1. Tobacco Control Policy The Challenge of Raising Tobacco Taxes Global and Regional Experience by Ayda A. Yurekli, Ph.D World Bank World Bank ECA Regional PCU Conference, Warsaw, Poland September 9, 2001

2. Why is Raising Tobacco Taxes a Policy Challenge? Tobacco taxes are NOT new taxes Challenging, because –higher taxes improve public health, but –Policy makers worry about the economic consequences of higher taxes

3. 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 –Wont necessarily reduce employment –Wont necessarily increase smuggling

4. 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 reduces 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

5. Price Elasticity Evidence As tax increases, consumption decreases Evidence from Turkey

6. Price Elasticity Evidence As tax increases, consumption decreases Evidence from Hungary

7. High opportunity cost for smokers and their families

8. High Opportunity Cost in Bulgaria

9. Will higher tobacco taxes be good for the economy? Why do policy makers worry? reduce revenues? –Tobacco generates 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

10. Tobacco Taxes- Important source of revenue!

12. Tobacco Tax Revenues: Who Earns, How Much?

14. Revenue Generating Potential of Tobacco Taxes Empirical Arguments Depends on several factors. –Consumption level –Tobacco tax rates –Retail price of cigarettes –Income –Price and income elasticity of demand –Control of smuggling activities

15. As Cigarette Tax Rises Revenue Increases Tax per pack and cigarette tax revenues in Norway, 1990-1998

16. Evidence from Hungary: Since 1997 the tax rate has increased, and so has total revenue (in real terms)

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

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

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

20. Do high tax rates mean high prices? Not in ECA countries!

21. Cigarette prices lower than most food products in Bulgaria

22. High tax rates and high average prices of cigarettes in EU

23. Will higher taxes lead to smuggling: What is the Solution? Canadian Government reduced tobacco tax rates dramatically in February 1993

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

25. 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.

26. Employment is decreasing for several reasons: Efficiency, technology and privatization

27. Recommendations Increasing taxes: Win win situation for both public health and the economy. Higher taxes will generate higher revenues while reducing consumption There is still room to increase cigarette taxes in ECA countries due to inelastic demand, and low tax rates Reducing tax rates is not a solution for smuggling Employment in cigarette manufacturing is reduced for different reasons other than reduced consumption ?