1. 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

2. 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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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): (poorest) to – 0.21 (richest)

10. 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

11. 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