Corné Van Walbeek, PhD School of Economics University of Cape Town Increasing cigarette taxes and prices as a tobacco control strategy in South Africa and Jamaica Most of the work presented here was performed with funding from Research for International Tobacco Control (RITC)

Aim of this presentation To show that changes in tobacco taxes are good for –Tobacco control –Government revenue To show that the rationale for increasing the excise tax may differ between countries To warn against too complex taxes

The situation in South Africa The 1980s: The government in the pocket of the tobacco industry –Budget Speech 1983: “The Tobacco Board has presented justified arguments for the maintenance of the status quo regarding the excise taxes on tobacco, and I do not intend to wake sleeping dogs” –Budget Speech 1986: “Any increases in excise duties at present could be counter-productive, since it could in fact – on account of the potentially adverse effect on consumption – lead to a reduction of revenue from this source”

The composition of the retail price of cigarettes in South Africa If the excise tax is a specific tax, it gets eroded very quickly in times of moderate inflation (10-20 %)

Government revenue and the excise tax When the real excise tax per cigarette decreases, government revenue decreases

As the real price decreases, consumption increases Decreases in the price of cigarettes stimulate consumption

The changes in South Africa in 1994 Democratically elected government comes to power New government has no historical ties with tobacco industry Raises tax burden from 30 % to 50 % over short time period Rationale for the tax increases: public health, not government revenue

Impact of the changes in the retail price on cigarette consumption An increase in the retail price is a very good tobacco control mechanism

The Ministry of Finance also gains A 10 per cent increase in the real excise tax increases government excise tax revenue by between 5 and 7 per cent

Jamaica A comparison with South Africa JamaicaSouth Africa Population m31,4 m PC (15+) consumption500 cigs pa770 cigs pa Cigarette price 2005J$ 220 (US$ 3.67) R (US$ 2.50) Tax burden %49 % Fiscal situationUnhealthyHealthy

The same economic principles apply in Jamaica as in South Africa Again, as the real price increases, cigarette consumption decreases

The challenge in Jamaica The fiscal situation: –66 per cent of government expenditure is on government debt (2005) –All sources of revenue have to be protected –Rationale for excise taxes on tobacco products is revenue, not public health –Don’t kill the golden goose

There is still potential to increase government revenues in Jamaica Assumptions: E p = -0.5, no change in industry price No change position After tax increase of 15 April 2005

An important lesson from Jamaica Highly complex tax structures can be manipulated by the industry Jamaica’s tax regime on cigarettes 1.Special consumption tax (SCT): specific amount per cigarette, plus 39.9 per cent on the excess if the ex factory price exceeds a specified benchmark amount 2.“Excise levy”: 23 per cent of the sum of the ex factory price and the SCT, and 3.General Consumption Tax (GCT): percentage levied on the sum of the ex factory price, the SCT and the “excise levy”

Impact of a “51 per cent increase in the SCT” 14 April 2005: “The specific component of the SCT will be increased from J$ per 100 cigarettes to J$ per 100 cigarettes with immediate effect, and the threshold for the ad valorem component will be increased from J$ per 100 cigarettes to J$433.81” Cartoon: The Gleaner (Jamaican national newspaper), 15 April 2005

What the change in the SCT actually means Before tax changes After tax changes Difference in taxes Ex factory price (100 sticks)J$ SCT (specific component) SCT (ad valorem component) Subtotal Excise levy Subtotal Total increase in tobacco-specific taxes = J$ per 100 cigarettes Percentage increase = 6.6 per cent

For more expensive cigarettes the tax has actually decreased! Before tax changes After tax changes Difference in taxes Ex factory price (100 sticks)J$ SCT (specific component) SCT (ad valorem component) Subtotal Excise levy Subtotal Total decrease in tobacco-specific taxes = J$ 8.87 per 100 cigarettes Percentage decrease = 2.5 %

Impact of the tax increase on the retail price Carreras advertisement in The Gleaner (15 April 2005): “As a result of the increase in the tax on cigarettes the recommended retail price of cigarettes increases with immediate effect.” Recommended retail price of Craven “A” increased from J$ 180 to J$ 220 per pack after the tax increase Who wins here?

Conclusions 1.People respond to price signals, also for cigarettes 2.An increase in the excise tax is a very powerful tobacco control tool 3.Increases in the excise tax increase government revenue 4.Beware of complex excise tax formulae –Industry officials will try to outsmart government officials