World Health Organization Wants Higher Excise Taxes on Tobacco

October 3, 2014

In a couple of weeks, members of the World Health Organization Framework Convention on Tobacco Control (FCTC) will meet in Moscow, Russia for the sixth session of the Conference of the Parties to the WHO FCTC. One of the topics they will discuss is tobacco taxation as a means to reduce demand for the product. Specifically, they are recommending that countries adopt excise taxes on tobacco that are at least 70 percent of the retail sales price.

They promote higher tobacco and cigarette taxes by pointing to two possible beneficial effects for countries. First, they are aimed at reducing tobacco consumption (especially among children), which is associated with reduced mortality. Second, they say that this tax increase will increase tax revenue for nations.

Raising taxes may not reduce consumption especially if the tax becomes so high that it encourages smuggling and counterfeiting. And, to the extent that tobacco taxes actually reduce consumption, they will also reduce revenue. Thus, countries should not see them as a stable source of revenue.

Reducing Tobacco Consumption

The primary goal of raising tobacco taxes is to reduce the number of people who smoke. Although demand for tobacco is more inelastic than other goods, raising the price substantially will likely have some effect on the amount people will smoke.

However, raising tobacco taxes may not have as large of an effect as expected. One major limitation to the amount a country’s tax can reduce smoking is cross-border purchases or smuggling. Countries that place high tax burdens on their cigarettes, for instance, may be able to reduce the amount of cigarettes purchased within their jurisdiction, but their tax may increase cigarette purchases in other countries and encourage smuggling.

In the United States, cross-state smuggling has been an issue for many years. States like New York, which have very high cigarette taxes drive down purchases in New York, but drive up purchases in other states. In fact, 57 percent of total consumed cigarettes in New York were purchased outside of the state in 2012.

These high taxes also increase the relative profitability of counterfeit cigarettes created in foreign countries and shipped to the high tax country, which can be more dangerous than real cigarettes.

Tobacco Tax Revenue

The second issue follows from the first. If tobacco taxes are seen as a potential way to reduce tobacco consumption, tobacco taxes should not be seen as a way to raise reliable tax revenue. If a country is successful at reducing tobacco consumption, there will be fewer tobacco purchases to tax. This will drive down the tax revenue. On top of this, if any smuggling or counterfeiting occurs, consumption may not decline, but tax revenue will.

The U.S. Experience

In the United States, tobacco consumption has steadily declined since the 1960s. This represents an ever narrowing tax base. This sort of tax should not be relied on for public programs.

To be fair, the WHO recommends that countries earmark these funds towards tobacco and health related programs. These programs would, presumably, shrink as tobacco consumption shrinks. However, based on some of the past behaviors of countries (especially the United States) it is unlikely that policymakers will use the revenue solely for the purposes promoted by the WHO and may run into future funding issues.

While it is in the interest of countries to reduce health problems with their citizens, tax policy is not a particularly good way of accomplishing this.

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