Directions in Development Curbing the epidemic Governments and the Economics of Tobacco Control

1. Directions in Development Curbing the epidemic Governments and the Economics of Tobacco Control Health and Economics: The Evidence Base Tobacco Control in LAC By Ayda A. Yurekli, Ph.D World Bank PAHO/Caribbean Tobacco Control Meeting, Jamaica, 2001 The World Bank

2. Changing Global Burden of Tobacco PatternLarge and growing number of deaths from smoking World: Annual Tobacco deaths (in millions) 2000 2030 Developed 2 ~3 Developing ~2 ~7 World Total 4 ~10 • 1 in 2 of long-term smokers killed by their addiction • 1/2 of deaths in middle age (35-69)

3. Changing Burden of Disease Pattern in Developing Countries, 1990 and 2020

6. Global Share of the LAC Cigarette Consumption

8. Higher Prevalence Rate in LAC

9. Global Youth Tobacco Survey, 1999 Ages 13-15

10. Heavy Smokers in Latin America

11. Heavier Smokers in Caribbean

12. Higher Prevalence Rate Among Health Professionals in LAC

13. Policymakers worry that the costs of tobacco control would be high. • Revenue loss: likely to have revenue gains • a 10% tax increase would raise revenue by 7% • Job loss: temporary, minimal and gradual • Possible smuggling: crack down on criminal activity, not lower taxes • Cost to individuals, especially the poor: partially offset by lower consumption

14. Which interventions are effective?Measures to reduce demand • Higher cigarette taxes • Non-price measures: consumer information, research, cigarette advertising and promotion bans, warning labels and restrictions on public smoking • Increased access to nicotine replacement (NRT) and other cessation therapies

15. Which interventions are ineffective at reducing consumption?Most measures to reduce supply • Prohibition • Youth access restrictions • Crop substitution • Trade restrictions • Control of smuggling is the only exception and it is the key supply-side measure

16. Taxation is the most effective measure • Higher taxes induce quitting and prevent starting • A 10% price increase reduces demand by: • 4% in high-income countries • 8% in low or middle-income countries • Young people and the poor are the most price responsive

17. Cigarette tax levels are lower in low and middle-income countries Source: Authors’ calculations

18. As Cigarette Price (Tax) Rises Consumption Falls

19. As cigarette price rises, consumption fallsSouth Africa Experience1970-1989

20. As Cigarette Tax Rises Revenues Increase too

21. Trend in Cigarette Tax Revenues and Tax Rates in Sweden 1970-1998

22. As the Chinese Government Increases Prices, Revenues Increases

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

26. Lower Consumption, Higher Revenues

27. High Opportunity Costs

28. Smuggling Concerns Smuggling causes revenue loss to governments: 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,

29. Large Scale Organized Smuggling  Avoidance of taxes  Public tolerance  lack of control  presence of organized crime  the complicity of the industry

30. Characteristics of Organized Smuggling  Tax free cigarettes exported cigarettes diverted from intended destination  International brands most popular, well-known  Transport system  Pass through many owners  The presence of criminal organizations  Distribution in non-official outlets

31. Canadian Government reduced tobacco tax rates dramatically in February 1993

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

33. Tobacco smuggling tends to rise in line with the degree of corruptionSmuggling as a function of transparency index

34. Recommendations to control smuggling Require a license and keep detailed records; Make cigarette exporters post a bond; and Require that unique markings be placed on cigarette packages.

35. Summary • Tobacco deaths worldwide are large and growing, and shifting rapidly towards developing countries • Demand measures, chiefly tax increases, information, and regulation are most effective to reduce consumption • Control of smuggling is the major supply-side intervention • Tobacco control is cost-effective

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

37. What is the “right” level of tax? • Complex question • Depends on various factors, degree to which society wishes to protect children, revenue considerations, etc. • Useful yardstick: where comprehensive programs used, tax is at least 2/3 to 4/5 of retail price.

38. Choosing the Right Types of ExcisesAd Valorem vs. Specific

39. Ad Valorem Excises It has a multiplier effect as part of any increase in the consumer price goes to the government as tax revenue. The multiplier effect creates a disincentive to the manufacturer to improve a product’s quality. It will give greater protection to domestic producers if the cheaper brands of cigarettes are domestic products and the prestige brands are imported. Determining the value is difficult when taxpayers use abusive transfer prices to reduce their tax liabilities( example: Phillippines). A solution to the valuation problem is to impose the ad valorem cigarette excises, which are collected from the manufacturer or importer, on the maximum retail price that is specified by the manufacturer and printed on the package. Keep pace with inflation better than specific taxes. No guarantee that tax revenue will keep pace with inflation

40. Specific Excises • Weak tax administration: Specific automaticaly adjusted for inflation should be preferred to ad valorem excises • Specifictaxes could be adjusted automatically whenever the CPI has increased by more than say 5 percent since the previous adjustment • Specifictaxes can keep up with inflation if they are automatically adjusted by reference to the consumer price index (CPI) • Specific excises are easier to administer • Specific taxation requires a precise definition of what constitutes “one unit” of quantity. • Specific excises protect the revenues from price wars or reductions • When quality and variety are considered important in a type of product, economic theory points to specific taxation

41. Types of Tobacco Taxes in EU

42. Cigarette Tax as % of Retail Price for Selected Latin American and the Caribbean Countries, 1999

43. 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

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