98420 Knowledge Brief Health, Nutrition and Population Global Practice TEN PRINCIPLES OF EFFECTIVE TOBACCO TAX POLICY Caryn Bredenkamp, Roberto Magno Iglesias and Kai-Alexander Kaiser July 2015 KEY MESSAGES  When proposing reforms, tobacco taxes need to be presented not only as revenue measures, but also as in the public’s best interest.  A unitary specific rate is best – for tax administration, for revenues, and for health – and should be regularly adjusted to avoid the erosion of real revenues by inflation.  Implementation needs to be accompanied by revenue protection and anti-smuggling measures, including tax stamps.  Reliable data and good analysis matters. Before undertaking reform, solid market analysis using non-industry data will help to optimize tax design, while after the reform, continuous monitoring of market prices and tax stamp roll-out will help protect it. Introduction as revenue measures, but also as in the public’s best interest. In general, the public is resistant to tax increases, and especially so when they lack confidence in the This brief provides guidance in the design of effective tobacco government’s ability to spend the revenues well. Therefore, tax policies in countries such as the emerging ASEAN Ministries of Finance need to highlight not only the revenue economies, where tax administration and enforcement increases, but also what the public will gain from the tax. In capacity may not be as strong as in OECD countries. It the Philippines, the strategy was to stress the health gains of focuses on tobacco, but many of the principles are equally the tobacco and alcohol excise taxes, emphasizing the lives applicable to other excise taxes, such as alcohol. While that would be saved from reduced smoking, as well as to link bearing in mind that policy advice should always be tailored to revenues to priority areas of expenditure, specifically universal context, these principles have wide applicability across health coverage. Political economy and stakeholder analyses countries. The brief is illustrated with examples from the 2012 will help to determine which priorities and arguments would be Philippines tobacco and alcohol “sin tax” reform and draws on most powerful in a given context. the experience of World Bank teams in providing technical assistance to tobacco tax reforms in the Philippines, Vietnam and Indonesia. 2. Increases in tax rates should be large and sustained enough to reduce consumption. Small and episodic increases in tax rates are unlikely to reduce The Ten Principles consumption because demand for cigarettes is quite inelastic. People need relatively large price shocks, as well as the 1. When proposing reforms to tax rates and prospect of relatively large future price increases, in order to structure, tobacco taxes need to be presented not only reduce consumption. Page 1 HNPGP Knowledge Brief  market entrants, and reduces overall revenues. Also, by making existing tobacco products cheaper than similar new 3. An ad valorem tax structure should be avoided. In products, it severely blunts the health impact of the reform. lower and middle-income country contexts, with relatively weak tax administrations, ad valorem is easily abused 8. Implementation of taxes needs to be because it requires calculating and declaring the exact tax accompanied by revenue protection and anti-smuggling base (valuation) of every brand on the market. By contrast, measures, including tax stamps, unique identifiers, and specific taxes require verification only of the quantity sold. law enforcement. To ensure that all cigarettes entering the market (whether from domestic or cross-border sources) have 4. A unitary specific rate (i.e., no tiers) is best – for paid the tax that is due, tax stamps and/or unique identification tax administration, for revenues, and for health. Unitary markings (for example, serial numbers or local language rates mean that tax authorities need only count the number of warning labels) are recommended. Additional measures could cigarettes manufactured in order to determine the tax to be include the use of camera surveillance, production control paid. It also prevents the tobacco industry from gaming the tools or on-site tax inspectors at manufacturing plants and system by down-shifting, i.e. pricing cigarettes in the lower warehouses. Increased law enforcement would be an tiers in order to avoid the higher rates in the upper tiers and to important complementary measure. maintain consumption among price-sensitive consumers. A unitary rate also makes sense from a health perspective: 9. To optimize tax design – and health and revenue because every cigarette is equally harmful, every cigarette impacts – good market analysis should be done before should be taxed equally. undertaking tax reform. Important basic data include the market share of different products, production costs, prices 5. Multiple tiers should only be used temporarily for and current government revenues. This can be used to transition to a unitary rate, and transitions should be kept simulate scenarios of consumer and producer responses to short and tiers few. If multiple tiers are necessary as an different tax rates, and the corresponding health and revenue interim measure during transition to unitary, it is important to impacts. Government agencies should have their own ensure that the transition period is short (for example, < 3 independent and reliable sources of data to avoid having to years) and the number of tiers are very few (for example, 2 rely on data collected by the tobacco industry. tiers). The Philippines is in transition to a unitary tax on tobacco over five years, but went immediately to as few as two tiers in the first year of implementation (i.e., 2013). 10. Post-reform, continuous monitoring of market prices and tax stamp roll-out will help to validate whether 6. Specific rates should be automatically adjusted taxes are being paid and passed on to consumers in the for inflation to avoid erosion of real revenues and to form of price increases. Regular price data and stamp data, maintain the incentive to reduce smoking (i.e. to protect collected through internal revenue offices, can be health). Tax reforms and laws should include provisions that complemented by innovative bottom-up data collection index (specific) tax rates to inflation. If not, then the real through mobile app-based platforms with data transmitted by revenues obtained from taxes will be eroded over time. Also, consumers. the health impacts of taxation would be weakened as tobacco products become cheaper relative to incomes, inducing a return of consumption. In the Philippines, for example, lack of This HNP Knowledge Brief was prepared by Caryn Bredenkamp, Roberto indexation contributed to the near-halving of tobacco and Magno Iglesias and Kai-Alexander Kaiser (World Bank). It draws on the alcohol tax revenues from 1999 to 2011, during which time experience of World Bank teams in providing technical assistance to revenues fell from 0.9 percent of GDP in 1999 to 0.5 percent tobacco tax reform in the Philippines, Vietnam and Indonesia. It has of GDP in 2011. benefitted from comments provided by Kari Hurt, Tuan Minh Le, Yue Man Lee and Patricio Marquez (World Bank), Mark Goodchild (WHO), and 7. Grandfathering or special cut-off dates, which Jeremias Paul (Department of Finance, Philippines). protect incumbent producers and manufacturers, should be avoided at all costs. When incumbent Photo credit: Manix Abrera, GMA News News Online producers/manufacturers are offered exemptions or discounts from tax increases, it introduces many distortions which undermine both the revenue and health effects. It creates an uneven playing field for producers, creates a barrier to new The Health, Nutrition and Population Knowledge Briefs of the World Bank are a quick reference on the essentials of specific HNP-related topics summarizing new findings and information. These may highlight an issue and key interventions proven to be effective in improving health, or disseminate new findings and lessons learned from the regions. For more information on this topic, go to: www.worldbank.org/health. Page 2