PRESENTATION 6 Workshops on Tobacco prices and taxation Facing opposition

1. PRESENTATION 6Workshops on Tobacco prices and taxation Facing opposition World Health Organization (WHO) and International Union Against Tuberculosis and Lung Disease (The Union)

2. Questions • What are some of the common arguments against increasing price and taxes for tobacco products? • What are the some of the common responses that can be made to these arguments? • What is an earmarked tax? Is an earmarked tobacco tax only for funding tobacco control programs?

3. Despite strong evidence that tobacco taxation is a win-win solution, policy-makers have genuine concern that increasing tobacco taxes will also have negative impacts. These genuine concerns by policy-makers about possible negative economic impacts of tobacco taxation can be used or exaggerated by the industry or other stakeholders to block tobacco taxation efforts.

4. “Of all the concerns, there is one-taxation-that alarms us the most. While marketing restrictions and public and passive smoking (restrictions) do depress volume, in our experience taxation depresses it much more severely.” [1985 Philip Morris document] “…the 1982-83 round of price increases caused two million adults to quit smoking and prevented 600,000 teenagers from starting to smoke…We don’t need have that happen again.” (PM Doc 2045447810, www.pmdocs.com) Tobacco industry’s own words

5. Common arguments against tobacco taxation Higher tobacco taxes will -lead to smuggling.. -lead to reduction in government tax revenues… -hurt the poor… -lead to higher unemployment…

6. Government are frequently concerned that increases in tobacco taxes will contribute to illicit trade. In example, Sweden reduced tobacco taxes to minimize smuggling. However, this did not solve the problem of illicit trade –but resulted in increases in tobacco consumption, and reductions in government revenues...

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

8. More important factors contribute to illicit trade… • Unlicensed manufacturers and distributors • Lax anti-smuggling legislation • Public is tolerant/not considered a serious crime • Corruption in the country is high • Tobacco industry is complicit • Organized crime is present

9. Will higher taxes lead to a reduction in government revenues? For most countries, demand for tobacco products is inelastic… consumption falls less than the revenues generated from an increase in price This is why tobacco tax increases are commonly used by governments to generate revenues.

10. Interpretation of price elasticities < 1 = inelastic (price increases have less impact) 1 = unit elastic (1 unit to 1 unit impact) • >1 = elastic • (price increases have greater impact)

11. What is the price elasticity in your country? (Is it <1?) Asia Bangladesh -0.27 China -0.54 Indonesia -0.34 Nepal -0.8 Sri Lanka -0.53 Thailand -0.39  Eastern Europe Bulgaria -0. 80 Estonia -0.34 Turkey -0.19  Latin America Argentina -0. 27 Bolivia -0.85 Brazil -0.25 Chile -0.22 Uruguay -0.49  Middle East Egypt -0.40 Morocco -0.31 Sources: Adioetomo, Djutaharta, and Hendratno 2005; Alcaraz 2005; Ali, Rahman, and Rahman 2003; Aloui 2003; Arunatilake and Opatha 2003; Debrott Sanchez 2005; Gonzales-Rozada 2005; Hu and Mao 2002; Iglesias and Nicolau 2005; Karki, Pant, and Pande 2003; Nassar 2003; Onder 2002; Ramos and Curti 2005; Sayginsoy 2002; Taal 2004. These reports are available on line at http://www.worldbank.org and for Latin America at http://www.paho.org.

12. Will higher tobacco taxes be regressive? Many studies suggest that poor and low-income smokers are more responsive to tobacco price increases Therefore, poor smokers are more likely to quit or reduce consumption compared with higher-income smokers when there is an increase in tobacco prices. In the U.S., for example, smoking in households below median income level are about four times more sensitive to price than smoking in households above median (Source: Farrelly, M. (2001).

13. Health and financial gains to households from tobacco tax increases A reduction in tobacco use avoids long-term health damage and treatment costs from active and passive tobacco use. Smokers and their family members exposed to environmental tobacco smoke (ETS) would have positive health benefits. Furthermore, money not spent on tobacco products can be used for other goods that do not risk long-term health damage. Poorest households tend to spend a high percentage of household income on tobacco products. A reduction in tobacco consumption could free up resources for other goods and services that could be beneficial to the family as a whole.

14. Will higher taxes lead to higher unemployment? In some countries, there is a concern that higher tobacco taxes would lead to losses in jobs related to tobacco manufacturing, tobacco farmers, and small retailers.. However.. Generally tobacco manufacturing is not a major contributor to employment relative to other sectors Modern tobacco manufacturing is largely mechanized, therefore the contribution to employment is low relative to other sectors (i.e, service sectors)

15. What about the loss of income to small retailers? It is key to remember that reductions in tobacco spending would not be lost to the economy . If smokers quit, for example, they would typically use these funds to buy something else… -other services (restaurants, hotels, travel?) -investments in other goods (food, household goods? -investments in human capital (children’s education and health?

16. Example of Indonesia: Net employment levels increase as tobacco taxes increase (Ahsan et al 2007) • Tobacco expenditures are large: smokers spend 11.5% of expenditures on tobacco • Tobacco farming and manufacturing rank low (34th and 62nd of 66 sectors) in terms of overall economic output, employ, wages. • Reducing spending on tobacco = reallocated to other more productive sectors (i.e, service sectors). Simulations suggests that doubling the tobacco tax = positive net employment impact of >1/4 million jobs

17. Earmarked taxation- has been used to address opposition to tobacco taxes An “Earmarked tax” is a where a percent of the tax revenues collected is dedicated to a specific use. Earmarks can be used towards compensating any groups that may be more affected by tobacco tax increases (i.e., farmers, regions that rely on tobacco manufacturing, the poor) Earmarked funds can be a political tool to broaden support across for tobacco tax across many sectors. Earmarked funding from tobacco taxes have also funded tobacco-control programs.

18. Earmarked taxation has been used to gain public support for tobacco tax increases where the earmarks are for popular programs* The public is more accepting of higher taxes if it is dedicated to popular programs (child health insurance, for example) “In China, a 10 percent increase in cigarette taxes would decrease consumption by 5 percent and would increase government revenue by 5 percent. The increased earnings could finance a package of essential health services for one-third of China's poorest 100 million citizens in 1990 (Saxenian and McGreevey 1996” see DCCP).

19. Strategy: Know the situation in your country Is smuggling considered a serious crime in your country? What is the contribution of tobacco manufacturing and farming to employment relative to other sectors? What are the wages for tobacco manufacturing relative to other manufacturing sectors? What is the price elasticity of tobacco products? What is household spending on tobacco products, relative to other investments (health, education, etc) by income groups?

20. Review What are some of the common arguments against increasing price and taxes for tobacco products? What are the some of the common responses that can be made to these arguments? What is an earmarked tax? Is an earmarked tobacco tax only for funding tobacco control programs?