Price and Tax: The Facts

18 Aug 2008

Increasing the price of tobacco products is one of the most effective tobacco control measures available [1]. The most direct way for governments to impact price is to raise the level of excise tax on tobacco [2]Limiting sales of tax or duty-free tobacco products also serves to raise prices. Tax increases affect smoking behavior in the entire population, making this a highly cost-effective measure [3].

Economics provides a number of rationales for tax-based interventions in the market for tobacco, based on market failures. Tobacco use imposes external costs on non-smokers and on society-at-large in the form of exposure to second-hand smoke, increased healthcare costs, and lower productivity. The inadequacy of information about the health risks of tobacco use also creates a market inefficiency that can justify intervention. Additionally, the fact that nicotine is addictive supports its treatment as a special good that must be kept out of the hands of susceptible parties such as youth, until they can assess the risks and make informed decisions about whether or not to use tobacco [4].

Studies show that the vast majority of smokers regret that they ever started to smoke [5], and that a large proportion, even of young smokers, want to quit [6]. The higher prices that result from increasing excise taxes act on demand for tobacco products in two ways: they decrease the quantity of tobacco that smokers consume; and they decrease the prevalence of tobacco use by preventing potential users from initiating and encouraging users to quit 2 . High excise taxes are particularly effective in keeping cigarettes out of the hands of youth, thus leading to long-term reductions in smoking prevalence.

Historically, most studies of the impact of higher prices and higher taxes on the demand for tobacco products have been done in developed countries where a price increase of 10 percent has been shown to reduce the demand for cigarettes by 2.5 to 5 percent 8 . In recent years studies from developing countries have confirmed the effectiveness of tobacco tax policy as a tool for reducing tobacco use. The impact of price on tobacco use in low- and middle income countries is at least as large, and likely larger, than its impact in high-income countries. This means that less affluent consumers in the developing world are more likely to respond to a price increase than more affluent people in developed countries [7]. Poor people, youth, and minorities have been shown to be two to three times more likely to quit or to smoke less in response to price increases 3 .

Some argue, based on equity, that tobacco excise taxes are regressive: they impose a disproportionate burden on poor tobacco users, who are forced to pay a higher portion of their income to consume tobacco. In fact, excise tax increases end up being progressive, in that the rich who are more likely to continue to consume tobacco will pay more taxes than the poor, who are more likely to quit or reduce their consumption levels [8].

In addition to reducing tobacco consumption, increasing tobacco excise taxes will increase tax revenue [2], which can be a powerful motivation for governments to embrace the strategy. Some countries choose to invest a portion of the resulting revenue into tobacco control and health promotion. This process, known as “earmarking,” has been adopted successfully by a number of countries.

1. Chaloupka FJ, Warner KE. The economics of smoking. In: Handbook of Health Economics. 2000, Section III, Chapter 10.

2. Chaloupka FJ, Hu TW, Warner KE, Jacobs R, Yurekli A. The taxation of tobacco products . In: Jha P, Chaloupka FJ: Tobacco Control in Developing Countries Chapter 10, 2000.

3. Ranson MK, Jha P, Chaloupka FJ, Nguyen SN. The effectiveness and cost-effectiveness of price increases and other tobacco control policies. In Jha P, Chaloupka FJ, (eds.). Tobacco control in developing countries, 2000; Section V, Chapter 18, pp.427-447.

4. Jha, P., P. Musgrove, F. Chaloupka, and A.Yurekli. The economic rationale for intervention in the tobacco market. In Jha P, Chaloupka FJ, (eds.). Tobacco control in developing countries, 2000; Section II, Chapter 7, pp.153-174.

5. Fong GT, Hammond D, Laux FL, Zanna MP, Cummings KM, Borland R, et al. The near-universal experience of regret among smokers in four countries: Findings from the International Tobacco Control Policy Evaluation Survey. Nicotine Tobacco Research 2004;6 suppl 3:S341-S351.

6. Martin JP, Peruga A. The global youth tobacco survey : Results in the Americas . Epidemiological Bulletin. Pan American Health Organization (PAHO) 2002; 23(2).

7. Ross H, Chaloupka FJ. Economic policies for tobacco control in developing countries. Salud Publica Mexicana 2006; 48 (suppl 1):S113-S120

8. Peck, R., F. Chaloupka, P. Jha, and J. Lightwood. A welfare analysis of tobacco use. In Jha P, Chaloupka FJ, (eds.). Tobacco control in developing countries , 2000; Section II, Chapter 6, pp.131-152.


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