PRESENTATION 4 Types of taxes that can be applied to tobacco products Workshop on tobacco prices and tax World Health Organization (WHO) and International Union Against Tuberculosis and Lung Disease (The Union)

Questions for the end of the session What are the main types of taxes applied to tobacco products that can result in a price increase? To what products are excise taxes applied and why? What is the difference between an ad valorem and specific per stick excise? Why is it important for tax increases to keep pace with inflation? Can you explain the tobacco tax structure in your country?

Tax administration and the types of taxes applied can have an impact on how effective taxes are used for revenue and health goals ?

Types of taxes that can be applied to tobacco products: a focus on excise Excise: Ad-valorem: % rate based on value (base price) Specific per stick rate VAT Sales tax Tariff

Example of a tobacco tax structure - the European Union EXCISE Tax Ad valorem tax must be > 57% final price (unless excise tax> € 2.02 per pack) Specific tax between 5% – 55% total tax Minimum excise €1.28 per pack of 20 cigarettes (€ 64 per 1000 cigs) VAT (additional) countries’ rate on final price 13% – 20%

Cigarette Tax in four EU countries: specific and ad valorem prices and taxes per pack of 20 cigarettes Price specific ad val vat Total % price Poland € 2.3 € % € 0.4 € % Bulgaria € 1.3 € % € 0.2 € % UK € 7.8 € % € 1.1 € % Ireland € 7.5 € % € 1.3 € %

Comparing AV and specific taxes: Specific taxes Easier for government to make revenue forecasts based on buying patterns Provides an incentive to increase cigarette prices, because any increase in price is returned to the manufacturer as revenues. Because of this price effect, specific excises that impose the same tax per cigarette are more effective in discouraging cigarette consumption. Easier to administer because specific taxes are based on quantity and not the value of the product.

Comparing Ad valorem and specific taxes: AV A part of any increase in the price at point of sale is returned to the government as tax revenue (multiplier effect). The government effectively subsidizes any price reduction. Determining the value is particularly difficult, and firms can game the system to reduce their tax liabilities. Ad valorem taxes tend to keep pace with inflation better than specific taxes.

For either AV or specific taxes, an inflation adjustment is key to ensure that prices keep pace with inflation We can evaluate whether tobacco prices keep pace with inflation by estimating the real price: Real price = current (nominal) price ÷ consumer price index (CPI)

Difference between the nominal (current) price and real price of cigarettes, Indonesia

Where tobacco taxes are not adjusted for inflation, real prices decline and tobacco products can become more affordable relative to other goods and services

13 A decline in real tobacco prices and increases in consumption, Morocco Source: Aloui, 2003Aloui Inflation Adjusted Cigarette Prices and Cigarette Consumption, Morocco,

Tax increases that aim to reduce consumption need to be higher than the general rate of inflation and large enough to offset increases in household income Ad valorem tax (% per pack) is automatically adjusted for inflation. Specific taxes can keep pace with inflation if they are automatically adjusted to the consumer price index (CPI), or other price indicators. However, it is very important that the inflation adjustment be automatic. Such an adjustment should be made by administrative order, and should not require a decision by an executive agency or approval by a legislative body.

Review What are the main types of taxes applied to tobacco products that can result in a price increase? To what products are excise taxes applied and why? What is the difference between an ad valorem and specific per stick excise? Why is it important for tax increases to keep pace with inflation? Can you explain the tobacco tax structure in your country?