Tobacco Tax Policy Reform under WB Development Policy Operations: The Colombian Experience Jasmin Chakeri Program Leader – Equitable Growth, Finance and Institutions Mexico & Colombia Roberto Iunes Senior Economist – Health, Nutrition and Population GP Latin America & the Caribbean Washington DC, April 19, 2017

Outline of Presentation Development Policy Financing instrument Colombian context Tobacco tax in Colombia Objectives of the comprehensive tax reforms Support from the WBG Outcomes Lessons learned

Development Policy Financing (DPF) Instrument Financing for general budget support Program focuses on achieving measurable development results through government policies and institutional actions Adequate macroeconomic framework as assessed by the World Bank Upstream analytical work underpinning the program; parallel technical assistance Customize content and design to country circumstances Often done as a series – example: Colombia

Economic slowdown following oil price shock Colombian context Economic slowdown following oil price shock Impact on fiscal accounts Peace Agreement and implementation of post-conflict agenda Fiscal consolidation while protecting social and peace-related spending Move towards a “new economy” that relies less on extractives industries Colombia lost 3 percent of GDP in fiscal revenues between 2013 and 2016

Tobacco tax in Colombia (pre-reform) Represents one of the most important departmental taxes Revenue earmarked for health sector financing (and sports) Dual structure (introduced in 2010) Specific component: COP659/pack in 2016 (updated annually by CPI inflation) Ad valorem component: 10% of sales value General VAT rate (16%) applied as well Along with local business tax

Tobacco tax in Colombia (pre-reform) cont. Price per pack of cigarettes low US$1.81 (PPP) for most-sold brand, compared to US$2.5 (PPP) in other Latin American countries and US$7.03 (PPP) in OECD countries Share of taxes in sales price low 49.4% vs. 53% average for the Americas  Overall collections from tobacco tax low 0.07% of GDP in 2013, compared to 0.59% in Chile and 0.21% in Mexico Verguet: 26,000 deaths annually (16% of deaths among population > 35) Treating tobacco-related diseases costs $4.3 billion or 0.2% of GDP

Objectives of the comprehensive tax reform Creation of Tax Commission in 2015 to prepare comprehensive proposal Several objectives Increase tax revenue Enhance equity Simplify the tax system Improve competitiveness Address externalities (public health & environment) Increase liquor & wine tax Increase tobacco tax Introduce sugary drinks tax Environmental taxes Difficult political environment Rejection of first Peace Agreement Reaching peace remained No. 1 political priority

Support from the World Bank Group DPF to support fiscal sustainability and competitiveness reforms Fiscal reforms to help adjust to the new environment of low oil prices and create space for peace-related spending Structural reforms to diversify the economy and improve competitiveness in the context of the “New Economy” Close cooperation between WB macro-fiscal, trade & competitiveness and health teams Dialogue on overall tax reform with MoF: fiscal point of view (generate revenue) Dialogue on tobacco control with MoH: public health point of view (reduce consumption) Dialogue on customs with MoH and MoF: reduce smuggling

Support from the World Bank Group Questions that needed to be addressed What is the “optimal” tax rate? Elasticity Will tax increase lead to an increase in smuggling? Should there be one large increase or a more gradual approach? What is the short-term vs. long-term effect on the poor? WB provided technical expertise: in-house and international experts WB also brought convening power: joint meetings with MoF and MoH to bridge differences Estimated elasticity (Verguet): - 0.61 (poorest) to – 0.21 (richest)

Outcomes Increase in the specific component of the tobacco tax To COP1,400 in 2017 To COP2,100 in 2018, adjusted by CPI inflation + 4pp thereafter Ad valorem component maintained at 10% (but over total sales price) General VAT rate raised from 16% to 19% Additional revenues earmarked to finance health insurance Tax reforms accompanied by stronger anti-contraband measures (Anti-Contraband Law) Estimated fiscal impact: COP1 trillion in additional revenue through 2022 Positive health impact Preliminary results: 200,000 deaths averted (over 50 years) after the tax increase (over half of them in the poorest 20%) Almost 1.1 billion dollars of savings on health care expenditure avoided on tobacco related diseases (over half of them in the poorest 20%)b

Lessons learned Even in the context of fiscal consolidation, it is possible to implement reforms that benefit public health while at the same time increasing fiscal revenue Tobacco tax reforms need to be accompanied by stronger tax administration and enforcement, especially anti-contraband measures Evidence is critical: to inform public opinion, challenge interest groups and assure decision makers of the soundness of their decisions