(Photo: Unsplash / Ian Dooley)
Because they are so costly to society, tobacco products should be heavily taxed. An increase in the tax increases the price, which in turn decreases the demand for these products.
On Wednesday the Minister of Finance announced an increase in the excise tax on cigarettes by 8% from R 17.40 to R 18.39 per pack of 20 pieces. This increase in excise tax above inflation is significantly higher than in previous years. ‘Tax increases. The consumption tax on alcohol was also increased by 8%.
In his budget address, the minister explained the health reasons for the increase in excise taxes: “It is clear that excessive alcohol consumption can lead to negative social and health outcomes. Consumers react to price increases, and higher prices should lead to lower consumption of alcohol products with positive spin-offs. ”
This is the first time in years that a finance minister has taken such a strong health stance on the excise tax hike. In the past, the focus was only on sales. We welcome the Minister for this stance. While his emphasis was on alcohol, the same principle applies to tobacco products.
Tobacco and alcohol are not like other products. They cause enormous economic and personal costs to society. ON Recent study from colleagues in the Research Unit for the Economics of Excise Products found that tobacco consumption costs South Africa around R42 billion each year. The estimated consumption tax receipts for tobacco of R 13 billion for 2021 are no longer relevant in relation to these costs.
The human cost of tobacco smoking is enormous. The World Health Organization estimates that eight million people die prematurely each year from tobacco-related diseases worldwide. These are all unnecessary premature deaths.
Because they are so costly to society, tobacco products should be heavily taxed. An increase in the tax increases the price, which in turn decreases the demand for these products. Higher rates encourage smokers to quit, deter potential smokers from starting, and help smokers quit.
The Treasury Department estimates that it will collect R 5.78 billion from cigarette excise taxes in the 2020/21 fiscal year, R 8.68 billion or 58.8% below the estimated revenue. This very large deficit is largely due to the 20-week tobacco sales ban between March 27 and August 17, 2020. Simple calculations show that the Treasury lost tobacco taxes worth almost R 6 billion to the illegal market during this period.
Over the past three decades, numerous studies have examined how South African smokers change their consumption in response to changes in the price of cigarettes. Most studies have found that for every 1% price increase, cigarette consumption decreases by around 0.6%, with all other factors remaining constant. In business terminology, the price elasticity of cigarette demand is -0.6.
While an 8% increase in the tobacco ban is likely more than most analysts expected (and feared by the industry), Wednesday’s budget speech would have been a great opportunity for the minister to cause a stir.
If the minister had increased the tax by 50% and increased cigarette prices by an average of 50%, cigarette consumption would have decreased by 30% given a price elasticity of demand of -0.6. International and South African studies have shown that about half of this decrease in cigarette use is due to a decrease in the number of smokers, while the other half is due to a decrease in the number of cigarettes smoked by continued smokers. A 15% decrease in the number of smokers would be significantly higher than the number of smokers who quit during the ban.
Wouldn’t such a large increase in excise tax lead to an increase in illegal trade? This is a typical argument in the tobacco industry. The fact is that trafficking is a major problem in South Africa even before the lockdown. The South African Revenue Service began turning the tide on illicit trafficking in 2019, but unfortunately this was all reversed during the sales ban. During the ban on sales, the entire market became illegal. It is likely that the illegal market has become more entrenched during this period.
However, the illegal market can be reversed. We saw this from 2019. South Africa has signed but not yet ratified the Protocol to Eliminate the Illicit Trade in Tobacco Products. Should the country ratify this protocol, we will undertake to take measures that have been shown to be effective in the fight against illicit trafficking, such as digital tax stamps, track and trace technology, licensing protocols and the responsibility of tobacco companies to distribute their product.
There are numerous examples of countries that have successfully reduced the illicit trade in tobacco products while aggressively increasing the excise duty on these products. It requires political will, resources and the power to enforce. DM
Corné van Walbeek is the Director and Samantha Filby is Research Fellow at the Research Unit on the Economics of Excise Products at the University of Cape Town.