Taxes on e-cigarettes and heated tobacco products are not nearly high enough
South Africans will soon pay more for “novel” tobacco and nicotine products. This follows last month’s budget speech in which the finance minister announced that: “In line with department of health policy, we will start taxing heated tobacco products (HTPs), for example, hubbly-bubbly. The rate will be set at 75% of the rate of cigarettes. Electronic-cigarettes, or so-called vapes, will be taxed from 2021.”
The Treasury defines HTPs as products that “produce aerosols containing addictive substances and other chemicals that are inhaled by users”. Examples include IQOS by Phillip Morris International and Glo by British American Tobacco (BAT). The Treasury has yet to come up with a definition for e-cigarettes, but notes that: “electronic-cigarettes are different to HTPs: they do not contain tobacco, but they do contain nicotine or other chemicals.”
While HTPs heat tobacco to generate nicotine, e-cigarettes heat e-liquid, which may or may not contain nicotine. The most well-known e-cigarette brand in SA is Twisp.
The minister’s announcement raises two points. The first concerns the chosen tax rate for HTPs. The second pertains to the many issues the Treasury will need to tackle when deciding how to tax e-cigarettes in 2021.
Excise taxes are levied on products such as tobacco and alcohol to discourage their use. Given their harmful ingredients, HTPs should be subject to excise taxation. The Treasury is to be commended for its decision. However, HTPs should be taxed at the same rate as cigarettes (that is 100% of the rate of cigarettes, not 75%). Due to tobacco’s toxicity, the World Health Organisation (WHO) advises that countries treat HTPs in the same way as other tobacco products. In the area of tobacco taxation, this means taxing HTPs and other tobacco products uniformly.
After choosing the tax base, the Treasury must set an appropriate rate. One approach is to tax e-cigarettes based on their equivalence to combustible cigarettes
Whether intentional or not, the announced tax differential creates the false impression that HTPs are less harmful than their combustible counterparts. It also supports the tobacco industry’s rhetoric that HTPs are a “healthier” option than cigarettes. The government should not be proud that Phillip Morris’s CEO has commended the minister for recognising “the role that taxation can play in encouraging adult smokers to switch to less harmful tobacco products”.
The Treasury’s decision to tax HTPs at a lower rate than traditional tobacco products is not supported by credible scientific evidence. Some studies, including a substantial number funded by the tobacco industry, claim that HTPs reduce exposure to harmful chemicals relative to standard cigarettes. However, the WHO and independent studies assert that “reduced exposure” does not translate to “reduced harms”.
Credible scientific evidence shows that while HTPs may expose users to lower levels of some toxicants than cigarettes, they expose users to higher levels of other toxicants. The industry’s failure to inform consumers of this distinction is dangerous for public health: HTPs may harm users who have never smoked cigarettes and undermine cessation among cigarette smokers trying to quit.
Tobacco companies have tried to sell the idea of a “better smoke” before. The tobacco industry has a record of publishing incomplete or manipulated information and presenting it to governments and consumers. Today, it is repeating these tactics by marketing HTPs as harm reduction devices when they are nothing more than an attempt to expand the customer base amid declining cigarette consumption.
Taxing e-cigarettes is a more tentative issue. They are not tobacco products, but they are not harmless. The WHO recommends that e-cigarettes should be taxed, but does not advise how. It is currently investigating best practices for taxation of these products.
There are two elements of an e-cigarette that can be taxed: the e-liquid and the physical device. A tax on the e-liquid can take the nicotine concentration into consideration (for example, higher tax for higher nicotine concentration), or can be levied independent of the nicotine concentration. A tax that relies on measuring the nicotine content of the e-liquids is not viable in SA, as we do not have the laboratories to do the requisite testing, and self-reporting by industry is not sufficient.
In the absence of an agreed equivalence measure, SA would need to follow an international benchmark rate, to be set by the WHO, or inform its decision by the experiences of other countries
The excise on the e-liquid can be levied on either the volume of the liquid, or the price of the liquid. Each approach has its pros and cons. A tax based on volume is simpler than a tax based on price because only the volume of e-liquid needs to be assessed. A tax based on the price requires capacity to monitor the market and assess prices, which may be difficult where informal markets are concerned.
The problem with a tax on the volume, however, is that it tends to favour products that are more expensive, which are typically those with a higher nicotine concentration. A tax based on price does not suffer this drawback, as the quantum of the tax is higher for higher-priced products.
After choosing the tax base, the Treasury must set an appropriate rate. One approach is to tax e-cigarettes based on their equivalence to combustible cigarettes. This requires an estimate on how many millilitres of e-liquid equates to one pack of cigarettes, and applying the cigarette excise rate accordingly.
There are a number of ways that equivalence can be measured, but there is currently no consensus yet. In the absence of an agreed equivalence measure, SA would need to follow an international benchmark rate, to be set by the WHO, or inform its decision by the experiences of other countries.
A final issue the Treasury needs to consider concerns taxation of the physical e-cigarette device. People buy devices less frequently than e-liquids so a tax on the device is unlikely to impact those already using the product. However, it could prevent vaping initiation, especially among price-sensitive youth. For this reason it would be important for public health to see these devices incur an excise tax.
However, the fact that e-cigarettes are so heterogeneous and subject to technological change requires the Treasury to carefully consider what constitutes an e-cigarette product. While this makes taxation of the devices more challenging, countries such as Russia, Kenya, Bahrain and numerous US states show that it can be done.
In the coming months, the bill that establishes how HTPs and e-cigarettes should be regulated will be debated in parliament. The bill includes a regulatory framework in which it is illegal to market HTPs and e-cigarettes to young people, or to advertise them as smoking cessation aids. In the absence of regulation, the tobacco industry fiercely markets its “novel” products to attract new consumers and to maintain existing consumers.
It is imperative that the bill gets passed, that HTPs are taxed at 100% of the rate of cigarettes, and that e-cigarettes are appropriately taxed in 2021. Public health should be prioritised over industry profits.
• Filby is a research officer in the research unit on the economics of excisable products housed in the School of Economics at the University of Cape Town.
This article originally appeared in the Business Live - https://www.businesslive.co.za/bd/opinion/2020-03-05-taxes-on-e-cigarettes-and-heated-tobacco-products-are-not-nearly-high-enough/