Guide Step 1

24 Jun 2013

Getting there: A step-by-step guide to asking for a tax or price target

1. Consider types and levels of tax and price targets

Before initiating discussions with the finance ministry or legislators in your country, you should have a basic understanding of the tax issues involved, and probably also an idea of what types of target you want to propose.

Of course, your task will be much easier if your proposals meet not only health objectives, but also the objective that is usually top-of-mind for most officials: raising revenue.

Fortunately, increasing tobacco taxes has a positive health impact, and also generally results in substantial revenue gains for governments. Good tax advocacy by tobacco control NGOs usually involves proposing “win-win” solutions: large tax increases that increase prices, reduce prevalence and boost revenue.

What type/level of target is best?

As a general rule, an ideal tax policy rule would run something like this:

Increase tobacco taxes annually so that tobacco prices go up by 5 percent more than the sum of inflation and income growth, until smoking (or tobacco use prevalence) has declined by X percent.

Let’s look at the elements of this rule. First, what ultimately matters for health is whether prices go up — depending on your country’s tax structure, increases in tax rates may need to be quite a bit higher.

Second, if tobacco prices don’t even keep up with general inflation, tobacco products will actually get cheaper relative to other products, and people will buy more of them.

Third, if there is lots of economic growth and people have more and more money to spend, tobacco users will also tend to buy more tobacco products. So prices need to keep up with income growth, not just inflation.

Our “ideal” rule may not be suited to your country, which is why we suggest reviewing all your options and discussing them with us. Let’s go through these options one-by-one.

Perhaps the simplest approach is a tax-level target: Achieving a certain amount of tax per cigarette (or per pack) within a certain number of years. The target level chosen could be the average tax level in neighbouring countries (if your country’s tax is much lower), or some memorable number. However, there are two possible pitfalls with this type of target. First, if inflation or average incomes are growing rapidly, even a large tax increase may be too small to have an impact on consumption. (See discussion of affordability, in “Other important aspects of Article 6 recommendations”). Second, if your country depends primarily on ad valorem taxes, reaching a tax target will depend in part on tobacco industry pricing decisions.

Another approach, which deals with the first problem, is to set an affordability target, for example by making a commitment to increase tobacco taxes or prices up to the amount of average wages earned in a certain number of minutes or hours. One advantage of this approach is that even after the target level has been reached, further tax increases may still be necessary from year to year as wages go up — the target doesn’t “expire” when it’s reached.

Yet another approach is to look at the percentage of final retail price that is made up of tax — this is known as a tax share target. Tax share is frequently used for international comparisons (for example in the WHO Global Tobacco Control Reports). Price levels may be hard to compare between countries, because of currency fluctuations and different standards of living, but tax share provides a rough indicator of how a country is doing relative to other countries in implementing Article 6.

Unfortunately, tax share targets are sometimes difficult to communicate to the general public, because they are often confused with the level of ad valorem tax. They also do not guarantee high prices — there are several cases of countries with high tax share but low prices. Another variant worth a serious look is some form of health impact/consumption target. The public health rationale for increasing tobacco taxes is to reduce consumption, in particular by young people; why not tie tax policy directly to a health target, for example by committing to raising taxes enough so as to reduce youth smoking prevalence by half within five years? Of course, convincing the Ministry of Finance to accept this approach might take some effort, but the public message is powerful and politically difficult to oppose.

Finally, targets do not necessarily have to be single numbers of any kind, to be reached after a certain number of years. A policy to increase tobacco taxes once per year, by a certain amount or percentage, may be just as effective as a five-year, 10-year or 20-year target.

Table 1 lists several different types of targets, with some advantages and disadvantages of each. In all likelihood, you will want to select two or three options for targets that meet public health goals, as well as government revenue goals.

 

TYPE OF TARGET   EXAMPLE   ADVANTAGES CAUTIONS PRECEDENTS

Price
target

Within five years, increase average price of one pack of cigarettes to US$20, in 2012 dollars  
  • Predictable effect: Price increases directly affect consumption.
  • Governments usually control tax levels; more politically difficult to control prices.
  • Revenue impact hard to predict – depends on share of price that goes to taxes.
  • To maximize impact, price target should look at price of LOWEST price brand, as well as average price across brands.
  • Can be undermined by inflation, income growth, if not adjusted for both
 Recent discussions in New Zealand about achieving a NZ$100 per pack price by 2025.

Affordability
target

Within five years, increase average price of one pack of cigarettes to equivalent of one hour of work at average wage.
Or: within five years, increase tax level on 100 packs of cigarettes to 2 percent of GDP per capita
  • Automatically adjusts for inflation, income growth.
  • Dependent in part on industry pricing decisions.
  • May need reliable and timely wage statistics (if tied to wages); alternative is to tie to GDP.
  • Revenue impact hard to predict.
Several academic papers have been published on the topic, but no country has implemented

Tax-level targets

Within five years, taxes on one pack of cigarettes will reach US$5.
  • Easy to implement, particularly for countries with specific excise taxes on tobacco (rather than ad valorem)
  • Predictable revenue impact 
  • Health impact can be undermined by inflation, income growth, if not adjusted for both
European Union tobacco taxation directive includes a minimum taxation level

Tax share targets

Within ten years, excise tax share on tobacco products will reach or surpass 70 percent (or, 70 percent of the retail price will be made up of tax.) 
  • Excellent for international comparisons (even when there are large differences in living standards, income category)
  • Likely to adjust for inflation
  • May adjust for income growth (depending on industry pricing)
  • Revenue impact unpredictable
  • Does not always result in high prices (depending in part on type of taxes used)
South Africa used a tax share benchmark of 53 percent.
The European Union tobacco taxation directive requires a minimum excise tax share level of 57 percent.
World Bank’s 1999 report, Curbing the Epidemic, recommended total tax share of two-thirds to three-quarters.
WHO Technical Manual on Tobacco Tax Adminstration (2011) recommends 70 percent excise tax share

Health/
Consumption
impact targets

Increase tobacco taxes so as to reduce youth prevalence by 50 percent within five years.
Increase tobacco taxes so as to reduce per capita consumption by 25 percent within five years.
  • Direct tie to health is very appealing.
  • Emphasizes the critical role price plays in reducing (or not reducing) tobacco use.
  • Revenue impact hard to predict
  • Governments may doubt achievability
United States Healthy People 2020 strategy has targets for reduction of adult and youth tobacco use, for reduction of youth initiation, and for increases in smoking cessation attempts and successes

Mixed targets
with
recurring element

Increase tobacco taxes every year by 5 percent over inflation, at least until reaching an excise tax share of 70 percent, as part of a national goal of halving prevalence within 15 years
  • Annual increase requirement makes it easier to hold government accountable.
  • Longer-term target provides some protection against changes in political, economic conditions. 
  • Finance ministries may consider this type of rule limits their flexibility.
United Kingdom had “inflation + 5 percent” rule in the 1990s, and continues to have some of the highest tobacco tax rates in the world – but without a long-term target.

Table 1

Pitfalls to consider when choosing targets

In considering types of targets, be aware of pitfalls that might reduce their impact on health, as well as things to be included that might strengthen their impact. There are even pitfalls in establishing targets based on some of the general recommendations made by WHO and others, such as the 70 percent tax share recommendation. For example:

  • “Tobacco taxes will increase 10 percent every year for five years” will not reduce tobacco consumption if inflation and real incomes are also growing at 10 percent every year.

A better target might be “Tobacco taxes will increase 10 percent above inflation and income growth every year for five years.”

  • “Taxes will comprise at least 70 percent of the retail price of tobacco products by 2017.” Great, right? Not necessarily. If the retail price of tobacco products is $1.00 a pack, this target could be met as long as taxes make up $0.70 of that amount. This would be a very affordable price in many countries.

A target with a better public health impact might be, “Taxes will comprise at least 70 percent of the retail price of tobacco products, or a per-pack rate of at least the equivalent of 2 hours at average wage, by 2017, whichever results in the higher tax level.”

Discussion of targets should also consider how tax increases would apply to various types of tobacco products on the market, to avoid the undermining of a target by smokers switching from cigarettes to cheaper substitutes (see discussion under Other important aspects of Article 6 recommendations )

Proceed to Step 2:Consider public communications strategy 

Related News

View All News >

Stay informed with our newsletter

Follow us