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Corn é Van Walbeek, PhD School of Economics University of Cape Town

Increasing cigarette taxes and prices as a tobacco control strategy in South Africa and Jamaica. Corn é Van Walbeek, PhD School of Economics University of Cape Town. Most of the work presented here was performed with funding from Research for International Tobacco Control (RITC).

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Corn é Van Walbeek, PhD School of Economics University of Cape Town

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  1. Increasing cigarette taxes and prices as a tobacco control strategy in South Africa and Jamaica Corné Van Walbeek, PhD School of Economics University of Cape Town Most of the work presented here was performed with funding from Research for International Tobacco Control (RITC)

  2. Aim of this presentation • To show that changes in tobacco taxes are good for • Tobacco control • Government revenue • To show that the rationale for increasing the excise tax may differ between countries • To warn against too complex taxes

  3. The situation in South Africa The 1980s: The government in the pocket of the tobacco industry • Budget Speech 1983: “The Tobacco Board has presented justified arguments for the maintenance of the status quo regarding the excise taxes on tobacco, and I do not intend to wake sleeping dogs” • Budget Speech 1986: “Any increases in excise duties at present could be counter-productive, since it could in fact – on account of the potentially adverse effect on consumption – lead to a reduction of revenue from this source”

  4. The composition of the retail price of cigarettes in South Africa If the excise tax is a specific tax, it gets eroded very quickly in times of moderate inflation (10-20 %)

  5. Government revenue and the excise tax When the real excise tax per cigarette decreases, government revenue decreases

  6. As the real price decreases, consumption increases Decreases in the price of cigarettes stimulate consumption

  7. The changes in South Africa in 1994 • Democratically elected government comes to power • New government has no historical ties with tobacco industry • Raises tax burden from 30 % to 50 % over short time period • Rationale for the tax increases: public health, not government revenue

  8. Impact of the changes in the retail price on cigarette consumption An increase in the retail price is a very good tobacco control mechanism

  9. The Ministry of Finance also gains A 10 per cent increase in the real excise tax increases government excise tax revenue by between 5 and 7 per cent

  10. Jamaica A comparison with South Africa

  11. The same economic principles apply in Jamaica as in South Africa Again, as the real price increases, cigarette consumption decreases

  12. The challenge in Jamaica The fiscal situation: • 66 per cent of government expenditure is on government debt (2005) • All sources of revenue have to be protected • Rationale for excise taxes on tobacco products is revenue, not public health • Don’t kill the golden goose

  13. There is still potential to increase government revenues in Jamaica After tax increase of 15 April 2005 No change position Assumptions: Ep = -0.5, no change in industry price

  14. An important lesson from Jamaica • Highly complex tax structures can be manipulated by the industry • Jamaica’s tax regime on cigarettes • Special consumption tax (SCT): specific amount per cigarette, plus 39.9 per cent on the excess if the ex factory price exceeds a specified benchmark amount • “Excise levy”: 23 per cent of the sum of the ex factory price and the SCT, and • General Consumption Tax (GCT): percentage levied on the sum of the ex factory price, the SCT and the “excise levy”

  15. Impact of a “51 per cent increase in the SCT” 14 April 2005: “The specific component of the SCT will be increased from J$126.81 per 100 cigarettes to J$192.00 per 100 cigarettes with immediate effect, and the threshold for the ad valorem component will be increased from J$252.39 per 100 cigarettes to J$433.81” Cartoon: The Gleaner (Jamaican national newspaper), 15 April 2005

  16. What the change in the SCT actually means Total increase in tobacco-specific taxes = J$ 20.04 per 100 cigarettes Percentage increase = 6.6 per cent

  17. For more expensive cigarettes the tax has actually decreased! Total decrease in tobacco-specific taxes = J$ 8.87 per 100 cigarettes Percentage decrease = 2.5 %

  18. Impact of the tax increase on the retail price Carreras advertisement in The Gleaner (15 April 2005): “As a result of the increase in the tax on cigarettes the recommended retail price of cigarettes increases with immediate effect.” Recommended retail price of Craven “A” increased from J$ 180 to J$ 220 per pack after the tax increase • Who wins here?

  19. Conclusions • People respond to price signals, also for cigarettes • An increase in the excise tax is a very powerful tobacco control tool • Increases in the excise tax increase government revenue • Beware of complex excise tax formulae • Industry officials will try to outsmart government officials

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