Increasing tobacco taxes saves lives and raises revenue

 

The explosive details that have emerged from the Nugent Commission in the past weeks have pieced together a telling tale of deliberate interference in the monitoring of the illicit tobacco trade at the South African Revenue Service.

Among the latest revelations – the retraction by Judge Frank Kroon, former head of the services’ advisory board, that the investigation unit known as the rogue unit was operating unlawfully – is critical. 

Kroon’s admission means that Johann van Loggerenberg and his team, before they were publicly humiliated and booted from the revenue service, were in fact on the right track when they pursued some tobacco companies for their involvement in the illicit tobacco trade and tax evasion. It resurrects the narrative that some in the tobacco industry had indeed been interfering in the operations of the revenue service. And this means that the National Prosecuting Authority needs to pursue the 13 cases they received from SARS in 2013 against the 15 tobacco companies for tax evasion and involvement in the illicit trade amounting to the value of R12-billion.

The fake narrative promoted by the tobacco industry is that there is a separation between the illicit trade in tobacco and the legal tobacco industry in South Africa. These buried cases from 2013 show us that the opposite is true – elements in the tobacco industry are themselves involved in the illicit trade.

It raises interesting questions about the much-publicised “take back the tax” campaign supported by some tobacco companies. And the answer for those who want to understand what is really going on is that this is a business war between tobacco companies: some involved in the illicit trade and others not. These companies want to use state resources to clamp down on their competitors who are able to sell cigarettes cheaply because they do not declare them to the Revenue Service and therefore do not pay taxes.

Others who are involved in the illicit trade have also jumped on the take back the tax bandwagon because they want legal cigarettes to remain cheap so that they continue to have a market of consumers who can afford to pay for them – ensuring the survival of their businesses.

The fact that these companies do not pay taxes means that the taxes collected from tobacco sales do not cover the harm caused by the cigarettes they produce: R13-billion in tax income vs R59-billion in tobacco-related harm. 

Increasing excise taxes is the way to address this imbalance and has three benefits.

The first is that it reduces consumption. The tax increase means the price of the product increases, making it less affordable to the smoker. Smokers therefore either cut down or stop completely. And this, in turn reduces the tobacco-related harm, including the burden of disease and death.

Higher prices also discourage adolescents and teenagers from starting to smoke. 

The second is that it is the cheapest and most cost-effective way of reducing the prevalence of smoking and reaping the health benefit. A study looking at the impact of tobacco policies on smokers showed that increasing tobacco prices by 33% through higher taxes costs 15 times less than other measures. And it produces the same health benefit. 

A more recent estimate has shown that raising tobacco taxes costs the equivalent of as little as 7 cents per person per year. This must be measured against the cost of treating one person for lung cancer in the public health system for one year, which runs into hundreds of thousands of rand. 

And the third is that it raises revenue for the state. The tobacco industry argues increases in tax result in a loss to the economy. But the World Bank review notes that money not spent on tobacco products is probably spent elsewhere which will stimulate that sector’s production and in turn create jobs, contributing to economic diversification. Over time there is likely to be a net gain rather than loss in employment.

Across the world – from both developed and developing countries — there are examples of the benefits of taxation.

Brazil was able to increase its revenue from tobacco taxes by 48% over a seven-year period from 3.5-billion reals in 2006 to 5.1-billion reals in 2013. The excise taxes for a pack of cigarettes increased by 116%, while real cigarette prices increased by 74%. The benefit for public health was that consumption decreased by nearly 30% during that time. 


Thailand is another case in point. There were 10 separate tax increases between 1993 and 2015 in Thailand. As a result, the smoking rate in men dropped from 59% to 41.6% and the smoking rate fell from 32% to 19.9%. Tax revenues increased from $500-million in 1993 to $2.1-billion in 2015. Thailand’s projections are that the country would have saved over 300,000 lives by 2026 as a result. 

South Africa also had a good tobacco story to tell. South Africa was one of the first developing countries to introduce significant excise tax increases. Between 1993 and 2011 tobacco taxes increased from less than R2 on a pack to about R10 a pack. As a result, tobacco tax revenue increased from R3-million to almost R12-billion in that period which also saw almost half a million smokers give up the habit. 

However, since 2012, the tax increases have been so small that they have not had an impact on affordability of cigarettes. As a result, smoking rates have stagnated and South Africa still has more than six million smokers with an estimated 40,000 people dying from tobacco-related diseases each year. 

The savings to the health system, and therefore to the fiscus is undoubtedly significant if the taxes are increased now – and has the added benefit of contributing to an improvement in quality of life. So ask yourself: Do we invest in prevention now or do we spend more on treatment later? 

 

*This article first appeared in the Daily Maverick on October 8, 2018. 

 

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