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The Economics of Tobacco Control

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Presentation by Precious C. Akanonu and Joseph Ishaku at the second annual Nigerian Tax Research Network meeting which took place in Abuja on 24th and 25th November 2018.

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The Economics of Tobacco Control

  1. 1. The Economics of Tobacco Control: Modelling the Fiscal and Health Impacts of Tobacco Control in Nigeria Presentation by : Precious C. Akanonu and Joseph Ishaku for the NTRN Conference
  2. 2. Outline •Background •Current State of Tobacco Taxes •Methods and Data Sources •Findings •Conclusion and Recommendation
  3. 3. Background Relatively low but rising prevalence • Prevalence (GATS, 2012) • 6 million adult smokers – 5.6% prevalence rate (GATS, 2017); 4% growth rate • Higher among men (10%) than women (1.1%) • Health and Economic costs (Tobacco Atlas, 2015) • Tobacco related diseases account for about 17,500 deaths per year • Economic losses are estimated at US$ 591 million • Tobacco taxation considered the most effective tobacco control measure • Reduces tobacco consumption • Raises substantial government revenue
  4. 4. Current State of Tobacco Taxes in Nigeria Low ad valorem excise tax rate; no specific excise tax • Tobacco Market • 920 million cigarette packs were consumed in 2015, 74% domestically-produced (NCS, 2017) • Oligopolistic domestic market- BATN (75%) • Average pack of cigarettes costs approximately ₦183.50 (60 cents) in 2017 • Tax level and structure • Excise duty: 20% ad valorem on UCA (UCA at ₦60 = 20 cents); excise duty burden amounts to 6.49%(NCS, 2017) but WHO recommends 75% • Imported cigarettes excluded from excise duty. Levied an import levy of 40% of CIF plus other small levies (ETLS, CISS, import duty, and surcharge) • 5% VAT applies to both domestic and imported.
  5. 5. Components of Retail Price 89% 6% 5% NOT price Excise tax VAT Domestically- produced cigarettes 66% 13% 5% 8% NOT price Import levy VAT Others [ETLS, CISS, Import duty & Surcharge] Imported cigarettes 25% 75% NOT price Excise tax Best practice
  6. 6. Methods and Data Sources
  7. 7. Conceptual Framework: Tobacco Excise Tax Simulation Model MODEL INPUTS • Average growth in net-of- tax price • Elasticities •Taxes [excise duty, VAT, import levy, etc.] •Tax burden POLICY INTERVENTIONS (PI) PI Excise duty Import levy Ad valorem (%) Specific (₦) (%) 1 20 20 50 2 0 30 50 3 0 60 50 4 0 139 50 MEASURED OUTCOMES • Cigarette consumption • Smoking prevalence •Government revenue •Net-of-tax revenue •New Tax burden
  8. 8. Assumption Specification (εi ) Justification Price elasticity of demand (licit domestic market) εp = 0.5 • The demand for imported cigarettes is more responsive to price changes compared to demand for domestic cigarettes (Kostova et al., 2013). Price elasticity of demand (licit imported market) εp = 0.5 Price elasticity of demand (illicit market) εp = 0.9 • Illicit cigarettes are the cheapest brands • Demand for the cheapest brands is most responsive to price changes, as consumers cannot switch to any cheaper brand Cross-price elasticity εcross−price = −0.5 • As the price of licit cigarettes increase, consumers of the cheapest licit brands will switch to buying illicit cigarettes which are cheaper (Tauras et al., 2006) Income elasticity (licit market) εi = 0.5 Illicit cigarettes are inferior goods --therefore, any increase in income will lead to a decline in illicit cigarette consumption (Gallus, et al., 2006) Income elasticity (illicit market) εi = − 0.5 Change in smoking prevalence C = 50%sp + 50%si For every decrease in cigarette consumption, about 50% can be ascribed to a decrease in smoking prevalence, while the other 50% ascribed to a decrease in smoking intensity (TETSiM, 2017).
  9. 9. Policy Intervention Description Policy intervention 1 (PI.1) Keep 20 percent ad valorem tax, include ₦20 specific excise duty, and increase import levy to 50 percent of CIF per pack. This policy intervention represents the government’s plans to retain the present ad valorem duty on tobacco while introducing a specific excise duty and increasing import levy from (40 to 50 percent) for 2018. Policy intervention 2 (PI.2) Change to specific tax system, set the excise duty burden to ₦30 per pack, and increase import levy to 50 percent of CIF per pack. This policy intervention simulates a complete change from ad valorem to specific tax system set at ₦30 per pack. Also, accommodates an increase in import levy to 50 percent. Policy intervention 3 (PI.3) Change to specific tax system, set the excise duty burden to ₦60 per pack, and increase import levy to 50 percent of CIF per pack. This policy intervention simulates a complete change from ad valorem to specific excise duty system set at ₦60 per pack. Also, accommodates an increase in import levy to 50 percent. Policy intervention 4 (PI.4) Change to specific tax system, set the excise duty burden to the equivalent of 75 percent of current retail price, and increase import levy to 50 percent of CIF per pack. This policy intervention simulates a complete change from ad valorem to specific excise duty system in line with the WHO recommended 75 percent benchmark; which is equivalent to ₦139 specific tax per pack for Nigeria. Also, accommodates an increase in import levy to 50 percent.
  10. 10. Sensitivity Analysis I: Income Growth & Industry Responses (One-off)
  11. 11. Sensitivity Analysis II: Three-year Projection of Results • 3-year projection of results accounting for: • 12 possible scenarios showing 4 possible growth rates (no growth, and World Bank projection for 2017, 2018, 2019) against the 3 possible industry responses • Simulates the 4 policy interventions in the base year (2016 prices) • PI.1: Base year policy change + ₦20 increase in specific excise tax annually • PI.2, PI.3, and PI.4: Base year policy change + 2 pp. increase in excise duty burden in retail price annually
  12. 12. FINDINGS
  13. 13. Cigarette Consumption • Consumption decreases in all scenarios under PI.3 and PI.4 –which impose higher duty levels under specific tax systems, compared to PI.1 and PI.2 which impose lower levels • Changes in tax/duty policy need to be substantial and operate under specific tax system to have the most desired effect on cigarette consumption.
  14. 14. Smoking Prevalence • Smoking prevalence decreases in all scenarios under PI.3 and PI.4 – which impose higher tax levels and specific tax systems relative to PI.1 and P1.2. • This implies that changes in tax policy need to be significant and operate under specific tax system to have the desired effect on smoking prevalence.
  15. 15. Government Revenue • Under all policy interventions and in all scenarios considered, government excise duty revenue from cigarette sales will increase significantly. • Excise duty revenues are most significant under specific tax system (as in PI.3 and PI.4) relative to ad valorem tax system (as in PI.1).
  16. 16. Tax Burden • Current excise duty burden is (at 6.49%), political will for tobacco control policies has to be strong and consistent to gradually raise excise duty burden to meet up with the WHO- recommended level of 75% of retail price. • Higher excise duty burden (thus better outcome) on tobacco products under the policy intervention in line with the WHO-recommendation
  17. 17. Three-year Projection Results I (for S.1 only) • Consistent trend of decreasing consumption if PI are sustained each year over the 3-year period. 800 820 840 860 880 900 Year 1 (S.1) Year 2 (S.1) Year 3 (S.1) Cigarette Consumption (Million Packs) PI.1 PI.2 PI.3 PI.4
  18. 18. Three-year Projection Results II (for S.1 only) • Consistent trend of increasing government revenue if PI are sustained each year over the 3-year period. 10.0 30.0 50.0 70.0 90.0 Year 1 (S.1) Year 2 (S.1) Year 3 (S.1) Excise Tax Revenue (Ns billion) PI.1 PI.2 PI.3 PI.4
  19. 19. Conclusion and Recommendations • There is an urgent need to raise taxes given the dangers to public health, benefits to public finance, and given current low tobacco tax levels • Tobacco taxation can yield a win-win situation in terms of public health and finance in Nigeria. • Our findings suggest that substantial upward review of excise duty levels + a change to specific tax system yields the most desirable outcomes. • Beyond taxes/duties, an effective tobacco control tax policy will also require: • Strengthening tax administration and revenue-collecting agencies are strengthen • Other MPOWER strategies • International cooperation
  20. 20. Thank you for listening! Office: 4 Dep Street, Maitama, Abuja

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