Tax study- Interview of Professor Corne van Walbeek

Interview of Corné van Walbeek, Professor in the School of Economics and Principal Investigator of the Economics of Tobacco Control Project, University of Cape Town, South Africa

 

Journalist : Mr Jean Marc Poche, « Le Mauricien » newspaper, Mauritius

 

Question: The campaigns to reduce the prevalence of smoking in the Island have been on the national agenda for years. But it doesn’t seem the result is significant? How do you assess the situation?

Professor Corné:In terms of tobacco control policy, Mauritius has performedwell so far, but the results, in terms of smoking prevalence, have been disappointing. Mauritius was the 15^th country globally, and the second in Africa, to ratify the Framework Convention on Tobacco Control, the world’s only public health treaty. Mauritius has implemented smoke-free policies, has banned tobacco advertising, promotion and sponsorships, and has introduced large pictorial health warnings on cigarette packaging.

However, despite the current tobacco control legislation, the implementation of these interventions has not always been equally effective. The graphic health warnings on cigarette packs have remained unchanged since 2009. The World Health Organisation recommends that the warnings be rotated every three years. The ban on smoking in public places is not always respected by the entertainment industry, especially nightclubs and pubs. Waterpipe lounges are spreading across the island, despite being prohibited.

In 2008 Mauritius rationalised the cumbersome and inefficient tobacco tax system to a uniform specific tax, which is regarded as best practice internationally, and has increased the excise tax seven times since 2008. In real (inflation-adjusted) terms,the excise tax increased at an average annual rate of about 7.6% in the past ten years.

In terms of outcomes, smoking prevalence is still high and has decreased only marginally. According to the Mauritius Non-Communicable Diseases survey, smoking prevalence among males was 38.5% in 2016, which is only marginally down from 40.3% in 2008. Among females, the smoking prevalence in 2016 was 4.1%, compared to 3.7% in 2008.

Our research indicates two explanations for this rather disappointing outcome. Firstly, consistently good economic growth in Mauritius has resulted in substantial increases in households’ disposable income. The additional spending power is often spent on things like tobacco and alcohol. Thus, even though the price of cigarettes was increasing, the increase in household income means that cigarettes havebecome more affordable, and thus more accessible.

Secondly, the tobacco industry has strategically priced cigarettesin order to retain its customers. The cigarette market in Mauritius can be divided into three segments: premium brands (like Camel and Benson & Hedges), popular brands (mainly Matineé) and discount brands (like Matelot and Rothmans). British American Tobacco (BAT) has generally increased the retail price of the premium and popular brands by more than the excise tax increase, but has increased the retail price of the discount brands by substantially less than the excise tax increase. Through this pricing strategy, BAT has been able to increase its profitability on premium and popular brands, and has been able to maintain and possibly even expand its market for price-sensitive smokers who typically purchase discount brands.

While there is no law that prescribes how the tobacco industry should set its retail prices (other than paying the excise and other taxes), BAT’s pricing strategy has been very detrimental totobacco control and public health. Currently the margins on discountbrands are quite small soa large tax increase would force BAT to increase the retail price of these products.In turn, these higher prices would act as an incentive for poor, price-sensitive consumers to reduce their cigarette consumption and to possibly quit smoking altogether.

 

 

Journalist: How does smoking prevalence impact on the health of the population?

Professor Corné:Epidemiologists estimate that smoking causes 7 million premature deaths annually. Smoking causes a variety of cancers, respiratory disease and heart disease. About half of regular smokers die prematurely because of tobacco-related diseases.

Economists have estimated the cost of tobacco, taking into consideration the cost of treatment of tobacco-related diseases, lost earnings of the patient and caregiver, cost of fires caused by cigarette butts, etc. A recent global study on the economics of tobacco control, published by the National Cancer Institute in the US, estimates the annual global cost of smoking at 1.4 trillion (1 400 000 000 000) US dollars. For individual countries in which cost-of-smoking studies have been performed, the total cost of smoking is typically between 1% and 2.5% of GDP.

 

Journalist: Are increases in taxes and excise duty an efficient method to deter people in general from smoking? 

Professor Corné:Yes. Economists around the world have investigated factors that determine the demand for tobacco, and have found that the two most important factors are cigarette pricesand people’s income. As average incomes increase, people have more money and can spend more on cigarettes.

Most studies suggest that for every 10% increase in the price of cigarettes (in excess of the inflation rate), consumption of cigarettes decreases by between 4% and 8%. Young and poor people are more price sensitive than older and richer people, since they have less money to spend, and thus decrease their consumption by a greater percentage.

While the government typically cannot set the retail price of cigarettes, they can have a substantial impact on it, by increasing the excise tax. In Mauritius the excise tax is currently levied at Rs102.22 per pack of 20. Over and above the excise tax, cigarettes are subject to VAT.

There is a consensus, backed by hundreds of scientific studies, that the single most cost effective tobacco control intervention is an increase in the excise tax. Other tobacco control interventions, like smoke-free public places, bans on advertising, promotion and sponsorship, pictorial health warnings, public health education campaigns, and plain packaging are important to “denormalise” tobacco use, but are not as effective in reducing tobacco use as large and consistent increases in the excise tax. There is no logical limit to raising the excise tax.

Increasing the excise tax, and thus raising the retail price of cigarettes, is a population intervention. The tax increases raises the price for everyone. Some people respond to the higher prices by reducing their consumption, and some may quit smoking completely. Others might not be affected by the higher prices at all, and smoke as many cigarettes as before. For such people, a comment that is often made by people critical of tax increases, namely “A change in the price of cigarettes does not have any impact on my smoking behaviour” is true. However, for a sizeable proportion of smokers, an increase in the price of cigarettes does change their smoking behaviour.

 

Journalist: You participated in a review of excise taxes on cigarettes. Could you talk about it?

Professor Corné:I am the Principal Investigator of the Economics of Tobacco Control Project (ETCP), which is based at the University of Cape Town in South Africa. About a year ago, the ETCP was approached by VISA, a local public health NGO, to perform a study on tobacco taxation in Mauritius. The brief was to analyse the development of tobacco taxation in Mauritius over an extended period (15 years or longer), and to analyse the likely impact of an increase in the excise tax on the price of cigarettes, cigarette consumption, and excise tax revenue. As far as I am aware, this is the first study that has performed a long-term analysis on cigarette taxation in Mauritius.

Together with colleagues from the University of Mauritius, we were able to accessinformationto piece together the history of tobacco taxation in Mauritius. Before 2008 the excise tax structure was a mixture of a specific tax (i.e. a tax levied on the number of cigarettes) and an ad valorem tax (i.e. a tax based on the value of cigarettes), and was levied at different rates on domestically produced and imported cigarettes. In 2008 all domestic production ceased in Mauritius following which, Mauritius relied completely on imports. In 2008, this inefficient tax structure was replaced by a uniform specific tax, where all cigarettes, irrespective of price and physical features, are subject to the same excise tax amount. Internationally, this tax structure is regarded as the most effective, since it is administratively much easier than an ad valorem tax, and is also less prone to manipulation by the tobacco industry.

Other than looking at the history of cigarette taxation in Mauritius, we also developed a simulation model in which we predicted the likely impact of different tax increases on the price of cigarettes, cigarette consumption and tobacco tax revenue, both for a single year (2019) and for multiple years (2019−2022). We found that an immediate 40% increase in the excise tax is likely to increase the retail price by 29%, reduce consumption by 10% and increase government revenue by 24% within one year. Should the initial 40% increase in the excise tax be followed up with annual increases of 15% in the subsequent three years, cigarette consumption would likely decrease by 20% by 2023 and government revenue would likely increase by about 64%.

At a dissemination workshop, held on 10 December 2018 in Port Louis, we presented the report.

 

Journalist: Tax increases on tobacco increase government revenues but may impact on the cost of living on a categoryof consumer?  How to fix the balance?

Professor Corné:The primary aim of increasing the excise tax on tobacco should be to reduce tobacco consumption. However, a very pleasant side effect of an increase in the excise tax is that it raises extra revenue for the government.

Smokers can respond in one of three ways to an increase in the prices of cigarettes: (1) quit smoking altogether, (2) reduce cigarette consumption, and (3) don’t change the smoking behaviour, but rather cut back on other expenditure. For the first group of smokers, the tax and/or price increase is unambiguously positive. Studies have shown that most smokers regret starting and want to quit, and for some smokers a large price increase might be the trigger to quit. The money that they previously spent on tobacco can now be spent elsewhere. For the second group, the impact of a tax increase on the cost of living depends on how much a person cuts back their consumption in response to the price increase. If they cut back their consumption a lot, the impact of the price increase on their total expenditure on cigarettes is limited. For the third group of smokers, the excise-induced price increase will be negative as the extra expenditure on cigarettes will mean that less money is available for other household expenditures. Studies from India, Kenya and South Africa have shown that food (especially food consumed disproportionately by children, like milk) and education are often crowded out by tobacco expenditure.

The government can alleviate the impact of tax increases on poor people unable or unwilling to stop smoking, by targeting the extra revenue to vulnerable groups. For example, in the Philippines, the government used the additional revenue from the tobacco tax to fund a national health scheme, specifically targeted to the poor.

A large number of studies have investigated the degree to which smokers from different income groups reduce their smoking when faced with a price increase. The evidence is clear that poorer households, on average, are more price responsive than richer households. As a group, the poor benefit from tax increases.A recent study, published in Tobacco Control, and conducted by colleagues at the University of Cape Town and officials at the Mauritian Department of Health found that this is also true in Mauritius: poor households reduce their cigarette consumption by a much greater percentage when faced with higher cigarette prices than richer households.

 

Journalist: Are increases in taxes the onlyway to reduce smoking prevalence?

Professor Corné:They are not the only way, but they certainly are the single most effective way to reduce smoking prevalence. As indicated earlier, a substantial number of interventions have been identified and are effective in reducing smoking. For example, smoke-free policies, pictorial health warnings, restrictions on sales, and bans of tobacco advertising, promotion and sponsorship have all been shown to help to reduce smoking, and have helped to create an environment where smoking is no longer seen as a normal activity. Mauritius, like many countries, has implemented most of these interventions. I have been told that the government aims to implement plain/standardised packaging in 2019, which will make Mauritius the first African country to do so.

The drawback of these interventions is that, once they are implemented, they cannot be implemented again. For example, once advertising is banned, it cannot be banned again. In contrast, there is no limit to tax increases. In most countries, increasing the excise tax on tobacco is a simple administrative/legislative process.

Countries that have taken tobacco control seriously, like Australia, the UK, some states in the US, the Philippines, Uruguay, Kenya, and South Africa (between 1994 and 2004 only) have all used rapid increases in the excise tax as the mainstay of their tobacco control policies.

 

Journalist: What are your views concerning smoking among youngsters and students?

Professor Corné:Youngsters and students should not smoke. At the same time, they are crucially important targets for the tobacco industry. Studies have shown that nearly all smokers start smoking before the age of 25. Once youngsters are addicted, the tobacco industry has a near-guaranteed stream of income for many decades.

Scientists from a variety of disciplines have investigated why people start smoking. There is strong evidence that the price of cigarettes has a strong impact on smoking initiation, especially among boys. Females’ decision to start smoking is determined less by the price of cigarettes than males’ decision to start smoking, usually because girlsget their first cigarettes from their boyfriends and/or brothers.

However, studies that have looked at smoking prevalence (not just the decision to start smoking)have found that youngsters are much more price sensitive than adults. These findings provide very strong support for using increased excise taxes as a means to reduce youth smoking. Increased tobacco taxes are particularly well-targeted to protect the most vulnerable population in society, namely the youth.

 

Journalist: In Mauritius the authorities are waging a fight against drugs trafficking and synthetic drugs that are available at a very low price.Won’t the fight against cigarette smoking leads smokers to have recourse toillicit drugs which are more dangerous than tobacco?

Professor Corné:Many studies have found that tobacco is a “gateway drug” to other drugs. I do not have a full global perspective, but in South Africa, there is evidence that users of hard drugs first started with tobacco, then “graduate” to marijuana/cannabis and then to harder drugs such as cocaine, heroin and methamphetamine. If this relationship is causal, it stands to reason that a reduction in tobacco use will result in less people “graduating” to more dangerous drugs.

 

Journalist: What about education? Is prohibition sufficient to discourage smoking?

Professor Corné:The scientific evidence indicates that education about the negative health effects of tobacco is not very effective in reducing tobacco use. The tobacco industry also knows this. The tobacco industry would not advocate for a policy if it knew that it was effective. For this reason they often argue for more education campaigns, and in some countries have spent substantial amounts of money on advertising campaigns warning the youth about the dangers of smoking, and informing them that smoking is for adults only.

Even though tobacco is a highly addictive product and causes the untimely death of millions of people annually, most economists would not propose the prohibition of the sale of tobacco products. The Prohibition (of alcohol) in the US in the first decades of the 20^th century resulted in much social and criminal upheaval, and ultimately was not effective in reducing the use of alcohol. The Prohibition has left an indelible mark on the psyche of tobacco control regulators and economists. A prohibition of tobacco would simply drive it underground and will result in mafia-style criminals running a profitable, untaxed industry. A much better option would be to strictly regulate the industry.In many countries this is happening, and the result has been a steady decrease in tobacco use. A number of countries are seriously planning for an end-game strategy, where smoking prevalence drops to insignificant levels (usually considered as less than 5%).

 

Journalist: What is the situation in other countries, e.g. South Africa, etc ?

Professor Corné: South Africa was one of the first middle-income countries to use rapid increases in the excise tax as a tobacco control tool. Between 1994 and 2004 South Africa reduced smoking prevalence from 33% to less than 25% as a result of rapid excise tax increases. At the same time government revenue from tobacco excise taxes more than doubled.

Since 2004 the situation has deteriorated. The Ministry of Finance bought the industry’s argument that illicit trade was becoming a problem (despite the fact that there was no real evidence that this was the case). However, after 2009, and especially after 2015, there was an increase in illicit trade. This can be attributed nearly exclusively to very serious management issues at the South African Revenue Services, and corruption at the highest levels of government. The increase in illicit trade happened despite the fact that the excise tax did not increase in excess of the inflation rate.

The message for Mauritius is very clear. Illicit trade in tobacco products is not a tax problem, but a problem of corruption and poor administrative systems. My understanding is that Mauritius does not suffer from much illicit trade in cigarettes. Keep it like that. However, this requires much vigilance from the Mauritian revenue, customs and policing authorities.