Best Practices in Tobacco Taxation

1. Best Practices in Tobacco Taxation Frank J. Chaloupka, PhD University of Illinois at Chicago International Tobacco Evidence Network

2. Overview • Tobacco tax structure • Tobacco tax levels and tax increases • Tobacco tax administration • Economic impact of tax increases—myths and facts Image source: World Health Organization. (2010).

3. Best Practices: Why Tax Tobacco? • 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 FCTC • Additional benefitof generating significant increases intobacco tax revenues in short- to medium-term Source: Jha, P. (2009).

4. Best Practices: What Type of Tax Structure? • Simpler tax structure is better • Complex tax structures are more difficult to administer • Complex tax structures create more opportunities for tax evasion and tax avoidance • Where existing tax structure is more complex, aim to simplify over time with goal of achieving a single uniform tax

5. Best Practices: What Type of Tax? • Rely more on specific tobacco excises as the share of total excises in price increases • Greater public health impact of specific excises given reduced opportunities for switching down in response to tax and price increases • Uniform specific tax 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 Source: WHO calculations using WHO GTCR 2009 data. 5

6. Best Practices: Taxes on Different Products • Adopt comparable taxes and tax increases on all tobacco products • Maximizes the public health impact of tobacco taxes and tax increases by minimizing opportunities for substitution between tobacco products in response to changes in relative prices • Challenging where diverse products available

7. Best Practices: Adjust Taxes for Inflation • Automatically adjust specific taxes for inflation • Unless adjusted regularly, real value of tax fallsover time, as do the revenues generated by the tax • Ensures that the publichealth impact of the tax is maintained • Currently done in Australia, New Zealand

8. Best Practices: Use Taxes to Reduce Affordability • Increase tobacco taxes by enough to reduce the affordability of tobacco products • Positive relationship between income and tobacco use implies increases in income can increase tobaccouse even as taxes rise

9. Best Practices: Increase taxes • Set tobacco excise tax levels so that they account for at least 70% of the retail prices of tobacco products • Update of the World Bank’s 2/3-4/5 yardstick • Well above where most countries are currently • Further increase in countries that have reached target

10. Best Practices: Tax Administration • Eliminate tax or duty-free sales of tobacco products • As called for in Article 6 of FCTC • Reduces opportunities for individual tax avoidance • Maximizes the public health and revenue impact of taxes • Adopt new technologies to strengthen tobacco tax administration and minimize tax avoidance and evasion • Apply new, sophisticated tax stamps (banderoles) • Adopt tracking and tracing technology • Adopt production monitoring technologies

11. Best Practices: Tax Administration • Strengthen tax administrators’ capacity by licensing all involved in tobacco product manufacturing, distribution, and sales • Facilitates identification of those engaged in illicit trade • Enhances ability to penalize those engaged in illicit trade through suspension or revocation of license • Ensure certain, swift, and severe penalties for those caught engaging in illicit trade in tobacco products • Increases the expected costs of engaging in illicit trade • Strong, administrative sanctions coupled with licensing and tracking/tracing systems

12. Best Practices: Tax Administration • Strengthen tax administrators’ capacity to monitor tobacco product markets and evaluate the impact of tobacco tax increases • “Trust but verify” • Monitoring of tobacco production and distribution • Physical controls over tobacco products • Periodic audits • Capacity to estimate the impact of tobacco tax changes on tobacco product consumption and revenues

13. Best Practices: Earmarking • Earmark a portion of tobacco tax revenues for tobacco control and health promotion efforts • Adds to the public healthimpact of tobacco taxes by further reducing tobacco use • Increases public support for higher tobacco taxes

14. Best Practices: Economic Impact—Myths and Facts • Do not allow concerns about job losses to prevent tobacco tax increases • Tobacco employment often declining even where tobacco product consumption is rising • Tax-induced reductions in tobacco-dependent employment are offset by increases in other sectors • Where concerns are significant, use tax revenues to support the transition from tobacco farming and manufacturing to alternative livelihoods

15. Best Practices: Economic Impact—Myths and Facts • Do not allow concerns about the inflation impact of higher tobacco taxes to deter tax increase • Tobacco tax increases have minimal impact on inflation in most countries • If concerns about inflationary impact on pension and other payments tied to consumer price index, use a price index that excludes tobacco products

16. Best Practices: Economic Impact—Myths and Facts • Do not view low taxes and prices for some tobacco products as a “Pro Poor” policy • High tobacco taxes on all tobacco products will result in greater reductions in tobacco use among the poor • Resulting reductions in use lead to a progressive distribution of the health and economic benefits that result from tax increase—truly a “Pro Poor” policy

17. Best Practices: Economic Impact—Myths and Facts • Do not allow concerns about the regressivity of higher tobacco taxes to prevent tax increases • Regressive impact often overstated • In many countries, tax increase can reduce regressivity given greater reductions in use among the poor • Concerns about the impact on the poor can be offset by using some of the new revenues to support efforts to help poor users quit, health promotion efforts targeting the poor, and/or poverty alleviation programs

18. Best Practices in Tobacco Taxation • A simpler tobacco tax structure that taxes all tobacco products equivalently and relies more on specific taxes will have a greater impact in reducing tobacco use and its consequences • Effective tobacco tax administration includes regularly increasing taxes with inflation and income growth so as to reduce the affordability of tobacco products

19. Best Practices in Tobacco Taxation • Strong tobacco tax administration is effective in reducing tax avoidance and tax evasion • Governments should not be deterred from raising tobacco taxes by the misleading arguments used in opposition to tax increases • Raise tobacco excise taxes so that they account for 70% of the retail prices of tobacco products