Background

24 Jun 2013

Where the tax recommendation comes from

The WHO Framework Convention on Tobacco Control (FCTC) is a legally binding international treaty which, at last report, has 177 Parties (176 countries, as well as the European Union) covering more than 85% of the world’s population. It came into effect in 2005. The governing body of the treaty is the FCTC Conference of the Parties (COP), which meets every two years.

The FCTC Conference of the Parties has adopted implementation guidelines for many articles of the treaty. Guidelines are interpretations of how best to implement specific articles of the Convention in order to meet the treaty’s goals. Thus far, the COP has adopted all guidelines unanimously. Guidelines are important interpretations of the treaty and can have tremendous influence.

For example, guidelines on FCTC Article 8 adopted in 2007 specified an “obligation to provide universal protection by ensuring that all indoor public places, all indoor workplaces, all public transport and possibly other (outdoor or quasi-outdoor) public places are free from exposure to second-hand smoke”. This principle of universal protection has since become the basis of national and sub-national legislation in countries around the world.

Higher tobacco taxes are widely recognized as the single biggest factor in reducing the prevalence of tobacco use, particularly amongst the younger and poorer segments of the population. Article 6 recognizes that “price and tax measures are an effective and important means of reducing tobacco consumption,” but does not specify how Parties should use the tobacco tax tool most effectively.

In 2010, at its fourth session, the COP formed a working group to draft Article 6 guidelines. More countries asked to join this working group than for any previous topic. The entire working group met in December 2011, and a smaller subgroup met in February 2012 to finalize draft guidelines.

At the fifth session of the COP, in November 2012, Parties did not agree on a full set of Article 6 guidelines, but did adopt guiding principles and recommendations.

Photo courtesy www.worldlungfoundation.org

Full guidelines are scheduled for adoption at COP6 in 2014.

Successful target-setting in Brazil

Why campaign for an explicit tobacco tax policy?

The recommendation of a long-term, explicit tobacco tax policy tied to health (and non-health) outcomes or targets is a potential game-changer.

In addition to providing another opportunity for advocates to push for larger and more regular increases in tobacco taxes, lobbying for tax or related policy targets at the national level can:

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 In many countries, tobacco tax rates are just one of many tax rates that the Ministry of Finance adjusts from time to time. There may not be a single dedicated staff position assigned to tobacco tax issues (e.g. monitoring revenue and market trends, calculating likely impact of increases, relationship to health outcomes etc.) Often finance ministry staff will be assigned to look at all excise taxes, or even all consumpion taxes – in the latter case, VAT (value-added tax) is likely to be given priority.

Finance ministries that don’t realize what a powerful policy tool tobacco taxation can be are especially vulnerable to tobacco industry lobbying. Moreover, politicians may be entirely ignorant of the importance of tobacco taxation. Getting governments to formulate a tobacco tax policy – even a less-than-ideal tobacco tax policy – can be an important first step to overcoming this ignorance.

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When you think about it, policy targets are very common. Political parties vying for election promise, say, to increase the percentage of children completing primary school to 80% within five years, or to electrify 90% of villages within three years, or to “create jobs for all” or “eliminate corruption within two years”. In the field of public health, governments routinely set targets for vaccination rates, infant mortality or even smoking prevalence.

In many countries, it is easy to point to broken electoral promises and unfulfilled government targets. On the other hand, there are also several interesting cases where target setting has had a large and positive effect. (See boxes on Brazil and Copenhagen)

One advantage of tobacco tax policy is that meeting a good but realistic target is neither expensive nor particularly difficult (especially compared to many other public health targets). The primary missing ingredient is usually sustained political will, particularly in the face of tobacco industry lobbying. The right tobacco tax target can provide advocates with a clear yard-stick for success (e.g. “At this rate, the government will not meet its target until 2150”), which is an important advocacy tool.

Moreover, if a country’s tobacco tax policy includes a clear public health outcome – e.g. reducing per capita consumption by 10% per year for the next five years – the target provides an easy way to tie tobacco taxation to health in the public’s mind.

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One challenge in obtaining tobacco tax increases is that tax policy is not set by the Minister of Health, leaving the most important tobacco control measure out of the hands of the minister most likely to be concerned about reducing tobacco use.

Additionally, ministers of health generally have much less power in policy debates than finance ministers. If the finance minister is unconvinced that tobacco tax increases are important, it is much more difficult — if not impossible — to achieve them.

In recommending the development of a coherent, long-term tobacco tax policy, the Article 6 decision of November 2012 places responsibility on the Ministry of Finance to set tax policy to achieve health objectives. This reinforces the importance of a government-wide approach to tobacco control, and should lead to closer collaboration between the ministries of health and finance on tobacco control.

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The establishment of targets by one government will not guarantee follow up on the targets by the next government, particularly one controlled by a different political party. But there are examples of targets — and policies to achieve them — having survived changes of government.

For example in the UK, tax targets were established by a Conservative government in the early 1990s, and were continued — and even increased — by the incoming Labour government. When the Labour government abandoned the targets after a couple of years, one reason was that the government felt that further tax increases on roll-your-own tobacco would fuel the smuggling of those products.

But rather than roll back taxes, the government continued to increase cigarette taxes and kept roll-your-own taxes steady with inflation while it launched a successful anti-smuggling strategy. Arguably, the existence of tobacco tax targets helped prompt the government to consider an alternative to rolling back a policy that had continued over eight years and across two different governments.

At the very least, tax or related health targets serve us public markers for incoming new governments. If they choose to abandon or change targets, it will have to be an explicit decision, likely with political repercussions.

Tax targets and explicit tobacco tax policies have another advantage: they can help provide continuity when (as frequently happens) the civil servants responsible for tobacco taxes change. It can be very frustrating to spend months or even years educating civil servants about the importance of tobacco taxation, only to have them replaced by new officials who in turn have to be educated. A written policy can be very helpful in this process.

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In many countries, advocates and independent academics find it hard to obtain data on tobacco tax rates and related indicators, such as revenue, sales and prices. Sometimes key numbers may not even be collected or verified – for example, some countries depend on industry reporting, without any verification, to determine sales numbers.

More frequently, data is collected by some branch of government, but there is no effort to collate relevant information. For example, national statistical agencies in many countries conduct household expenditure surveys that include questions about tobacco purchases, which can often be used to estimate the price elasticity of demand, prices and sales numbers. But this data is often not analysed and does not inform tobacco tax decisions.

Discussing targets, and then actually establishing those targets, involves discussing the importance of measuring progress and how to do it. This should lead to better monitoring and evaluation mechanisms not only nationally, but as part of the global WHO FCTC monitoring process.

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The recommendation to develop coherent, long-term policies on tobacco taxation implies a much more transparent process for the development of tobacco tax policy than is usually the case. More transparency increases the opportunity for more input and participation by civil society advocates.

Transparency in the development of fiscal policy is promoted by the International Monetary Fund (IMF),1 a fact that advocates might refer to in pushing for transparency in the development of tobacco tax policies in their country.

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When policy targets are public and widely known, failure to achieve them can be politically embarrassing. This is particularly the case if governments themselves are forced to document the failure, e.g. by publishing an annual report on progress towards a particular goal.

In the case of a tobacco tax targets, it would of course be ideal if governments that adopted such targets provided annual progress reports (e.g. to Parliament). At the very least, Parties to the FCTC should report their targets, and progress towards their targets, in the reports they are legally obliged to provide to sessions of the Conference of the Parties (COP) every two years.2

In both cases, it is of course crucial that advocates ensure their national media are aware of the content of such reports.

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We hope Parties will get into the habit of highlighting their tax targets in statements at COP sessions. Ideally, Parties would compete with each other to have the most ambitious target in their region or income group, the highest prices, the biggest resulting drop in prevalence, and so on.

This type of competition is already well-established in other areas. For example, countries seek to top league tables for share of electricity generated from wind, solar or other renewable sources of power. Others strive to show the largest drops in infant mortality, the fastest economic growth, or the highest per capita income.

This competition to be best in achieving particular objectives is not just about winning – it’s about learning from successful models in other places. In the tobacco tax field, Parties will presumably want to look at how countries that have managed to raise their taxes by large amounts have structured their taxes, improved their tax administration systems, and dealt with smuggling.

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Copenhagen: A target for shifting commuters to bicycles

In summary, the tobacco tax target recommendation in the Article 6 guidelines provides an opportunity for advocates to ask for:

  1. An explicit health objective (or target) for tobacco tax policy (e.g. to reduce prevalence by 25% over five years, or youth prevalence by 50% over 10 years).
  2. A target tax rate (e.g. excise tax to account for 70% of retail sale price of tobacco products) that can be expected to achieve the health objective.
  3. Annual tax increases, to help ensure that taxes increase more rapidly than inflation + incomes.
  4. A transparent tax policy development process that considers both health and economic objectives.

Next, we look step-by-step at how to do this.

Back to “The Opportunity”

Proceed to the Guide

Next, we look step-by-step at how to do this.

1  International Monetary Fund. How does the IMF encourage greater fiscal transparency? Fact sheet. Washington: IMF, April 4, 2012. Available on-line.

2 See  http://www.who.int/fctc/reporting/party_reports/en/index.html.

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