Tobacco Control Policy The Challenge of Raising Tobacco Taxes Global, Regional and Hungarian Experience By Ayda A. Yurekli, Ph.D World Bank Tobacco Dissemination Meeting, Budapest, Hungary 2001

Why is Raising Tobacco Taxes a Policy Challenge? Tobacco taxes are NOT new taxes Challenging, because Public health wants higher taxes, and Policy makers are worried about the consequences of higher taxes to the economy as a whole.

Why are higher taxes good for public health? Change Smoking Behavior As tax increases consumption decreases A 10% increase in price reduces consumption by: 4% in developed countries, 8% in developing countries Poor and Youth are more sensitive A 10% price increase reduce smoking as much as 10% among youth and the poor. Deter youth taking up smoking High opportunity costs Higher budget share for other goods and services

Price Elasticity Evidence As tax increases, consumption decreases Evidence from South Africa

It works for other countries: Evidence from UK

Does it work for Hungary?

High opportunity cost for smokers and their families

Allocating Tobacco Expenditure to Other Goods and Services Better Nutrition, Better Health

Why do policy makers worry? Will increasing tobacco taxes: reduce revenues? Tobacco is a good source of generating revenues Excise +VAT tax revenues Import tariffs Income taxes cause job losses Create employment opportunities In agriculture- farmers- and industry accelerate smuggling activities? Means less revenues, more criminal activities

Tobacco Taxes- Important source of revenue!

Tobacco Tax Revenues: Who Earns, How Much?

Tobacco Tax Revenue Per Capita

Revenue Generating Potential of Tobacco Taxes Economic Argument Production, distribution, and sales can be closely supervised by the government. Demand is price-inelastic (i.e., as price rises, consumption falls by less than the percentage rise in the price). The income elasticity of demand is greater than one, meaning higher the income, higher the consumption, and greater the revenue.

Revenue Generating Potential of Tobacco Taxes Empirical Argument Depends on several factors. Consumption level Tobacco tax rates, Retail price of cigarettes Income Control for smuggling activities

Tobacco Tax Rates and Prices: Where ECA fits in the Globe!

Tobacco Tax Rates and Prices Where Hungary fits in the Globe!

Global (European) Evidence: Total and Excise Tobacco Taxes as % of Retail Price 2000 Total tobacco tax= Excise+VAT, Excise = (Specific+Ad Valorem)

Regional Evidence : Total and Excise Tobacco Taxes as % of Retail Price

Hungarian Evidence: Total and Excise Tobacco Taxes as % of Retail Price

Average Price of Cigarettes

Hungarian Evidence: Tobacco Excise Revenues and % Share in Total Tax Revenues

Has the tobacco tax revenue been increasing in Hungary? Nominal vs. Real Revenue

Impact of Increased Taxes to the Economy Higher and increasing revenues Not necessarily increasing Smuggling, Unemployment? Check other factors

As Cigarette Tax Rises Revenue Increases

Evidence from Hungary: Since 1997 higher the real tax rate, higher the revenue

Smuggling: Large scale organized smuggling Tends to avoid taxes not invades Grows due to Public tolerance Lack of control Corruption level of the country The complicity of the industry Finds presence of organized crime Uses internationally well-known brands

Smuggling: What is the Solution? Canadian Government reduced tobacco tax rates dramatically in February 1993

Smuggling Sweden decreased cigarette taxes (17%) due to fear of smuggling in 1998

Smuggled cigarettes in Hungary

Smuggling, revenues, consumption

Recommendations to control smuggling Require that all cigarette exporters, manufacturers and distributors have a license and keep detailed records Make cigarette exporters post a bond that will only be returned when it is proven that the cigarettes have reached their final destination: and Require that unique markings be placed on cigarette packages so that smuggled cigarettes can be traced back to their source.

Tobacco Employment

Tobacco Trade and Production

Trade Earnings from Tobacco

Summary Why increase tobacco taxes Good for public health Improve health outcomes Change smoking behavior Youth and the poor are more sensitive Increase budget share for other goods and services Good for economy Generate revenues Won ’ t necessarily reduce the employment Won ’ t necessarily increase smuggling