Does the recent increase in excise duties really help to curb cigarette smoking?
AS the world’s population increases, policy-makers around the world are scratching their heads on the most effective ways to curb smoking, which is on the uptrend.
In many countries, governments have introduced excise taxes on cigarettes.
Come budget season, the issue of “sin” taxes will invariable crop up again. Cigarette tax has been steadily increasing over the years – the most recent hike occurring on Oct 1 when tobacco excise duty was raised by 1 sen (or 5.6%) per stick. British American Tobacco Malaysia Bhd (BAT Malaysia), which has a 70% share of the domestic legal cigarette market, subsequently increased the price of its 20-stick packs by 30 sen and its 14-stick packs by 20 sen soon after.
Consumer groups, anti-smoking factions and health organisations say the margin was too small to have any significant impact to curb smoking.
Cigarette companies argued that any kind of tax hike would just increase illegal cigarette trade, if not erode their profit margins.
RAM Holdings Bhd chief economist Dr Yeah Kim Leng says as cigarette smoking was an inelastic demand, habitual smokers were unlikely to kick the habit any time soon.
“The effect of a tax hike is that it must be high enough to reduce the level of smoking and deter new smokers. It’s hard to deter habitual smokers by increasing price alone,” he says.
“The recent tax increase will likely eat into the pockets of the lower disposable income group, who, unable to kick the habit, would definitely resort to cheap or illegal cigarettes. This can result in a loss in revenue to the Government,” Yeah adds.
In a newspaper report last month, the Royal Malaysian Customs said illicit cigarette trade rose 11% to 36.7% of the country’s total cigarette industry in the first half of 2009, costing the Government an estimated RM1.5bil in unpaid taxes.
Over 80% of the 36.7% of the illegal cigarettes are said to be found in Peninsular Malaysia.
The reason for the decline was attributed to the impact of the economic slowdown on consumer spending power and significantly higher levels of illegal trade.
For many, smoking is more of a necessity than anything else and those who buy cheap or contraband cigarettes tend to comprise consumers from the low-income category.
With their disposable income already stretched by the current global economic downturn, raising taxes would only add to their burden. Their alternative? The black market or affordable cigarettes.
In the United States, many have also argued that Obama’s tobacco tax hike would have an impact on those within the lower income group.
In a study conducted by Gallup-Healthways in the US in 2008, a survey of more than 75,000 people found a close correlation between income and smoking rates.
It found that 34% of respondents earning US$6,000 to $12,000 were smokers, and the smoking rate consistently declined among people of higher income. Only 13% of people earning US$90,000 or more were smokers.
Yeah says if taxes surged too high, the local (legal) cigarette market could start to shrink.
“Because the industry is an oligopoly, the legitimate manufacturers cater to the domestic market. A spike in taxes and eventually prices could hamper their domestic expansion plans and they may need to divert their business to other markets.”
“It’s a tough battle and not something that can be tackled by the Government alone. There has to be heightened awareness and education on to help curb smoking.
Yeah suggests that the extra tax collected by the Government be channelled towards educational measures to curb smoking.
“The Government could offer nicotine patches or even give them out for free. This will help those who have problems quitting. But then, why stop here? They should do something like this to curb all kinds of vices!”
Malaysia Council for Tobacco Control, in an e-mail to StarBizWeek claims that increasing tobacco tax was an effective way to save lives.
President Koris Atan says raising tax has been shown as one of the most effective methods to curb the deadly tobacco epidemic which kills at least 10,000 Malaysians every year.
”It is an established fact that as tobacco prices go up, consumption goes down. According to statistics, 36% of our teenage boys and 4.2% of girls are smokers,” he says.
Koris argues that cigarette prices were still too cheap and affordable to youths.
“Studies have shown that price increases prevent young people from starting to use tobacco and encourage current smokers to quit.
“International research has shown that a 10% increase in cigarette prices can reduce cigarette consumption by 4%–8%. This translates to saving about 16 million lives worldwide by 2020,” he says.
Koris says that the World Bank recommends a taxation rate of at least 65% or more of the retail price.
“The current amount is approximately 44%, way below the recommended rate which makes cigarettes affordable to the poor,” he argues.
Koris refered to a 2006 study by scholars Ross and Al-Sadat, which revealed that an increase in cigarette excise tax from RM1.60 to RM2.00 per pack would reduce cigarette consumption in Malaysia by 3.37%, or by 806,468,873 cigarettes.
“This reduction would translate to almost 165 fewer tobacco-related lung cancer deaths per year and a 20.8% increase in the government excise tax revenue,” he says.
Koris, citing another 2006 study, claimed that the cost of treating lung cancer, ischemic heart disease and chronic obstructive airway diseases was RM116mil, RM630mil and RM2.3bil respectively.
”By 2010, the cost of treating these top three smoking-attributable causes of deaths will increase to about RM4.1bil or 0.84% of the country’s GDP. Nearly 70% of the cost of treating these diseases will be borne by the Government using tax-payers money!”
Cigarette companies say any tax hike would directly cause illegal trade to rise should not be dismissed so easily. One local tax consultant certainly believes there is a direct link between the two.
“Place yourself in the shoes of a youth who is just starting to smoke. Would you go for a premium brand that costs RM9 or something ridiculously low like RM3?”
“Tax alone is not enough. The illicit trade problem needs to be policed well, be it by the police, marine or customs department because of the country’s long coast lines.”
One way to clamp down is to impose heavy fines on those who sell contraband cigarettes, he says.
Local anti-smoking groups, health organisations and consumer groups agree that raising taxes alone will not be enough.
“Illegal traders have the luxury of not paying tax and they can reduce prices if they need to. Legitimate players can only increase prices when tax goes up,” says a spokesperson from a local anti-smoking group.
Online newspaper Asian Tribune recently reported a study by the Nature Reviews Cancer of Canada, which revealed that tripling tobacco taxes could deter new smokers, increase cessation rates and save at least 115 million lives by 2050.
The study showed that worldwide smoking causes approximately five to six million deaths per year, including 31% of all cancer deaths in middle-aged men and 6% of all cancer deaths in middle-aged women.
It was also reported that countries such as France that have aggressively used higher taxes to curb smoking have reduced consumption much faster than countries that have not.
In low and middle income countries, it was estimated that a 10% increase in tobacco prices would reduce consumption by approximately 8%, double the effect seen in high-income countries.
In the second quarter of this year, China raised consumption tax on cigarettes by between 6% and 11% to add revenue to state coffers.
The tax increase would add about 30 billion yuan of extra revenue for the central government.
China, the world’s largest cigarette market, has more than 350 million smokers, about a third of its population.
More than one million people die from smoking-related illnesses every year.
Experts estimate that the annual death toll could rise to two million by 2025 and three million by 2050 as more youths take up the habit.
In a 2008 study by the Chinese Association on Tobacco Control, it was estimated that raising cigarette tax by one yuan per pack could help save thousands of lives and generate almost 65 billion yuan in revenue for the government.
In the United States, it was reported in April that president Barrack Obama signed a law raising tobacco tax nearly 62 cents on a pack of cigarettes, to US$1.01. Other tobacco products also saw similar increases.
The added revenue would be used to finance a major expansion of health insurance for children, reports claimed.