.tobacconomics.org Source: Paul, 2016

Philippines ‘Sin Tax’ Reform www.tobacconomics.org Source: Paul, 2016

Summary

Summary Tobacco use imposes disproportionate burden on the poor and contributes to poverty But tobacco taxes are regressive Tobacco tax increases are progressive From both a health and financial perspective Earmarking new tobacco tax revenues for pro- poor programs reduces concerns about impact of tax increases on the poor @tobacconomics 23

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