Taxes and The Business of Tobacco

Taxes and the
Business of Tobacco
Frank J. Chaloupka, University of Illinois at Chicago
J2J Tobaccos Global Impact Program
Abu Dhabi, UAE, 17 March 2015
1
Overview
Tobacco Taxation
Why tax tobacco products?

Types of tobacco taxes
Tobacco taxes globally
Impact of taxes and prices on tobacco use
Economic impact of tobacco taxes
The Business of Tobacco

Globalization of the tobacco industry
Consequences of globalization
www.tobacconomics.org
Why Tax Tobacco

Products?
Why Tax Tobacco?

"Sugar, rum, and tobacco, are
commodities which are no where
necessaries of life, which are become
objects of almost universal
consumption, and which are
therefore extremely proper subjects
of taxation.
Adam Smith
An Inquiry into the Nature and Causes
of The Wealth of Nations
Why Tax Tobacco?

Efficient revenue generation
Primary motive historically and still true in
many countries today
Very efficient source of revenue given:
Historically low share of tax in price in many

countries
Relatively inelastic demand for tobacco
products
Few producers and few close substitutes
One of many goods/services that satisfies the
Ramsey Rule
Why Tax Tobacco?

This vice brings in one hundred million
francs in taxes every year. I will certainly
forbid it at once as soon as you can
name a virtue that brings in as much
revenue
Napoleon III
7
Federal Cigarette Tax and Tax Revenues

Inflation Adjusted, 1955-2012
$1.05
$17,000
$0.95
$15,000
$0.85
Tax per
Pack (1/14 Dollars)
$0.75
Revenues (Millions of 1/14 Dollars)
$13,000
$0.65
$11,000
$0.55
$0.45
$9,000
$0.35
$7,000
$0.25
$0.15
$5,000
Year
Federal Tax
Tax Revenues
8
Source: Tax Burden on Tobacco, 2013, and authors calculations
Why Tax Tobacco?

To promote public health
Increasingly important motive for higher
tobacco taxes in many high income
countries
Emerging as important factor in some low and

middle income countries
Based on substantial and growing evidence

on the effects of tobacco taxes and prices on
tobacco use
Particularly among young, less educated, and

low income populations
WHO FCTC Article 6

Price and Tax Measures to
Reduce the Demand for
Tobacco
The parties recognize
that price and tax
measures are an effective
and important means of
reducing tobacco
consumption by various
segments of the
population, in particular
young persons.
WHO MPOWER
Raise Taxes on Tobacco
We [] have a package of
six policy measures, known
as MPOWER, that can help
countries implement the
provisions in the Convention.
All six measures have a
proven ability to reduce
tobacco use in any resource
setting. But tobacco taxes
are by far the most
effective.
Director General Dr. Margaret Chan,
WHO, 2008
Cigarette Price & Adult Smoking Prevalence

Inflation Adjusted, United States, 1970-2013
$6.00
37
$5.50
$5.00
33
Price per Pack (1/14 Dollars)

$4.50
Prevalence
29
$4.00
$3.50
25
$3.00
$2.50
21
$2.00
17
$1.50
Year
Prevalence
Price
Source: Tax Burden on Tobacco, 2013, National Health Interview Survey, and authors calculations
Taxes, Prices and Health: US, 1980-2005
13
Why Tax Tobacco?

Cover the external costs of tobacco
Pigouvian tax
Less frequently used motive
Account for costs resulting from tobacco use
imposed on non-users
Increased health care costs, lost productivity from

diseases/death caused by exposure to tobacco smoke
Increased financial costs related to publicly financed
health care used to treat diseases caused by tobacco
use
Can also include internalities that result from

addiction and time inconsistent preferences
Annual Economic Costs of Smoking (2010) & Cigarette Tax & MSA Revenues (2012),
Billion Dollars
$150.8
$170.6
$109.6
$38.7
$0.0
$20.0
$40.0
$60.0
$80.0
$100.0
$120.0
Source: 2014 Surgeon Generals Report and Tax Burden on Tobacco
$140.0
$160.0
15
$180.0
Why Tax Tobacco?

Differential tax structure to protect domestic
industry/farmers
Turkey 2004 considerably lower tax on cigarettes
using at least 1/3 oriental tobacco
Indonesia lower taxes on kreteks; lower taxes on
small producers
India lower taxes on bidis; no taxes on small bidi
producers
Egypt printing tax on foreign brands
Keep prices low for some products

Particularly those used by the poor
WHOs Best Practices in

Tobacco Taxation
Use tobacco excise tax increases to
achieve the public health goal of
reducing the death and disease caused
by tobacco use
As called for in Article 6 of the WHO FCTC
Additional benefit of generating significant
increases in tobacco tax revenues in short
to medium term
17
Types of Tobacco Taxes

Variety of tobacco taxes
Taxes on value of tobacco crop
Customs duties on tobacco leaf imports and/or
exports
Customs duties on tobacco product imports and/or
exports
Sales taxes/Value added taxes
Implicit taxes when government monopolizes tobacco
product production and/or distribution
Tobacco excise taxes (or similar taxes)

Tobacco Excise Taxes
Two types of excises
Specific Taxes: excises based on quantity or weight (e.g. tax

per pack of 20 cigarettes)
Ad Valorem taxes: excises based on value of tobacco
products (e.g. a specific percentage of manufacturers prices
for tobacco products)
Some countries use a mix of specific and ad valorem tobacco
excises, differential taxes for different products of given type,
minimum taxes, etc.
Many countries apply different types of taxes and/or tax rates
on different types of tobacco products (e.g. manufactured
cigarettes vs. bidis)
Excise systems for cigarettes

Number of
countries
186
56
50
60
20
Source: WHO GTCR IV
Total covered
Specific excise only
Ad valorem excise only
Mixture of both excises
No Excise
Types of Cigarette Excise Taxes

by Income Group, 2012
Excise System on Cigarettes
Total
countries
No Excise
Specific &
Ad-valorem
Only AdValorem
Only
Specific
51
28
13
High
51
18
17
Upper
Middle
52
11
19
18
Lower
Middle
32
18
Low
186
20
60
50
56
All
Countries
Source: WHO GTCR IV
Cigarette Tax Structure, Globally, 2012

Type of tax (Total number of countries: 166)
No Excise
(20)
Afghanistan,
Antigua &
Barbuda,
Bahrain, Iran,
Iraq, Kiribati,
Kuwait, Libya,
Maldives,
Marshall
Islands,
Mauritania,
Niue, Oman,
Palau, Qatar,
Saint Lucia,
Saudi Arabia,
Sierra Leone,
Somalia,
United Arab
Emirates
Mix (59)
Ad Valorem (36)
Specific (51)
Uniform (51)
Tiers (8)
Uniform (30)
Tiers (6)
Uniform (32)
Tiers (19)
Austria, Belgium, Bosnia &

Herzegovina, Bulgaria,
Chile, Costa Rica, Croatia,
Cyprus, Czech Republic,
Colombia, Democratic
Republic of Congo,
Denmark, Dominican
Republic, El Salvador,
Egypt, Estonia, Finland,
France, Germany, Greece,
Hungary, Iceland, Ireland,
Israel, Italy, Jordan, Kenya,
Latvia, Lithuania,
Luxembourg, Macedonia,
Malaysia, Malta, Mexico,
Montenegro, Morocco,
Netherlands, Poland,
Portugal, Romania, Russia,
Serbia, Slovakia, Slovenia,
Spain, Sweden,
Switzerland, Turkey*,
Thailand, Tunisia, UK
Andorra,
Brazil, China,
Kyrgyzstan,
Moldova,
Pakistan, Sri
Lanka,
Ukraine
Angola,
Argentina,
Bahamas,
Benin, Bolivia,
Burundi,
Cambodia,
Cameroon,
Ethiopia, Gabon,
Ghana,
Guatemala,
Guinea, GuineaBissau, Guyana,
Laos, Lebanon,
Madagascar,
Niger, Nigeria,
Paraguay,
Rwanda,
Sudan, Syria,
Togo,
Turkmenistan,
Venezuela,
Vietnam, Yemen,
Zambia
Bangladesh,
Burkina
Faso, Ivory
Coast,
Senegal,
Mali,
Myanmar
Albania, Australia,
Azerbaijan,
Barbados,
Botswana, Brunei,
Canada, Cook
Islands, Cuba,
Ecuador, Haiti,
Honduras, Jamaica,
Japan, Lesotho,
Macao, Malawi,
Mauritius, Namibia,
Nicaragua, Norway,
Panama, Peru,
Singapore, South
Africa, South Korea,
Suriname,
Swaziland, Taiwan,
Trinidad & Tobago,
United States,
Uruguay
Algeria,
Armenia,
Belarus,
Belize, Fiji,
Georgia,
Hong Kong,
India,
Indonesia,
Kazakhstan,
Mozambique,
Nepal, New
Zealand,
Papua New
Guinea,
Philippines,
Tajikistan,
Tanzania,
Uganda,
Uzbekistan
Note: The following countries imposed a minimum tax in addition to their statutory rates: the 27 EU countries, Israel, Russia, Switzerland,
Turkey, Turkmenistan and Ukraine; * Turkey's excise system changed from uniform ad valorem to uniform mix in 2013
Source: TMA 2012 and WHO
Different bases for tiered systems

31 (19%) of 165 countries covered have a tiered system
# of
countri
es
Country
Base of tiers
Bangladesh, Mozambique, Philippines, Belarus, Indonesia,

Pakistan
Retail price
Burkina Faso, Senegal
High, standard and low end cigarettes
China
Producer price
Indonesia
Production volume
11
Armenia, Belarus, India, Nepal, Georgia, Kazakhstan,

Kyrgyzstan, Moldova, Papua New Guinea, Tajikistan, Ukraine
filter/non filter
Indonesia, India, Philippines
hand/machine made
Indonesia, Myanmar
kretek/white cigarette,
cheerot/cigarette
Andorra, Algeria
Tobacco content (dark/blonde or

dark/light)
Brazil, Mozambique, Uganda
soft/hard
India, Nepal, Hong Kong, Sri Lanka
Cigarette length
Andorra, Uzbekistan
Trade (domestic/imported)
Belize, New Zealand
Weight (tobacco content in cigarette)
Fiji
Leaf content (domestic/imported)
Type
Packaging
Seven countries differentiate their excises based on more than one criteria: Andorra, Belarus, India,
Indonesia, Mozambique, Nepal and Philippines. Sources TMA 2012 and WHO
Average price and excise tax

by tax structure, 2012
Average excise PPP
Average price PPP
Excise tax structure
1.57
3.73
Specific only
1.28
2.50
Ad valorem only
1.32
2.86
Mix system
1.67
3.84
Relying more on specific
1.11
2.29
Relying more on ad valorem
1.70
No excise
Source: WHO 2013
Cigarette Tax Structure & Prices

0.60
0.50
0.40
0.30
Standard Deviation, Prices of Top 5 Brands
0.20
0.10
0.00
Source: Chaloupka, et al., 2014

Tobacco Taxation
Simpler is better
Complex tax structures more difficult to
administer
Greater opportunities for tax evasion and
tax avoidance under complex tax
structures
Where existing structure is more complex,
simplify over time with goal of achieving
single uniform tax

Tobacco Taxation
Rely more on specific tobacco excises as the
share of total excises in prices increases
Greater public health impact of specific excises
given reduced opportunities for switching down in
response to tax/price increases
Sends clear message that all brands are equally
harmful
Where existing tax is ad valorem, adopt a specific
tax and increase reliance on specific tax over time

Tobacco Taxation
Rely more on tobacco excise taxes rather
than on import duties
Various trade agreements reducing import duties,
implying reduced impact of tobacco product
duties on price, revenues, and public health
Import duties create more opportunities for tax
avoidance/evasion
Where existing system relies on import duties,
adopt tobacco excises and increase reliance on
excises over time
Article 6 Guidelines
Recommendations - Section 3 Tobacco
taxation systems
Parties should implement the simplest and most efficient
system that meets their public health and fiscal needs,
and taking into account their national circumstances.
Parties should consider implementing specific or mixed
excise systems with a minimum specific tax floor, as
these systems have considerable advantages over
purely ad valorem systems.

Tobacco Taxation
Adopt comparable taxes and tax increases on
all tobacco products
Reduces potential for substitution to other
products that would result from differential tax
treatment and/or tax increases
Maximizes public health and revenue impact of
taxes/tax increases
Harm reduction?
Tax as a Percent of Price, Various

Products, European Union, July 2012
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Cigarettes
Fine cut tobacco (RYO)
Cigars and cigarillos
Source: WHO, unpublished data
Taxable RYO and Pipe Tobacco

US, 2008-2009
2,000,000
1,500,000
P
o
u
n
d
s
1,000,000
500,000
RYO
Pipe Tobacco
Source: US Treasury Department, Alcohol and Tobacco Tax and Trade

Bureau
Recommendations - Section 3 Tobacco taxation
systems
All tobacco products should be taxed in a comparable way as
appropriate, in particular where the risk of substitution exists.
Parties should ensure that tax systems are designed in a way
that minimises the incentive for users to shift to cheaper
products in the same product category or to cheaper tobacco
product categories as a response to tax or retail price
increases or other related market effects.
In particular, the tax burden on all tobacco products should be
regularly reviewed and, if necessary, increased and, where
appropriate, be similar.
Tobacco Taxes, Prices

& Tobacco Use
Taxes, Prices &Tobacco Use

Increases in tobacco product taxes and prices:
Induce current users to try to quit
Many will be successful in long term
Keep former users from restarting

Prevent potential users from starting
Particularly effective in preventing transition from

experimentation to regular use
Reduce consumption among those who continue to use

Lead to other changes in tobacco use behavior,
including substitution to cheaper products or brands,
changes in buying behavior, and compensation
36
Taxes, Prices & Tobacco Use

Inflation
cigarette prices
and cigarette
Real
priceadjusted
and consumption
of cigarettes
inconsumption,
the UK
1971-1996
United Kingdom, 1971-1996
2.65
CONSUMPTION
16000
2.45
15000
14000
2.25
13000
2.05
12000
1.85
11000
1.65
PRICE
10000
1.45
9000
1971
1.25
1974
1977
1980
1983
1986
1989
1992
1995
Year
Source: Townsend 1998
P r ic e ( ) 1 9 9 4 va lu e
C ig a r e t t e C o n s u m p t io n
1 9 9 4 p r ic e s ( m )
17000
Cigarette Prices and Cigarette Sales

Kansas, 1966-2013, Inflation Adjusted
315
$5.00
295
275
$4.50
255
$4.00
235
$3.50
215
Price pe r Pack (Jan 2015 dollars)
Sale s (m illion pack s)
195
$3.00
175
$2.50
155
$2.00
135
$1.50
Price
Cigarette Tax Revenue Economic Report
J. Chaloupka
115
Sales (million packs)
Sources: Tax Burden on Tobacco, 2014; Bureau of Labor Statistics; and Authors Calculations
Frank
Taxes, Prices & Tobacco Use

Inflation Adjusted Cigarette Prices and
Cigarette Consumption, Morocco, 1965-2000
Source: Aloui, 2003
Cigarette Price & Consumption

Hungary, 1990-2011, Inflation Adjusted
27,000
700
25,000
600
23,000
500
Price, 2011 Forints/Pack

21,000
400
19,000
300
17,000
200
15,000
100
Million Sticks
13,000
0
1990 1991 1992 1993 1994 1995
1996 1997Million
1998 Sticks
1999 2000 2001 Linear
2002 2003
2004 2005
2006Sticks)
2007 2008 2009 2010 2011
Consumption,
(Consumption,
Million
Price, 2011 Forints
Linear (Price, 2011 Forints)
Sources: EIU, ERC, and World Bank
Cigarette and Adult Smoking Prevalence

US States & DC, 2009
25
23
21
19
Prevalence
f(x) = - 0.01x + 25.52

R = 0.17
17
15
13
11
9
350
400
450
500
550
600
650
700
750
800
Average price, (in cents)
Source: BRFSS, Tax Burden on Tobacco, 2010, and authors calculations
850
Adult Prevalence & Price, Brazil

16
Adult Smoking Prevalence and Cigarette Price

Brazil, Inflation Adjusted, 2006-2013
5.4
16
15
15
4.9
14
14
Adult Smoking Prevaleence
Price per Pack, 2013 BRL

4.4
13
13
3.9
12
12
11
2006
2007
2008
2009
Sales, Million Sticks
2010
2011
2012
3.4
2013
Price per Pack, 2013 BRL
Sources: Ministry of Health, Brazil; EIU; World Bank
200,000
Monthly Quit Line Calls, United States

11/04-11/09
4/1/09 Federal Tax Increase
150,000
1/1/08 WI Tax Increase
100,000
50,000
Cigarette Prices and Cessation

US States & DC, 2009
70
65
f(x) = 0.03x + 43.08

R = 0.37
60
% Ever Smokers Who Have Quit

55
50
45
350
400
450
500
550
600
650
700
750
800
850
Average price (in cents)

Source: BRFSS, Tax Burden on Tobacco, 2010, and authors calculations
f(x) =
R = 0
Cigarette Prices and Youth Smoking Prevalence US States & DC, 2009
27
25
23
21
19
17
Prevalence
15
13
11
7
350
400
450
500
550
600
650
700
750
800
850
Average price (in cents)

Source: YRBS, Tax Burden on Tobacco, 2010, and authors calculations
Cigarette Price & Youth Smoking Prevalence

High School Seniors, United States, 1991-2013
$6.50
36
$5.75
Smoking Prevalence, 12th Grade Students
Price per Pack (1/14 Dollars)

31
$5.00
26
$4.25
21
$3.50
16
$2.75
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Cigarette Price
12th grade prevalence

Sources: Tax Burden on Tobacco, BLS, MTF, and authors
calculations
Price, Consumption & Lung Cancer, France

# cigarettes/adult/day
300
5.5
5.0
4.5
Lung cancer death rates per 100,000 (divided

by four): men age 35-44
250
4.0
200
3.5
3.0
150
2.5
Relative price
2.0
100
Price (% relative to 1980)
Number/adult/day and death rates
6.0
1.5
1.0
50
1980
1985
1990
1995
2000
2005
2010
Year
Sources: Jha & Hill, 2012
Other Issues in Tobacco

Taxation
WHOs Best Practices in Tobacco

Taxation
Automatically adjust specific tobacco taxes
for inflation
Unless adjusted, real value falls over time, as
does the real value of revenues generated by tax
Ensures the public health impact of tax is
maintained
To date, not widely done
Australia, New Zealand, a few others

Taxation
Increase tobacco taxes by enough to reduce
the affordability of tobacco products
In many low/middle income countries, positive
relationship between income and tobacco use
Implies consumption increases even as taxes
increase if increases in income larger
Depends on relative price, income elasticity
Increasing affordability will result in increasing

tobacco use, consequences
50
Cigarette Prices & Cigarette Consumption

China, 1996-2005, Inflation Adjusted
P
r
i
c
e
(
1
9
9
0
R
M
B
)
1.97
70.9
1.77
68.9
P
a
c
k
s
1.57
66.9
p
e
r
1.37
64.9
1.17
62.9
0.97
60.9
1
Real Price per Pack
Per Capita Consumption
10
C
a
p
i
t
a
Income & Cigarette Consumption

I
n
c
o
m
e
p
e
r
C
a
p
i
t
a
(
1
0
0
0
1
9
9
0
R
M
B
)
6.3
70.9
5.8
68.9
P
a
c
k
s
66.9
P
e
r
5.3
4.8
4.3
64.9
3.8
62.9
3.3
2.8
60.9
1
Real Income per Capita
10
C
a
p
i
t
a
Affordability & Cigarette Consumption

A 2.09
f
f
o
r
d 2.04
a
b
i
l 1.99
i
t
y
(
1
9
9
0
=
1
)
70.9
68.9
66.9
P
a
c
k
s
P
e
r
1.94
64.9 C
a
p
62.9 i
t
a
1.89
60.9
Affordability
Inflati0n & Affordability Adjustments

Australia, 2000-2014, Inflation Adjusted
$16.00
$14.00
$12.00
$10.00
$8.00
$6.00
$4.00
$2.00
$0.00
Excise Tax
GST
Industry Price
Recommendations - Section 3 Tobacco
taxation systems
Parties should establish coherent long-term policies on
their tobacco taxation structure and monitor on a
regular basis including targets for their tax rates, in
order to achieve their public health and fiscal objectives
within a certain period of time.
Tax rates should be monitored, increased or adjusted
on a regular basis, potentially annually, taking into
account inflation and income growth developments in
order to reduce consumption of tobacco products.
Tobacco Taxes as Part

of Comprehensive
Approach

Taxation
Include tobacco excise tax increases as part
of a comprehensive strategy to reduce
tobacco use
Synergies with other policies called for by WHO
FCTC, MPOWER package
Comprehensive efforts strengthen social norms
against tobacco, build public and political support
for tax increases
Maximize the impact of the tax increases on
public health
But reduce revenue impact

Taxation
Use a portion of tobacco tax revenues to
support other tobacco control and/or health
promotion efforts
Growing number of governments use hard
earmark for tobacco control and/or health
promotion efforts; others use soft earmark
General opposition to earmarking amount MoF
officials, economists
Maximize the impact of the tax increases on public
health
But reduce revenue impact
Earmarked Tobacco Taxes
Source: WHO 2010
State Tobacco Control Program

Funding and Youth Smoking Prevalence, United States, 1991-2009
37
$1,000
35
33
$800
31
29
$600
Total Funding
$Millions (FY10 dollars)
27
$400
Percent Current Smoking
25
23
$200
21
$0
19
Year
total state program funding
high school prevalence
Source: ImpacTeen Project, UIC; YRBS
Recommendations - Section 5 Use of
Revenues Financing of Tobacco Control
Parties could consider, while bearing in mind
Article 26.2 of the WHO FCTC, and in accordance
with national law, dedicating revenue to tobaccocontrol programmes, such as those covering
awareness raising, health promotion and disease
prevention, cessation services, economically
viable alternative activities, and financing of
appropriate structures for tobacco control.

Taxation
Set tobacco excise tax levels so that
they account for at least 70 percent of
the retail prices for tobacco products
Update of World Bank yardstick of any
taxes accounting for 2/3 to 4/5 of retail
prices
Well above where most countries are
currently
Further increases in countries that do reach
this target
Weighted average Price of the Most Sold

Brand & Excise Tax per pack, and Total Tax
Share
By Income Group 2012
65.90%
63.34%
5.82
58.40%
48.72%
50.31%
40.76%
PPP
3.12
3.29
3.00
2.67
1.65
1.57
0.61
High income
Upper middle
Lower middle
Retail price, PPP
1.35
1.18
0.97
0.31
Low income
Excise tax PPP
China
All
Total tax share (%)
Note : Averages were weighted by number of current cigarette smokers in each country.
Because of the very large number in China, China's estimates were added separately.
Source: WHO GTCR IV
Weighted average Price of the Most Sold

Brand & Excise Tax per pack, and Total Tax
Share
By Region 2012
4.66
4.49
73.16%
53.21%
55.92%
3.13
50.27%
48.06%
2.63
2.58
39.91%
PPP
1.92
1.77
1.62
1.17
0.80
0.70
AFRO
AMRO
Retail price, PPP
EMRO
Excise tax PPP
0.59
EURO
SEARO
WPRO
Total tax share (%)
Note : Averages were weighted by number of current cigarette smokers in each country.
Source: WHO GTCR IV
Article 6 Guidelines - Text

As recognized in Guiding Principle 1.1, Parties have the sovereign
right to determine and establish their taxation policies, including the
level of tax rates to apply. There is no single optimal level of
tobacco taxes that applies to all countries because of differences in
tax systems, in geographical and economic circumstances, and in
national public health and fiscal objectives. In setting tobacco tax
levels, consideration could be given to final retail prices rather than
individual tax rates. In this regard, WHO had made
recommendations on the share of excise taxes in the retail prices of
tobacco products1.
WHO technical manual on tobacco tax administration. Geneva, World Health
Organization, 2010. (Recommends that tobacco excise taxes account for at least
70% of the retail prices for tobacco products).
1
Economic Impact of
Tobacco Taxes
Oppositional Arguments
Wont generate additional revenues

Will harm the poor
Will adversely affect the economy
Will cause extensive tax avoidance &
tax evasion
Tobacco Taxes Oppositional Arguments:

Revenue Impact
Tobacco Taxes & Tax Revenues

Myth: increases in tobacco taxes will
lead to lower tobacco tax revenues
given reductions in tobacco use
Tobacco Taxes & Tax Revenues

Fact: tobacco tax increases lead to
increased tax revenues
Tobacco taxes account for a fraction of tobacco
prices
Increase in tax leads to smaller increase in
price
Reductions in tobacco use less than
proportionate to price increase
Cigarette real price & real tax

revenue United Kingdom
9000
2.90
8500
Taxation revenue
8000
( million)
7500
Price () 1994 value

Tax revenue
2.40
7000
1.90
6500
6000
Price
5500
1.40
Year
Source: Townsend, 2010
South Africa - Taxes, Prices, and Tax

Revenues, 1970-2012, Inflation Adjusted
25
9000
8000
20
7000
6000
15
5000
Rand per Pack
Tax Revenues, Million Rand

4000
10
3000
2000
1000
Industry Price
Excise Tax
VAT
Excise Tax Revenues
Tobacco excise tax & tax revenues:

Poland
The excise tax revenue is increasing along with the tax rates
Percentage
share of excise
tax in retail price
of MPPC
cigarettes
Tobacco excise
tax revenue in
Poland (in mln
PLN)
Source: Ministry of
Finances
Source: Stoklosa & Ciecierski, 2010
73

Impact on the Poor
Tobacco Control & the Poor
Myth: tobacco control harms the poor
Tobacco Control & the Poor
Fact: tobacco use harms the poor
Tobacco & Poverty

Family falls into poverty
Foregone income 3:
Breadwinner dies
prematurely
Poor men
smoke
Foregone income 2:
Treatment cost &
Lost working days &
income
Breadwinner gets
sick due to
tobacco use
Cycle of
tobacco and
poverty
Foregone income 1:
More money spent
Less money spent
on tobacco:
on Education, nutrition etc
High opportunity cost
Source: Yurekli, 2007
Source: Jha et al, 2006
Poverty and Tobacco Use

Burdens of poverty are compounded by
tobacco use
Responsible for impoverishment of over 50

million in China
Crowding out of other spending:
Smoking households in China spent less

on food, housing, clothing, and education
than non-smoking households
Sources: Hu, et al., 2008; Liu, et al., 2006
Crowding Out
17 ITC Countries
Tobacco crowds out
spending on essentials.
Greater crowding out in
LMICs
Source: ITC Project, 2012
80
Tobacco Taxes & the Poor

Myth: tobacco tax increases harm the
poor
Tobacco Taxes & the Poor

Fact: tobacco tax increases can be
progressive
Tobacco use among low-income
populations more responsive to price
Pay smaller share of tax increase
Receive greater share of health
benefits from higher tax
Who Pays& Who Benefits

Turkey - 25% Tax Increase
9.7%
8.5%
9%
4%
-1%
-2.2%
-6%
-11%
-16%
-18.5%
-21%
-20.4%
-26%
-31%
-36%
-35.3%
Change in Consumption
Change in Taxes Paid

Source: Adapted from nder & Yrekli, 2014
Who Pays& Who Benefits, China
Low SES group:

Pays 6.4% of increased taxes
Receives 32.1% of health benefits
Health/tax ratio: 5.02
Source: Jha, et al, 2012
Impact of Tobacco Taxes

on the Poor
Need to consider overall fiscal system
Key issue is whats done with the revenues generated

by the tax
Greater public support for tobacco tax increases when

revenues are used for tobacco control and/or other
health programs
Net financial impact on low income households can be

positive when taxes are used to support programs
targeting the poor
Concerns about regressivity offset by use of revenues

for programs directed to poor

Impact on Employment
Tobacco Taxes & Employment

Myth: tobacco tax increases and
other tobacco control policies will
result in significant job losses as
tobacco use falls
Tobacco Taxes & Employment

Fact: tobacco control will result in net
increase in jobs in most countries
Tobacco-Related Employment
Very small share of employment dependent on

tobacco growing and manufacturing in most
countries
Economic presence does not imply economic

dependence
Employment in tobacco manufacturing falling over
time in response to tobacco industry shift to more
capital intensive production technologies.
Can use revenues from tobacco taxes to help those
in tobacco growing/manufacturing shift to other
sustainable livelihoods
Impact of Tobacco Taxes on Jobs

Tobacco tax increases will lead to decreased
consumption of tobacco products
Small loss of jobs in tobacco sector
Money not spent on tobacco products will be

spent on other goods and services
Gains in jobs in other sectors
Increase in tobacco tax revenues will be spent

by government
Additional job gains in other sectors
Net increase in jobs in most countries


Tax Avoidance & Evasion
Tobacco Taxes & Illicit Trade

Myth: tobacco tax increases will lead to
increases in illicit trade, eliminating the
public health and revenue benefits of
higher taxes

Fact: tobacco use falls and tax revenues
increase following tax increases even in
the presence of illicit tobacco trade
Tax Avoidance & Evasion Do NOT Eliminate

Health Impact of Higher Taxes
Source: Schroth, 2014
Tax Avoidance & Evasion

Do NOT Eliminate Revenue Impact of
Higher Taxes
95

Fact: other factors more important than
tobacco taxes and tobacco control
policies in explaining illicit trade
Illicit Cigarette Market Share

& Cigarette Prices, 2012
50.00%
45.00%
Illicit40.00%
trade share as % of legal cigarette consumption
35.00%
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
0
f(x) =
R = 0
10
12
14
Price USD
Sources: Euromonitor, WHO
Determinants of Illicit Tobacco

Corruption
Weak tax administration
Absence of tax stamps; weak or non-existent
physical controls; unlicensed manufacturers,
distributors, retailers; weak customs
authorities
Poor enforcement
Limited resources for border patrols, customs
authorities, etc; low penalties
Smuggling and Corruption, 2011

0.5
0.45
0.4
0.35
0.3
0.25
illicit cigarette trade volume
0.2
0.15
0.1
0.05
0
1
f(x)2=
R = 0
5
6
Transparency Index
10
Sources: Euromonitor, Transparency International
Determinants of Illicit Tobacco

Presence of informal distribution channels
e.g. Street vendors, unlicensed distributors
Presence of criminal networks
e.g. Organized crime, terrorist organizations
Access to cheaper sources
e.g. duty free, cross border
Controlling Illicit Tobacco Trade
Fact: there exist effective

interventions to reduce illicit trade
in tobacco products
Cigarette Taxes and Illicit Cigarette

Market, Spain 1991-2008
Combating Illicit Tobacco Trade

Illicit trade protocol to the WHO FCTC
Adopted November 2012; currently in process of being
signed/ratified; provisions calling for:
Strong tax administration
Prominent, high-tech tax stamps and other pack markings
Licensing of manufacturers, exporters, distributors, retailers
Export bonds
Unique identification codes on packages
Better enforcement
Increased resources
Focus on large scale smuggling
Swift, severe penalties

Multilateral/intersectoral cooperation
Summary
Cost Effectiveness of Tobacco Taxes

Significant tobacco tax increases make good
economic sense:
Not just long-term public health, but near-term

health and economic benefits
Tobacco control will not harm economies
Substantial impact in reducing health care

costs, improving productivity, and fostering
economic development.
Key Tobacco Control Policies

$6,000
Cost-Effectiveness
$5,000
$4,000
$3,000
$2,000
Cost per DALY Averted
$1,000
$0
High Income
Upper Middle Income
Lower Middle Income
Low Income
Source: WHO, unpublished data
The Business of Tobacco
Overview
Globally, the tobacco industry continues to
evolve and market power has increased
This has consequences for tobacco use and
tobacco control
Industry strategy can undermine tobacco

control
But a globalized industry now faces globalized
tobacco control
The Tobacco Industry

Has Evolved
Factors Contributing to Industry

Evolution
Bilateral, regional, and global trade agreements
Loosening of restrictions on foreign direct
investment
Privatization of government run tobacco
companies
A few significant exceptions
Consolidation among multinational tobacco

companies
Diversification of product lines
Tobacco control policies & regulation
Trade Agreements
Global/Multilateral treaties:
e.g. GATT/World Trade Organization
Regional Agreements: similar efforts to reduce

trade barriers among countries in given region:
e.g NAFTA, EU, ASEAN, WAEMU, etc;
Bilateral Agreements: reduce trade barriers

between selected countries:
e.g China- ASEAN free trade market
Significant reductions in tariff and non-tariff

barriers to trade in tobacco leaf and tobacco
products
Global Leaf Tobacco Exports &

Value, 1961-2011
Exports, 1,000 Tonnes
3,000
$12,000
2,500
$10,000
2,000
$8,000
1,500
$6,000
1,000
$4,000
500
$2,000
Export Value, Million Dollars
$0
Source: FAOSTAT 2014
Global Cigarette Exports & Value,

1961-2011
1,200
$25,000
1,000
$20,000
800
Million Tonnes
$15,000
Million Dollars
600
$10,000
400
$5,000
200
$0

Source: FAOSTAT 2014
Trade Agreements - impact

Impact of freer trade on tobacco use
Chaloupka & Laixuthai (1996) examined impact of
Section 301 agreements
Significant increases in tobacco use, market share of US companies
Taylor, et al. (2000); Perucic, et al. (in progress)

global analyses separately for low, middle, and highincome countries
More open markets lead to significant increases in tobacco use
Greatest impact in lower income countries
Increased tobacco use likely the result of greater

competition:
Lower prices
Increased marketing
Direct Investment & Privatization

Opening of markets has also resulted in
increased openness to direct investment
Investment in new production facilities/capacity
owned and operated by multinational tobacco
companies
Privatization of former government owned/operated
tobacco companies
for example, Turkish TEKEL sold to BAT in 2008 after being
on the market for many years)
Joint ventures between local monopoly and

multinational tobacco companies
For example, PMI and CNTC, Vinataba, and other national
monopolies
Direct Investment & Privatization

Public health concerns about FDI and
privatization
Government efforts to attract investors/buyers can
lead to agreements that government wont adopt
higher taxes, strong tobacco control policies
Increased presence of multinationals will lead to
widespread use of sophisticated marketing practices
Tobacco use will be higher than it would be otherwise
Public health benefits of privatization

Eliminates conflict of interest between revenues
generated from production/sale of tobacco and
health/economic benefits of tobacco control
Impact of Direct Investment

Cigarette Prices, Ukraine, 2000-2006
Source: Ross et al., 2008
Impact of Direct Investment

Cigarette Consumption, Ukraine, 1990-2006
Source: Ross et al., 2008
Privatization with Strong Tobacco

Control: Turkey
Source: CTFK, 2012
Mergers & Acquisitions

Considerable consolidation among tobacco
companies
Acquisition of local cigarette companies by
Multinationals (MTCs)
Acquisition of popular local brands (e.g. BAT acquisition of
Protabaco - 2nd largest Colombian company - in 2011)
Mergers between local tobacco companies and MTCs

For example, PMI and Fortune Tobacco Company merger in 2010
nearly monopolizes Philippine cigarette market
Acquisition of one MTC by another MTC

For example, Imperial Tobacco Groups acquisition of Altadis in
2008; RJR acquisition of Lorillard in US (2nd & 3rd largest US
companies)
Others to come?
Cigarette Company Market Shares

1985-2013, Selected Years
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
1985
1990
1995
CNTC
PMI+Altria
2000
BAT
2006
JTI
ITG
2010
2013
Others
Source: Maxwell Tobacco Fact Book, various years; Euromonitor, 2014

Increasingly, consolidation across products
Altria, US largest cigarette company, acquisition of US
Smokeless Tobacco Company in 2008, largest
smokeless company in the US
Lorillard Inc. acquisition of Blu, a leading e-cigarette
company
JTIs acquisition of Gryson, a leading RYO/MYO
manufacturer in Western Europe
PMIs purchase of Jed Roses patent for a nicotine
inhaler

Combined with development and marketing
of new products
Nearly every MTC developing/marketing electronic products and
other non-tobacco nicotine products
2011 - BAT creates Nicoventures to develop reduced risk
tobacco products, other nicotine delivery products
Seeking approval for Voke nicotine inhaler to be licensed as a
medical device
2012 - Altria markets Verve a non-tobacco, nicotine lozenge
2014 RJ Reynolds go nationwide with nicotine gum Zonnic,
marketed as cessation aid
2014 Heat not burn products emerging Ploom (partially
owned by JTI), iQOS HeatSticks (PMI), others
More to come
Global Tobacco Market, 2013
Euromonitor, 2015
Euromonitor, 2014
Euromonitor, 2015
Euromonitor, 2014
Euromonitor, 2014
Pricing Power
I'll tell you why I like the cigarette

business. It cost a penny to make. Sell it
for a dollar. It's addictive. And there's a
fantastic brand loyalty.
Warren Buffet
130
Pricing Power
Euromonitor, 2014
Brand Shares, 2013

7
3
2.4
2
2.4
2.3
2
1.9
1.9
1.9
1.8
1.7
1.7
1.6
1.5
1.4
1.4
1.3
1.3
1.2
1.2
1.1
1.1
1.1
Euromonitor, 2014
Brand Shares by Region, 2013
Euromonitor, 2014
Philip Morris International
Euromonitor, 2014
British American Tobacco
Euromonitor, 2014
Consequences of
Globalization for
Tobacco Control
Consequences of Globalization
Challenges to national tobacco
control policies
Challenges posed by new products
Regionalization of production
On the plus side: Global action to
counter a globalized industry
Challenges to National Tobacco

Control Policies
Within countries : national, subnational laws
Philip Morris challenge of Norway tobacco product display ban
Favorable EFTA ruling; ban upheld by Oslo District Court
State-State disputes trade treaties

Indonesia/US dispute over US ban on flavored cigarettes; Multiple
challenges to Australias tobacco plain packaging measure
Investor-State disputes - bilateral investment

treaties
Philip Morris Asia challenge of Australian plain packaging policy
under bilateral investment treaty between Hong Kong & Australia
Challenges Posed by New Products

Ways to avoid smoke-free policies
Unclear coverage of electronic products and
other novel prices under existing bans on
tobacco product advertising, promotion and
sponsorship
Significant tax/price advantages
Depends on how tobacco products are defined for
tax purposes
Also depends on tax structure
Renormalization
140
142
Regulatory Challenges for

New Products
Need for tobacco control policies & regulation to
maximize the net public health impact
Could include:
Limits on youth access

Inclusion of vaping products under smoke-free policies
Strong product standards
Differential taxation
Allow some forms of marketing
Net public health impact of ENDS, other

emerging products unclear
Regionalization of Production
Consolidation/centralization of production in
regional production hubs
Capitalize on significant economies of scale in
production of tobacco products
Take advantage of regional trade agreements that
greatly reduce or eliminate barriers to trade in tobacco
products
Generally located in:
Large consuming country within region
Country where labor, tobacco leaf, other costs are low
Not associated with tobacco tax rates
Total Tax as Percentage of Retail Price of Most

Sold Brand and Production as Percentage of
Total Supply, 2012
Hungary
UK
Chile
Belgium
Canada
Saudi Arabia
Azerbaijan
Kazakhstan
Cameroon
Nigeria
Source: WHO, 2013
Globalization of Tobacco Control:

WHO FCTC and MPOWER
Gives priority to public health
Recognize need for international
action and cooperation
Evidence-based
Mindful of potential social and
economic impact of tobacco
control efforts
Concerned about role of industry
A global public good
Summary & Conclusions
Summary
Strong evidence base to support guiding
principles and recommendations
Involvement of many Parties in developing
guidelines
Considerable scope for strengthening tax
systems and increasing taxes
Increasing examples of best practices
globally
But still many more examples of less than best
practices
For more information:

Tobacconomics
http://www.tobacconomics.org
@tobacconomics
fjc@uic.edu

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Taxes and The Business of Tobacco

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Taxes and the

Why tax tobacco products?

The Business of Tobacco

Why Tax Tobacco

Why Tax Tobacco?

Why Tax Tobacco?

Historically low share of tax in price in many

Why Tax Tobacco?

Federal Cigarette Tax and Tax Revenues

Revenues (Millions of 1/14 Dollars)

Source: Tax Burden on Tobacco, 2013, and authors calculations

Why Tax Tobacco?

Emerging as important factor in some low and

Based on substantial and growing evidence

Particularly among young, less educated, and

WHO FCTC Article 6

Cigarette Price & Adult Smoking Prevalence

Price per Pack (1/14 Dollars)

Taxes, Prices and Health: US, 1980-2005

Why Tax Tobacco?

Increased health care costs, lost productivity from

Can also include internalities that result from

Source: 2014 Surgeon Generals Report and Tax Burden on Tobacco

Why Tax Tobacco?

Keep prices low for some products

WHOs Best Practices in

Types of Tobacco Taxes

Types of Tobacco Taxes

Types of Tobacco Taxes

Specific Taxes: excises based on quantity or weight (e.g. tax

Excise systems for cigarettes

Source: WHO GTCR IV

Types of Cigarette Excise Taxes

Source: WHO GTCR IV

Cigarette Tax Structure, Globally, 2012

Austria, Belgium, Bosnia &

Different bases for tiered systems

Bangladesh, Mozambique, Philippines, Belarus, Indonesia,

Burkina Faso, Senegal

High, standard and low end cigarettes

Armenia, Belarus, India, Nepal, Georgia, Kazakhstan,

Indonesia, India, Philippines

Tobacco content (dark/blonde or

Brazil, Mozambique, Uganda

India, Nepal, Hong Kong, Sri Lanka

Belize, New Zealand

Weight (tobacco content in cigarette)

Leaf content (domestic/imported)

Average price and excise tax

Average price PPP

Excise tax structure

Relying more on specific

Relying more on ad valorem

Cigarette Tax Structure & Prices

Source: Chaloupka, et al., 2014

WHOs Best Practices in

WHOs Best Practices in

WHOs Best Practices in

WHOs Best Practices in

Tax as a Percent of Price, Various

Fine cut tobacco (RYO)

Cigars and cigarillos

Source: WHO, unpublished data