Hana Ross, Principle Research Officer, Southern Africa Labour and Development Research Unit (SALDRU), University of Cape Town

1. Taxing Tobacco in Africa
Hana Ross, PhD
School of Economics
University of Cape Town

2. Why Tax Tobacco? (1)
• Efficient revenue generation
– Primary motive historically and still true in many countries
today
– Very efficient source of revenue given:
• Low share of tax in price in many countries
• Relatively inelastic demand for tobacco products
• Few producers and few close substitutes
– “Sugar, rum and tobacco are commodities which are no where
necessaries of life, which are become objects of almost
universal consumption, and which are therefore extremely
proper subjects of taxation” (Adam Smith, Wealth of Nations,
1776)

3. 0
100
200
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500
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700
800
0
1000
2000
3000
4000
5000
6000
7000
8000
9000
10000
1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
Exciseperpack(Constant2009SACents)
Exciserevenue(Millionsofconstant2009SARands)
Excise revenue Excise per pack
South Africa: Excise Tax
Revenues

4. Taxes and Tax Revenue in
Zimbabwe

5. Cigarette Taxes and Government
Revenue in Togo (2007–2010)
0.0
0.5
1.0
1.5
2.0
2.5
0%
5%
10%
15%
20%
25%
30%
35%
40%
2007 2008 2009 2010
Excisetaxrevenue
(inbillionconstant2010XOF)
Advaloremexcisetaxrate
Excise tax rate (ad valorem)
Real excise tax revenue
Note: The base of the ad-valorem tax is the ex-factory price for cigarettes manufactured locally and CIF price +
customs fees (VAT excluded) for imported cigarettes

6. Why Tax Tobacco? (2)
• Promote public health
– Increasingly important motive for higher tobacco taxes in many
high income countries
• Emerging as important factor in some low and middle income countries
– Based on substantial and growing evidence on the effects of
tobacco taxes and prices on tobacco use
• Particularly among young, less educated, and low income populations
– “The Parties recognize that price and tax measures are an
effective and important means of reducing tobacco
consumption by various segments of the population, in
particular young persons.” (Framework Convention on
Tobacco Control, Article 6”)

7. Aggregate Cigarette
Consumption & Real Cigarette
Price in South Africa
0
500
1000
1500
2000
2500
0.00
5.00
10.00
15.00
20.00
25.00
1961
1965
1969
1973
1977
1981
1985
1989
1993
1997
2001
2005
2009
Cigaretteconsumption(millionpacks,tax-
paidonly)
Averagepriceperpack,2012prices
Price per pack, constant 2012 prices Cigarette consumption, million packs
7
Increase in real price: 23% between 1990 and 1995; 67% between 1995 and 2000; 106%
between 1990 and 2000

8. Cigarette consumption and lung cancer in the
United States:
Declining consumption means declining lung
cancer deaths
0
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50
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100
0
500
1,000
1,500
2,000
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3,000
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4,000
4,500
1900
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2002
2005
Age-standardizeddeathsper100,000
Cigaretteconsumptionpercapita
Cigarette consumption Male lung cancer deaths

9. Higher prices = lower
infant mortality
• EU study: An increase of €1 (US $1.18) per
pack in the median cigarette price is
associated with a significant decline in infant
mortality both the same year and the following
year
• Cigarette price increases across 23 European
countries between 2004 and 2014 were
associated with 9208 fewer infant deaths.
Filippidis et al, JAMA Pediatrics, 2017.

10. Article 6 Guidelines – Key
Recommendations for the Taxation
System
 … implement the simplest and most efficient
system that meets Parties’ public health and
fiscal needs (specific or mixed systems
preferred over purely ad valorem systems)
 tax rates should be monitored, increased, or
adjusted on a regular basis, …(inflation,
income growth = affordability)
 all tobacco products should be taxed in a
comparable way (avoid risk of substitution)

11. Compliance with Article 6 -
status as of 2016

12. Tax structures by region
Specific Ad valorem Mixed No excise Total
AFRO 13 27 4 1 45
AMRO 15 9 7 2 33
EMRO 3 3 4 10 20
EURO 11 2 39 0 52
SEARO 2 2 4 2 10
WPRO 17 3 3 3 26
Total 61 46 61 18 186

13. Systems that include and favor specific
taxes lead to higher prices
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
Specific Mixed (relying more on
specific)
Mixed (relying more on ad
valorem)
Ad valorem No exicse
Priceperpack(USDPPP)
Excise Rest of Price

14. Tobacco Taxes in Low and Middle-
Income countries in 2012
African countries vs. top performing countries from Asia, South America
and Europe
Africa Asia South
America
Europe
Source: WHO GTCR, 2013
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Taxesasa%ofpriceofthemostsoldbrand
Excise tax All other taxes

15. Simulation of Tax Incrase in
Uganda
Excise as % of Retail Price Total Excise Revenue
(millions of UG Shillings)
Total Consumption
(thousands of packs)

16. 0
100
200
300
400
500
600
700
Camelia Marlboro
Tiered ad-valorem excise tax system in
Senegal 2012
20% ad valorem tax on economy brands and
45% ad valorem tax on premium brands
Retail price per pack: 350 CFA
Including excise: 58 CFA
Retail price per pack: 600 CFA
Including excise: 186 CFA
Price
difference:
250 CFA
CFA

17. 0
100
200
300
400
500
600
700
Camelia Marlboro
Scenario I
Uniform 45% ad valorem tax on all brands
Retail price per pack: 423 CFA
Including excise: 131 CFA
Retail price per pack: 600 CFA
Including excise: 186 CFA
Price
difference:
177 CFA
CFA

18. 0
100
200
300
400
500
600
700
Camelia Marlboro
Scenario II
Uniform specific tax of 186 CFA per pack of 20
cigarettes
Retail price per pack: 478 CFA
Including excise: 186 CFA
Retail price per pack: 600 CFA
Including excise: 186 CFA
Price
difference:
122 CFA
The most beneficial from the revenue and the public health perspectiveCFA

19. Weak Tax Administration
Possible Domestic Tax Evasion: Senegal 2010
Tobacco leaf imports Quantity
(million)
Expected
cigarette
production
million
Total tax paid
cigarettes
production
million
Total imports 5.1 kg
For domestic production 3.3 kg 163.1 packs 118.7 packs
Missing cigarettes 24.9 packs
% of missing cigarettes in
tax paid production
27%

20. Price Gap is Deadly
• An increase of 10% in the price differential
between median-priced and minimum-priced
cigarettes was associated with an increase of
0.07 deaths per 1000 live births the following
year.
Filippidis et al, JAMA Pediatrics, 2017.

21. Manufacturers' tax avoidance practices
Induced by Complex Tax Systems: Evidence from
Egypt
Net of tax price per pack of GST/pack
less than 65 P.T. 108 P.T
more than 65 to 73 P.T 112 P.T
more than 73 to 84 P.T. 125 P.T.
more than 84 to 95 P.T. 140 P.T.
more than 95 to 106 P.T. 153 P.T.
more than 106 to 300 P.T 175 P.T.
more than 300 to 425 P.T. 315 P.T.
more than 425 P.T. 325 P.T.
Retail Prices
GST
tax/pack Sales
Premium brands
Marlboro & Merit 8.50 3.25 249,160,624
Kent 8.50 3.25 6,909,409
Mid level priced brands
Rothman- F 5.00 1.75 211,044,603
LM 4.75 1.75 312,473,298
Next 4.25 1.75 36,422,160
Mondial 4.00 1.75 5,984,907
New Super lux 3.50 1.75 34,601
Tier Tax System based on Retail Price
Industry Brand Repositioning
2009 Tax System

22. Excise Administration - Egypt
2009 Tax System Since 2010
Mixture of Excise
Ad valorem (40% of
Retail Price) &
Specific
(EP1.25/pack)
In 2014, total tax
represents 73% of
retail price;
earmarking for
students’ health
insurance.

23. Egypt (continued)
• Tax increases in 2014, 2015, and 2016 - e.g.
50% increase in 2015 and 2016.
• In 2015 Egyptian government made more
money in cigarette taxes than from ships
crossing the Suez Canal.

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5.00
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2008
2010
2012
2014
ConsumerPriceIndex
Priceperpackofcigarettes
CPI Nominal price Real price (constant 2008 prices)
Real and Nominal Cigarette Prices
in South Africa

25. Taxes and Prices in South Africa
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5.00
10.00
15.00
20.00
25.00
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2013
Retailprice(constant2008prices)
Net-of-tax price Excise tax GST/VAT

26. Despite a large fall in consumption,
real excise revenues and industry
revenues have greatly increased
26
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2002
2004
2006
2008
Aggregatecigaretteconsumption(millionsofpacks)
Rmillions(adjustedforinflation,2008base)
Cigarette consumption (RHS scale) Excise tax revenue Total industry revenue

27. Article 6 Guidelines – Key
Recommendations for the Use of
Revenue
 Article 26.2 of the WHO FCTC: “Each Party shall provide
financial support in respect of its national activities
intended to achieve the objective of the Convention, in
accordance with its national plans, priorities and
programmes.”
 Article 6 guidelines: “Parties could consider, while bearing
in mind Article 26.2 of the WHO FCTC, and in accordance
with national law, dedicating revenue to tobacco-control
programmes, such as those covering awareness raising,
health promotion and disease prevention, cessation
services, economically viable alternative activities, and
financing of appropriate structures for tobacco control.”

28. Fiscal Space Created by Raising
Cigarette Excise by US$ 0.25/Pack
Source: Tobacco Tax Reform At The Crossroads Of Health And Development. WB 2017

29. Why Economics?
Economic arguments around tobacco, alcohol and SSB
control are unclear and often debated
• In 1996, an Asian Health Minister stated “cigarette producers are
making large contributions to our economy... we have to think
about workers and tobacco farmers”
• In 1997, The Economist commented "most smokers (two-thirds
or more) do not die of smoking-related disease. They gamble
and win. Moreover, the years lost to smoking come from the end
of life, when people are most likely to die of something else
anyway”
Source: Tobacco Control 1996, The Economist 1997

30. Times are Changing?
In 1997, The Economist commented "most smokers (two-thirds or
more) do not die of smoking-related disease. They gamble and
win. Moreover, the years lost to smoking come from the end of
life, when people are most likely to die of something else
anyway”
In 2015, The Economist wrote: “Stub it out. …everybody now
knows how to get people to quit: hike taxes, ban smoking
indoors and advertising, publicise the health risks and help
smokers to quit.”

31. Best Practices In Tobacco Tax
Policy
- Simple tax structures are
easier to administer.
- Aspire for 70% excise tax share
to retail prices.
- Adjust tax rates regularly to
account for inflation and income
effects.
- Tax increases are more
effective if implemented as
part of a package.
S – Simple and
specific tax structures
T – Tax levels and tax
shares sufficiently high
to impact tobacco
consumption
O – Overcome inflation
and income effects by
regular tax increases
P – Package

32. Technical Assistance
• UCT’s Economics of Tobacco Control
Project (ETCP) http://tobaccoecon.org
• Knowledge Hub on Articles 6 (Tax and
Price) and 15 (Illicit Trade)
http://untobaccocontrol.org/kh/taxation/

33. Sri Lanka Workshop on the Economics of Tobacco Control
May 2017
Representative research
projects
• The demand for tobacco, alcohol and SSBs
– Estimating the price elasticity of demand
– The impact of tax increases on particular groups, e.g. the poor
• Tax modelling
– The likely impact of a change in the tax structure or level on tobacco consumption, smoking
prevalence and government revenue
• Illicit trade
– Estimating the level and changes in the level of illicit trade
– Ways to reduce illicit trade (e.g. Tracking and Tracing technology)
• Other projects
– Socio-economic impact assessment of proposed legislation
– Data gathering (both primary data collecting and curation of existing data)
– Costs of smoking

34. Thank you!
Hana Ross
hzarub1@yahoo.com