Tobacco and China A Complex Challenge By Ayda A. Yurekli, Ph.D World Bank, Washington DC Ministerial Level Economics of Tobacco Control Seminar, Beijing, China November 2000

Why should governments intervene? Large and growing number of deaths from smoking World: Annual Tobacco deaths (in millions) Source: Peto, Lopez, and others 1997; WDR Developed 2 ~3 Developing ~2 ~7 World Total 4 ~10 u 1 in 2 of long-term smokers killed by their addiction u 1/2 of deaths in middle age (35-69)

With current smoking patterns, tobacco will eventually cause more than 2 million deaths each year in China

Increase in domestic cigarette sales has slowed in 1990s

China Smoked 32% of the Global cigarettes in 1999

Chinese women pick up the smoking habit as they get older

Smoking Addiction Starts Early in Age

Higher the Income, Lower the Prevalence Rate, but not for Women in China

Smoking is more prevalent among less educated and China is no exception

Trends in Total and Per Capita Sales in China

As price increases, consumption falls

As the Chinese Government Increases Prices, Revenues Increases

Tobacco tax revenue is the single largest tax revenue in China

Tobacco is a major source of tax revenue for provincial and local governments

Tobacco tax revenue is not a significant source of government revenue in most countries

Tobacco trade was effected by the Asian Crisis

New Government’s Policy on Tobacco Production and Area

Chinese Government’s Efforts to Increase Quality,

Smuggling  Each year at least 100 billion cigarettes enter China illegally and 1.4 billion cigarettes are legally imported.  Demand for foreign cigarettes is quite large.  Illegal production of domestic cigarettes is a growing problem.  Anti-Smuggling Campaign started to crackdown on corruption

Smuggling Concerns  Smuggling causes revenue loss to governments: In China, it is estimated that 15 billion yuan (US$ 1.8 billion) is lost per year and this is growing.  Smuggled cigarettes sell at a lower price, making cigarettes more affordable and therefore increasing consumption  Smuggling activities provide more opportunities for organized crime networks and may increase the general level of corruption in the country  One of the most frightening outcomes of smuggling is the likelihood that children will find it easier than ever to purchase tobacco products,

Sweden decreased cigarette taxes (27%) due to fear of smuggling in 1998

Tobacco smuggling tends to rise in line with the degree of corruption Smuggling as a function of transparency index

Chines government’s anti-smuggling campaign has had a substantial impact on illegal imports

Types of Tobacco Taxes Excises Specific - based on quantity Ad-Valorem- based on value VAT Customs Duty

Ad-Valorem versus Specific Taxes

Administration of Tobacco Taxation and Revenues Administration: a. Compliance b. Registration and licensing c. Timing of tax liability and tax payment d. Bonding e. Physical controls f. Use of stamps –g. Refunds and credits h. Floor stocks tax

Earmarking tobacco tax revenues Justification of earmarking tax revenues 1. Earmarked tobacco taxes could be used to fund health promotion and disease prevention. 2. Earmarked tobacco taxes promote vertical equity. 3. Earmarking Revenues for Tobacco Farmers: 4. Earmarking revenues for other anti-tobacco activities: