Do tax increases on tobacco hurt the poor? Some findings from South Africa

1. Do tax increases on tobacco hurt the poor? Some findings from South Africa Corné van Walbeek School of Economics University of Cape Town

2. Background • Tobacco control is receiving much attention internationally • Tobacco control instruments: • Advertising ban • Clean indoor air legislation • Restrictions on sales to youth • Health awareness • Excise tax increases • Consensus that tax increases are most effective

3. A strong inverse relationship

4. The government also benefits…

5. One small problem…. • In most countries smoking prevalence among the poor is higher than among the rich • The poor tend to spend a higher proportion of their income on cigarettes than the rich • Implication: tobacco excise taxes are regressive • Problem for tobacco control advocates: tax increases would hurt the poor

6. The tobacco control position • Does this mean that tobacco excise taxes should be decreased because they are regressive? • Tobacco control economists: NO • While the excise tax is regressive, increases in the excise tax, reduces the regressivity of the excise tax • How? Because the poor’s cigarette demand is more price sensitive than the rich

7. Aim of this paper • Investigate the regressivity of tobacco taxation in South Africa, 1990 to 2000 • Have tobacco taxes become more or less regressive over time?

8. Methodology • Obtain nationally representative and comparable surveys on tobacco use/expenditure • Divide the sample into income quartiles • Calculate average percentage of household income spent on tobacco products, by income quartile • Estimate tax incidence by income quartile, and consider how this has changed over time

9. Finding appropriate surveys • Require at least two surveys to investigate the impact of tobacco price and tax changes on consumption • “Best” surveys are Income and Expenditure Surveys 1990, 1995 and 2000 • 1990 IES: urban households only • 1995 and 2000 IES: urban and rural households, but 2000 IES has some very severe limitations • 2000 IES data “upscaled” to balance with national income aggregates and national cigarette consumption • Analysis applies to urban households only, and is based on weighted data

10. The possibility of product substitution • Tobacco products investigated by the respective IESs: • Cigarettes • Cigars and cigarillos • Pipe and other tobacco (used for RYO cigarettes) • Smoking requisites • If cigarettes become too expensive people might switch to RYO cigarettes

11. Some evidence of product substitution among the poor

12. Percentage of urban households spending money on cigarettes

13. Average percentage of household income spent on tobacco excise taxes, for urban smoking households only

14. Relative incidence of the tobacco excise tax, for urban smoking households only

15. But what about the quitters? • The rate of quitting was not the same for all income quartiles and racial groups • To account for quitting, we recalculated the average tax incidence percentages for all households that bought tobacco products in 1990

16. Relative incidence of the excise tax, for the proportion of urban households that were smoking in 1990

17. Conclusion • Tobacco excise taxes in South Africa were regressive but have become less regressive • Many poor households have quit smoking during the 1990s because it became unaffordable • Substitution to RYO tobacco among the poor distorts the picture slightly for cigarettes, but does not alter the main conclusions

18. End of presentation

19. Backup slides

20. Percentage of urban households spending money on tobacco products (not only cigarettes)

21. Average percentage of household income spent on cigarette excise taxes, for the proportion of urban households that smoked in 1990

22. End