In his sponsorship speech of his version of the sin tax reform bill, Sen. Ralph Recto says that “a higher tax rate does not automatically result in higher collections” and will result in smuggling.
The Recto report presents anecdotal data from a few carefully selected countries (with no references) to convey a general story that higher excise tax will lead to 1) smuggling 2) loss of government revenue and 3) loss of impact on smoking prevalence. We show how these short-term “trends” have been spliced from the long-term picture, then taken out of context to deceive the Senate and the public. The larger picture around the world is that an increase in sin taxes leads to increased revenues and declines in tobacco consumption. Smuggling bears little relation to tobacco price per se and is related more to regulatory measures in each country.
The Recto Story: “High excise levels (22%), increased consumption of illicit cigarettes, undermined regulatory and fiscal objectives.”
The full story: From 1980 to 1994, the Canadian government enacted major tax increases on tobacco products. These actions initiated significant tobacco smuggling which the tobacco industry blamed on excessive taxation; it was later discovered that the tobacco industry had actually promoted smuggling schemes to increase their profits and provide an argument for tobacco taxation reduction. This has resulted in numerous U.S. and Canadian criminal convictions of tobacco industry officials and partners [Ref: Int J Health Serv. 2008;38(3):471-87.Public policy implications of tobacco industry smuggling through Native American reservations into Canada. Kelton MH Jr, Givel MS.]
The Recto Story: “Sharp, above-inflation increase in excise rate led to increased revenues initially but eventually to a revenue decline.”
The full story: In Hungary, regular tobacco tax increases resulted in decreased cigarette consumption. State incomes have increased in spite of regular cigarette tax raises. [Ref: Cent Eur J Public Health. 2007 Sep;15(3):122-6. Higher cigarette taxes–healthier people, wealthier state: the Hungarian experience. Szilágyi T.]
The Recto Story: “Steep excise tax increase resulted in swift emergence of illicit trade, and virtually flat cigarette duty revenues.”
The full story: Illicit tobacco neutralized government revenues in Ireland, when they pushed for tax escalation in 1998. This was because, even before the tax increase, they were already the highest priced cigarettes in the region. This certainly does not apply to the Philippines, which boasts among the cheapest cigarettes in the region and the world. Despite the extreme situation in Ireland, government revenues did grow after tax escalation [Ref: Economics of Tobacco: Modelling the Market for Cigarettes in Ireland. PadraicReidy and Keith Walsh. Research and Analytics Branch, Planning Division, Revenue Commissioners. February 2011.]
Furthermore, smoking-attributable deaths decreased after the tax increase. [Ref: Tob Control. 2012 May 26. The effect of tobacco control policies on smoking prevalence and smoking-attributable deaths in Ireland using the IrelandSS simulation model.Currie LM, Blackman K, Clancy L, Levy DT.]
The Recto story: “Staggering increase in excise tax (in 2011,172% of 2004 rates) led to illicit trade growing to almost 40% of the market.”
The full story: Analysis of previously confidential documents from BAT’s Guildford depository demonstrates that smuggling in Asia was driven by corporate objectives. [Ref: Complicity in contraband: British American Tobacco and cigarette smuggling in Asia. Collin J, LeGresley E, MacKenzie R, Lawrence S, and Lee K. Tob Control 2004;13:ii104-ii111 doi:10.1136/tc.2004.009357].
Malaysia’s solution was not to pull back on excise tax as Recto proposes. Their solution was to implement tracking and tracing systems to control tobacco smuggling in 2004. They were able to recover approximately US $100 million in extra revenue during the first year alone. [Ref: Bharu, K. 2004. Security ink and tax stamps on beer, liquor. New Straits Time, November 5th.]
5. NEW YORK
The Recto story: “Excise duty hikes above underlying inflation leveled to a sharp drop in legal volumes, decline in government revenues, decreased smoking incidence and illicit trade reaching almost 40% of the market.”
The full story: Sales did plummet immediately following the 55% tax increase in 2000, but this recovered to settle on a new level lower than the sales level before the tax increase. Despite the decline in sales, revenue increased dramatically, aided by stricter regulation to curb smuggling [Ref: State Cigarette Excise Taxes: Implications for Revenue and Tax Evasion, Final Report. Prepared for the Tobacco Technical Assistance Consortium, Emory University, Rollins School of Public Health. Farrelly M, Nimsch C, James J.]
Recto story: “Continuous massive excise increases, increased government revenue, constant smoking incidence, illicit trade is more than ? of total consumption.”
The full story: In Southeast Europe, smuggling is lowest in countries like Romania (25% of total cigarette consumption) where transnational tobacco companies have the largest presence and official market share. It is highest in countries like Albania (80%) where these companies are absent. Given the evidence of the tobacco industry’s complicity in smuggling this is unlikely to be a coincidence. [Ref: Tobacco use, a major public health issue in south-east Europe. EurohealthVol 9 No 4 Winter 2003/2004. IvanaBozicevic, Anna B Gilmore, Thomas E Novotny]
Furthermore, the daily smoking prevalence in Romania dropped to 22% in 2011 from 29.7% in 2003, as revealed by a survey conducted by the Health Ministry with the support from the Bucharest-based Lung Diseases Institute [Ref: Romanian Business News – ACTMedia, Tuesday, November 22, 2011]
The Recto Story: “135% increase in 2005 over 2000, declining government revenues despite tax increase, smoking incidence was virtually unchanged from 2001, illicit trade grew.”
The full story: In the longer picture, we know from the Singapore Ministry of Finance, that the Government collected $621 million of excise duty on tobacco products in FY2006, $700 million in FY2007, and $794 million in FY2008. [Ref: http://app.mof.gov.sg]
In the long run too, Singapore excise tax policy has led to one of the lowest smoking rates in the region, and the prevalence continues to decline. Today, the country boasts of the biggest declines in smoking-related deaths among high income countries all over the world. [Ref: Cardiovascular Disease and Risk Factors in Asia : A Selected Review. Ueshima H et al. Circulation. 2008;118:2702-2709].
The Recto story: “Reduction in excise rates used to counter extreme levels of illicit trade (late1990s); massive increase led to increased illicit trade (2007and 2008) and reduction in total cigarette consumption.”
The full story: In fact 1998 is one of the few years that Sweden posted a decline in excise tax revenue. They lowered excise tax by 17% with hardly any effect in revenue, and as a result, tobacco consumption went up by 20%. [Ref: Nordisk tobaksstatistik 1970-2002 and WHO calculations].
Today, Sweden is the best example of how there is no relation between tobacco price and illicit trade. The country boasts of the highest priced cigarettes in the world, the lowest rates of illicit sales, and among the lowest prevalence rates of smoking and smoking-related diseases. [Ref: Cigarette smuggling in Europe: who really benefits? LukJoossens, Martin Raw; Tobacco Control 1998;7:66–71]
9. UNITED KINGDOM
The Recto story: “’Duty escalator’ tobacco taxation led to down-shifting by consumers, increased illicit trade, government revenue loss but with no impact on smoking incidence levels.”
The full story: The UK has posted significant declines in smoking consumption since they imposed the “tobacco duty escalator in 1993”. [Ref: Econometric Analysis of Cigarette Consumption in the UK. Magdalena Czubek ,SurjinderJohal. December 2010. HMRC Working Paper Number 9].
Furthermore, through an action plan to curb illicit trade in 2000, the UK has successfully suppressed smuggling and posted earnings in revenues. [Tob Control 2008;17:399-404 doi:10.1136/tc.2008.026567 . Progress in combating cigarette smuggling: controlling the supply chain. L Joossens, M Raw.
Antonio Dans, MD is a professor at the University of the Philippines College of Medicine and president of the Asia-Pacific Center for Evidence-Based Medicine.