PRE-BUDGET SUBMISSION 2014

Transcription

1 PRE-BUDGET SUBMISSION 2014 August 2013 Recommendations for Budget 2014 RECOMMENDATION 1: Introduce price cap regulation of the tobacco industry. Introduce price cap regulation to reduce excess tobacco industry profits. Any reductions in the manufacturers prices following the introduction of regulation to be offset by equal rises in tobacco taxes. RECOMMENDATION 2: Adjust the structure of tobacco taxation. Adjust the structure of tobacco taxation to ensure tax increases benefit the Exchequer, rather than the tobacco industry. RECOMMENDATION 3: Introduce a price escalator for tobacco taxes. Commit to an annual price escalator for tobacco taxes on all tobacco products of at least 5% above the rate of inflation. Based on a retail selling price of 9.20 for 20 cigarettes and an annual inflation rate of 1.2%, this would result in a price increase of 6.2%, or 0.62 in Budget RECOMMENDATION 4: Commit to a comprehensive Smuggling Strategy. Draft and implement a comprehensive Smuggling Strategy that includes a commitment to reduce the rate of smuggled tobacco by 1% per annum.

2 INTRODUCTION In this submission, Ireland s largest health charities the Irish Cancer Society and Irish Heart Foundation set out a comprehensive, collaborative approach to reducing the smoking rate in Ireland so that public health is protected and we move closer to achieving a future where children do not smoke. Every day 15 Irish people die from a smoking related illness. That s the equivalent of the population 1 living in the town of Tipperary being wiped out every year. In five years, a number equivalent to the population 2 of Kilkenny City will be dead as a result of tobacco use. No other legal activity results in such a high death rate. Yet the tobacco industry has successfully convinced society to tolerate the high numbers of deaths from smoking. It has never been acceptable and regardless of the arguments made by the tobacco industry, it never will be. In our submission to Budget 2014, we focus on ways to limit the tobacco industry s influence and generate new revenue for the Exchequer. While they continue to exercise the power and influence achieved through marketing initiatives funded by the supernormal profits they earn, we cannot expect that fewer children will smoke. It s no longer enough to look at the demand-side; we need to focus on the supply-side. It is on this basis that we make the recommendations outlined in this proposal. The Irish Heart Foundation and Irish Cancer Society have welcomed the united approach across Government Departments under the Healthy Ireland framework, which states that cutting the smoking rate in Ireland is a shared objective. A healthier society benefits all of us, economically and socially. We are optimistic that by continuing to progress vital health legislation such as the standardised packaging of cigarette packs, we can also drive forward with fiscal initiatives that will complement laws directly focused on health and actually reduce the tobacco industry s influence. Our proposals include: Regulating the tobacco industry and thereby capping tobacco industry profits to normal levels. The tobacco industry is dominated by a small number of players which has led to numerous market failures. Regulation would reduce the inefficiencies created by these failures while capping the profit margin enjoyed by the tobacco industry. This proposal would create million additional revenue for the Exchequer per annum; Changing the tax structure so that tobacco companies can no longer manipulate the level of tax they pay by increasing or decreasing the price of their products. Our current tobacco structure enables smokers to down-trade to cheaper brands rather than quitting. Increasing the specific tax rate to the maximum rate allowable under EU law will ensure that the cost of the cheapest brand of cigarettes increases in real terms; Introducing a tax escalator for tobacco products. This has been successfully implemented in the UK and we recommend that tobacco taxation increases by CPI + 5% annually. This will ensure the price of tobacco remains high in real terms; Committing to a comprehensive National Smuggling Strategy that does not include any financial resourcing by the tobacco industry. We recommend that new legislation is introduced to make it illegal to purchase smuggled tobacco and that this is supported by greater enforcement measures across the country. Tobacco is often considered to be a revenue earner for the Exchequer but smoking costs the Irish taxpayer 1 billion more per annum in health-related costs than it generates in tax. Furthermore, we have heard disingenuous arguments from tobacco industry sources with no substantiating evidence that jobs will be lost if the smoking rate declines. There are only 120 people directly employed by the Ibid 2

3 tobacco industry in Ireland 3. It takes just eight day for an equivalent number of people to die from smoking in Ireland. The Irish Cancer Society and Irish Heart Foundation want to work with relevant stakeholders and Government Departments towards a healthier future. We believe it is the responsibility of all of us to protect children and create a smoke-free future for them. 3 Letter from Mr. Declan Hughes, Managing Director of Imperial Tobacco, Mullingar to Mr. Pat the Cope Gallagher, M.E.P. dated April 5 th,

4 RECOMMENDATION 1: Introduce price cap regulation of the tobacco industry. Introduce price cap regulation to reduce excess tobacco industry profits. Any reductions in the manufacturers prices following the introduction of regulation to be offset by equal rises in tobacco taxes. Note: The concept of price cap regulation of the tobacco industry is based on original research by Dr Robert Branston and Prof. Anna Gilmore, University of Bath, and Prof. David Sweanor, University of Ottawa. 4 Estimates of the impact of price regulation in Ireland provided in this section are based on calculations by Dr Branston. A proposal for price cap regulation of the tobacco industry In the lead-up to Budget 2013, the Irish Heart Foundation and Irish Cancer Society proposed the introduction of price regulation of the tobacco industry in the Finance Bill as a measure designed not only to protect public health but that would also yield significant revenue to the Exchequer. The proposal represents a potentially significant new departure in tobacco control, and in our determination to have this proposal implemented, we now provide the estimated revenue gains for the Exchequer. Tobacco products in Ireland and other countries are subject to high levels of taxation with good reason tobacco is the only legal consumer product that kills half of all users when used as intended. Tobacco use also imposes significant costs on the Irish economy through increased public expenditure on smoking-related health conditions and increased mortality rates for smokers of working age. The tobacco industry in Ireland has continually lobbied against tax increases, while at the same time increasing its own prices year-on-year, depriving the Government of tax revenue which could have been collected. 5 International research proves that high price is the single most effective way of encouraging people to quit smoking. But if tobacco companies earn a significant proportion of profits from this high price and reinvest them in product innovation, marketing and lobbying activities, this undermines tobacco control measures. The market power enjoyed by the small number of tobacco companies which dominate the tobacco market worldwide makes the sale of tobacco unusually profitable. Research on the Irish market 6 shows that the three main tobacco companies have profits in the range of 26-55% and make combined profits after tax of 100 million each year. This proposal for price cap is designed to ensure the tobacco industry does not continue to make extraordinary profits from the harm it causes. The introduction of price cap regulation would cut the profit the tobacco industry can earn to a level enjoyed by other consumer staple companies (12-20%). Any reductions in the manufacturers prices following the introduction of regulation could be offset by equal rises in tobacco taxes. As a result, Government revenue would increase by between million per annum, without changing the price the consumer pays. The proposal would also bring many health benefits, particularly in removing price as a marketing tool for the industry. Why is the tobacco industry so profitable? The tobacco industry makes excess profits because their products are so cheap to produce and because there is little competition in the market due to the fact it is dominated by a small group of multinational companies. There are significant barriers to market entry for new tobacco manufacturers, including economies of scale in manufacturing and distribution costs. These barriers 4 Branston, R. and Gilmore, A. (2013) The case for Ofsmoke: the potential for price cap regulation of tobacco to raise 500 million per year in the UK. Tobacco Control, doi: /tobaccocontrol Gilmore, A., Branston, R. and Sweanor, D. (2010) The case for OFSMOKE: how tobacco price regulation is needed to promote the health of markets, government revenue and the public. Tobacco Control, doi: /tc See Howell, F. (2012) The Irish tobacco industry position on price increases on tobacco products. Tobacco Control, 21(5), Original research by Dr Robert Branston, University of Bath, School of Management. 4

5 have been inadvertently increased by necessary tobacco control measures, particularly bans on advertising and promotion of tobacco products. As a result, the tobacco industry is one of the most profitable in the world. In 2010, the combined profits of the six leading tobacco companies were $35 billion, equal to the combined profits of Coca-Cola, Microsoft and McDonald s. 7 A market failure exists in the tobacco market both in Ireland and across the world. The industry enjoys immense market power, with the manufacture of tobacco concentrated among a small group of global companies. As normal competitive forces are absent, the companies can raise their prices at will. Even a small increase in a company s margins has a significant impact on their profits. This pricing power is compounded by tobacco tax policies because when Government increases tax, it enables the industry to hide their own small price increases. Small, gradual tax increases, even at high rates of tax, may benefit the industry, while having relatively little impact on consumption. This explains why high tax countries, such as Ireland, are often the most profitable for the tobacco industry. The tobacco industry in Ireland Three companies distribute more than 90% of all tobacco products sold legally on the domestic market in Ireland: Gallaher (Dublin) Limited (parent company Japan Tobacco Inc, JTI); John Player and Sons Limited (parent company Imperial Tobacco Group) and PJ Carroll and Company Limited (parent company British American Tobacco Group, BAT). Figure 1: Value of the tobacco market in Ireland Value of tobacco market in Ireland All 000,000 current prices Tobacco retail value - retail selling price Cigarettes Cigars Smoking tobacco Tobacco profits are approximately double what are typical in many other industries. Comparable European consumer staple companies have profitability in the range of 12-20% 8, while tobacco companies in the Irish market are estimated to have operating profits of between 26-55%. Figure 2: Market share and profitability of the tobacco industry in Ireland 2011 Imperial JTI BAT Total tobacco industry profits Market Share 33% 46% 10% Revenue 79,777, ,184,988 34,538, ,500,694 (after VAT and duty) Profit actually made 32,973,449 62,280,000 9,003, ,256,449 Operating profits 41% 55% 26% 2010 Imperial JTI BAT Total tobacco industry profits Market Share 34% 46% 10% Revenue 85,139, ,440,477 35,525, ,105,445 (after VAT and duty) Profit actually made 35,712,886 65,308,000 9,383, , 403,886 Operating profit 41% 56% 26% 7 Eriksen, M., Mackay, J. and Ross, H. (2012) The Tobacco Atlas 4 th Edition. Georgia: American Cancer Society. 8 Branston, R. and Gilmore, A. (2013) The case for Ofsmoke: the potential for price cap regulation of tobacco to raise 500 million per year in the UK. Tobacco Control. 5

6 Price cap regulation to address excess tobacco industry profits Tobacco remains a legal product and we are not suggesting that the industry should not make a reasonable profit on the manufacture and sale of tobacco. However, the industry should not be enabled to enjoy extraordinary profits. We propose that like other regulated industries, the price level of tobacco is capped. Crucially, a cap on the tobacco industry s prices would limit their profitability and thus transfer excess profit from tobacco companies to Government. Price cap regulation The standard calculation used to assess what would be allowed under a regulated industry is the RPIx system (Retail Index Price, where x is the expected efficiency savings). This would allow tobacco companies to cover all legitimate costs and make profits similar to those enjoyed by companies producing other consumer staples. The tobacco regulator would review the prices at intervals and the prices set would be based on how prices in the economy have generally changed, an assessment of the genuine costs each firm faces in production and operation, and an assumption about the productivity improvements companies would be expected to make. In the future the regulatory remit could be expanded beyond price, for example into areas such as product content, marketing, distribution and monitoring of underage sales. Estimates of Irish Government revenue from tobacco price regulation in 2010 and 2011 Analysis of the Irish tobacco market suggests that the introduction of price cap regulation would increase Government revenue by million per annum. Following the introduction of a regulatory system, the tobacco industry regulator would have access to all the data necessary to apply the price cap to tobacco companies. Without such resources and data, the numbers provided herein will always be estimates (a note on the data is provided in Appendix 1). These estimates are presented to address two possible scenarios a conservative scenario (in revenue terms for Government) and an optimistic scenario. In both instances the price the consumer pays for tobacco products would not change. In the optimistic scenario the regulator allows companies to make profits of 12% (lower level of European consumer staple companies) and the annual cost of regulation is assumed to be 7 million. In the conservative scenario, the regulator allows profit levels of 20% (higher level of consumer staple companies) and the annual cost of regulation is assumed to be 10 million. 6

7 Figure 3: Estimates of tobacco price regulation for 2011 and Imperial JTI BAT Total tobacco industry profits Market Share 33% 46% 10% Revenue after duty & VAT paid 79,777, ,184,988 34,538, ,500,694 Profit actually 32,973,449 62,280,000 9,003, ,256,449 made Operating profits 41% 55% 26% Profit at 20% 15,955,541 22,436,998 6,907,600 45,300,139 Implied reduction 17,017,908 39,843,002 2,095,400 58,956,310 Profit at 12% 9,573,325 13,462,199 4,144,560 27,180,084 Implied reduction 23,400,124 48,817,801 4,858,440 77,076,365 Impact of price regulation 2011 Optimistic scenario (12% profit) Conservative scenario (20% profit) Reduction in Profits due to regulation 77,076,366 58,956,310 Implied reduction in corporate 9,634,546 7,369,539 Cost of regulator 7,000,000 10,000,000 Potential net increase in tax revenue to Exchequer 60,441,820 41,586, Imperial JTI BAT Total tobacco industry profits Market Share 34% 46% 10% Revenue after duty & VAT paid 85,139, ,440,477 35,525, ,105,445 Profit actually 35,712,886 65,308,000 9,383, ,403,886 made Operating profit 41% 56% 26% Profit at 20% 17,027,994 23,088,095 7,105,000 47,221,089 Implied reduction 18,684,892 42,219,905 2,278,000 63,182,797 Profit at 12% 10,216,796 13,852,857 4,263,000 28,305,653 Implied reduction 25,496,090 51,455,143 5,120,000 82, 071,232 Impact of price regulation 2010 Optimistic scenario Conservative scenario (12% profit) (20% profit) Reduction in Profits due to regulation 82,071,232 63,182,797 Implied reduction in corporate 10,258,904 7,897,850 Cost of regulator 7,000,000 10,000,000 Potential net increase in tax revenue to Exchequer 64,812,328 45,284,947 7

8 For 2011, in the conservative scenario, tobacco companies combined profits would fall by 58.9 million and the Government would raise an additional 41 million (once the loss of corporation tax of 7.3 million and the costs of the regulator at 10 million had been removed). In the optimistic scenario, tobacco companies combined profits would fall by 77 million and the Government would raise an additional 60 million. Paying for the cost of regulation As is the case in other regulated industries in Ireland, the tobacco regulator could be funded through a levy or licence fee paid by all tobacco companies. The estimates for the annual cost of the regulator ( 7 million in the optimistic scenario and 10 million in the conservative scenario) reflect the current cost of other Irish regulators (many of which regulate much more complex markets). Figure 4: The current cost of regulation in Ireland Regulator Commission for Communications Regulation 22.2m 22.8m Electronic communications 19.5m Post 1.38m Commission for Energy Regulation 9.76m 9.93m Commission for Aviation Regulation 2.7m 3m Broadcasting Authority of Ireland 6.37m* 5.2m *based on revenue raised, others based on expenditure Benefits of price regulation Price cap regulation is a means of protecting society from the monopoly power of the tobacco industry. It would allow the government to capture a significant proportion of the excess profits the tobacco industry currently enjoys, as tobacco taxes would need to be increased to offset any reductions in price as a result of the price cap for manufacturers. Regulation would provide both revenue and public health benefits: Increase Government revenue from tobacco sales by million per year. In the regulatory scheme price differences between products would only be based on the cost of production. This would remove price as a marketing tool for the industry and would also address the problem of consumers down-trading to cheaper products. Reduce industry funds available to develop new products. Reduce the funds industry has available for lobbying to fight public health measures. Complement other tobacco control measures such as standardised packaging by preventing the companies using price changes as a defence against the introduction of such measures. The regulatory agency would engage directly with the industry, thereby shielding Government from attempts by the industry to influence policy. Legal considerations Price regulation of the tobacco industry is an innovative departure for tobacco control policies and as such a number of legal issues must be considered. A legal researcher (Mislav Mataija) from the European University Institute (EUI) was commissioned to provide a legal analysis of price regulation. The analysis considers price regulation in terms of the provisions of the Tobacco Tax Directive, EU rules on free movement of goods and establishment and EU competition rules. The full legal analysis is available on request. The author provides a number of recommendations as to how the scheme could be assembled to best meet EU legal standards, including: 8

9 The more scope the scheme provides for competition the less likely it will be viewed as restrictive; The scheme should allow flexibility for the regulator and manufacturers, particularly by proposing to look in detail at the costs of production of each tobacco product individually, rather than applying a blanket capped price across all products; and The public health goals of the scheme should be clearly identifiable in order that the scheme might be justified under the Treaty aim of protecting human health. Summary The tobacco industry has leveraged market failures to manipulate Government anti-tobacco policies to its own advantage and make extraordinary profits. Controls need to be put in place so that the industry cannot continue to earn extraordinary profits, without regard to the health burden on smokers and the economic burden its activity places on society. Price regulation would ensure that tobacco prices discourage smoking and benefit the Exchequer (by million), rather than providing enormous profits for tobacco companies. It would also provide significant public health benefits. In Budget 2014, the Irish Cancer Society and the Irish Heart Foundation are calling on Government to introduce price cap regulation to ensure that the industry properly contributes to the costs it imposes on the State and on its citizens. 9

10 RECOMMENDATION 2: Adjust the structure of tobacco taxation Adjust the structure of tobacco taxation to ensure tax increases benefit the Exchequer, rather than the tobacco industry. Our current tobacco structure enables smokers to down-trade to cheaper brands rather than quitting. Increasing the specific tax rate to the maximum rate allowable under EU law will ensure that the cost of the cheapest brand of cigarettes increases in real terms. The Exchequer can benefit from increased revenue if the structure of tobacco tax is changed. We are seeking an increase in the level of specific tax up to its maximum allowable level of 76.5% and a corresponding reduction in the level of ad valorem tax. Specific tax is levied on the volume of cigarettes sold. Ad valorem tax is calculated on the price of the packet of cigarettes. This means that if the price of cigarettes goes down, so does the tax take. This is possible because of the European Court of Justice ruling in 2010 which found minimum pricing of tobacco to be illegal. Currently, our tobacco tax structure allows the tobacco industry to put price increases on high-end cigarettes and to keep lower-end products cheap. Figure 5: Average breakdown of cigarette price. Adequately taxing tobacco is the single most effective and cost-efficient intervention to reduce tobacco consumption, especially amongst younger generation smokers and low income smokers. This policy has long been endorsed by the World Health Organization and the World Bank. The Framework Convention for Tobacco Control, which Ireland has signed, also emphasises taxation as a major part of a comprehensive tobacco reduction policy. Given the high proportion of tobacco industry profit that makes up cigarette retail price, there is an opportunity to squeeze this profit by altering the tax structure. 10

11 An increase in the rate of specific tax does not necessarily mean that the price of cigarettes would increase. Increasing the rate of specific tax will lead to one of two scenarios, both of which will increase revenue for the Exchequer: 1. The tobacco manufacturers increase price to maintain their profit margin and push the tax increase onto the consumer; 2. The tobacco manufacturer will absorb the tax increase and price will remain unchanged. Scenario 1 Manufacturers increase price proportionate to specific tax increase Under the first scenario, the tobacco industry will argue that changing the tax structure is effectively an increase in retail price. Of course, this is not the case because the industry could simply absorb the tax increase into its profits. Instead, it is the argument of an industry fighting to retain margins that dwarf all other consumer staples. To highlight the baselessness of the tobacco industry s argument, it is worth looking at how they have taken advantage of the Revenue Commissioner s price elasticity of demand (PED) figure and further increased their profits over the last decade. Every year for the last 10 years, the tobacco industry has increased the price of cigarettes regardless of whether there is a tax increase or not. Yet their prebudget submissions reveal a very different case being made to decision-makers. This is acutely highlighted in the peer-reviewed paper by Fenton Howell (2011), The Irish tobacco industry position on price increases on tobacco products 9, from which the table below is extracted. We can clearly see that the three predominant themes emerging throughout the period were that: increasing taxes would increase the illegal trade, Ireland's taxes on tobacco are among the highest in the world and that government should not increase taxes in the forthcoming budget. 9 Fenton Howell (2011) The Irish tobacco industry position on price increases on tobacco products ; Tob Control doi: /tobaccocontrol

12 Source: Fenton Howell (2011) The Irish tobacco industry position on price increases on tobacco products ; Journal of Tobacco Control. The conclusions reached by the author are worth repeating here: The tobacco industry was also consistent throughout the period as to how it commented on previous tax increases by the government. It was never highly critical; rather it expressed disappointment when it did mention it in its pre-budget submissions. Of note was the complete absence of any reference to the price increases that it imposed on tobacco products. However, most strikingly, in its 2009 submission, which was far the strongest in terms of arguing for no tax increases on tobacco products it stated Sadly, being the highest priced country in the EU for tobacco products, Ireland is already regarded as a paradise for tobacco smugglers. According to our estimates, one in every five cigarettes smoked in Ireland that s 20 percent of the market is accounted for by product on which no Irish duty is paid in our view, every cent that is added to the price of a packet of cigarettes will only drive these figures upwards to a point where in the next 1 2 years, we believe some 25% of the market will be accounted for by non-irish duty paid product. It is an unhappy equation which we all must take note of if ordinary, law abiding smokers are not to be driven into the hands of criminals in even greater numbers than at present.' 12

13 Subsequently, in the following fiscal year (December 2009 November 2010) the government did increase tax by 21.5 cents, the tobacco industry, despite its protestations in its pre-budget submissions increased price by a further 23.5 cents. We argue therefore, that when faced by opposition from the tobacco industry on the issue of increasing the rate of specific tax, arguments hinged on claims that increasing price will decrease Exchequer revenue or encourage people to switch to smuggled tobacco, that the Department of Finance rebuts these assertions using the information above and points out that if the tobacco industry believes their own argument then they operate a healthy profit margin that can easily absorb the price increase. If the tobacco industry thought that increasing price would increase smuggling, it would not have increased price over successive years as highlighted above. From a public health perspective, a price increase resulting from restructuring tobacco tax would make it less attractive for young people to start smoking. We can see from the figures below (Figure 5) that a price increase leads to a decrease in consumption. We know that new smokers, mostly children and young people under 18, become addicted in greater numbers when price remains constant. This reinforces the fact that price must be kept high to help people quit smoking. However, this must go hand-in-hand with increased resources directed at reducing illegal tobacco supply and cessation support for current smokers who want to quit. Figure 6: Excise increases on cigarettes, (with pro rata increases on other tobacco products) from When properly administered, the essence of taxation s effectiveness lies in its ability to increase the price of tobacco products - which directly decreases tobacco s affordability to the population at large and groups with lesser purchasing power in particular. For those on lower incomes and for younger generations, who are more likely to smoke or start smoking, making tobacco less affordable decreases its access and attractiveness. The decrease in demand for tobacco is highlighted by increased cessation rates among current smokers and reduced tobacco uptake rates among potential users. It should not be assumed that people are shifting to illegal tobacco products. The HSE s tobacco surveys indicate a current adult smoking rate of 22% 11 and smoking amongst young people has fallen to 12% from 15% in Evidence from three national surveys (SLÁN, the Office for Tobacco Control (OTC), and the Living in Ireland survey) covers the period between 1998 and Combining the results from all three surveys, smoking prevalence for Irish adults fell from around 31% to 24% between 1998 and The last SLAN survey was in 2007, showing an overall smoking prevalence rate smoking rate of 29%. The most recent survey by the HSE National Tobacco Control Office (with a smaller sample size than SLAN) in December 2012 found a rate of 22% (see 12 Kelly, C., Gavin, A., Molcho, M. & Nic Gabhainn, S. (2012). The Irish Health Behaviours in School-aged Children (HBSC) study Dublin: Department of Health. 13

14 Young people are particularly sensitive to price rises and may reduce their smoking at two to three times the rate of older people. For instance, in 2002, the New York City tobacco control program put in place by Mayor Michael Bloomberg included raising tobacco tax. In the ten years before the programme was implemented, there was no decrease in smoking rates. After the control programme, teenagers smoking decreased from 17.6% in 2001 to 8.5% in 2007, a level nearly two-thirds lower than the latest available US national teen smoking rate. Tobacco taxation has three main purposes: To raise revenue To promote health by deterring consumption (i.e. as a sumptuary tax) To correct for social costs. Therefore, the cross-government objective outlined in the Healthy Ireland Framework, to reduce smoking prevalence by 1% per annum 13, would be met if an increase in the rate of specific tax resulted in an increased price of tobacco products. However, in order for price increases to effectively decrease consumption, they need to be significant. We recommend that any increase in price as a result of an increased specific tax rate is rolled into the price increase that would result from the adoption of annual tax escalator policy of CPI + 5% (see recommendation 3 below). Scenario 2 Manufacturers absorb the specific tax increase Under the second scenario, tobacco manufacturers would absorb any increase in the proportion of tax on tobacco products that would arise from a change in the tax structure. As we have previously highlighted, the profits of the tobacco industry are enormous despite the high tax rate levied on their products. By increasing the rate of specific tax, which is calculated by the volume of cigarettes sold rather than the price, we can do three things: Prevent the industry from over shifting the tax burden onto higher end products. Prices of cigarettes in Ireland range from about 8.00 to 9.50 for a 20-pack. Increasing the rate of specific tax would keep cigarettes priced at a relatively standard rate and stop the tobacco industry from encouraging down-trading to cheaper cigarettes by people who can t afford the high-end cigarettes; Increase revenue for the Exchequer. At the moment, lower priced cigarettes means less income for the Government but if the specific tax rate is increased, tax returns will rise; Reduce the profits of the tobacco industry which are currently used to undermine health legislation targeted at stopping people from smoking. We can see from the box below that the tobacco industry is using the tax structure on tobacco products to keep some cigarette prices low so that they are more affordable to people who might otherwise quit or not start smoking. We are concerned that while the price of cigarettes has increased across the market as a whole, there continues to be a wide differential between the prices of the cheapest and most expensive cigarettes. This is because the tobacco industry is absorbing tax increases on the cheapest brands so that smokers of those brands are not affected. It does this by increasing prices on the more expensive brands, usually around the time that Government increases excise duties so that its own increases are not noticed by consumers. We know that people who smoke cheaper brands of cigarettes are often children or young people and those with low incomes. This makes children and poor people more likely to smoke and further exacerbates an existing health inequality associated with the profile of a smoker. 13 Government of Ireland (2013) Healthy Ireland Framework: Dublin: The Stationery Office. 14

15 Pricing and marketing in Ireland It is essential that taxation policy does not facilitate the introduction of economy products, encourage marketing through pricing strategies, or allow the tobacco industry to absorb tax increases on the cheapest brands, rather than passing them on to the consumer. As illustrated in a recent study in individual markets tobacco companies may increase prices over and above tax increases (i.e., overshift the taxes thus increasing profits), while using these profits to enable them to absorb tax increases (rather than pass them on in full to the consumer) on the cheap brands 14. The sample of prices in the Irish market below shows the considerable price differentials between premium, medium and ultra-low category cigarettes: Figure 7: Tobacco prices in Ireland Note all are cigarette packs are 20 cigarettes, unless stated. P.J. Carroll &Company Ltd, May 2013 Cigarettes Recommended retail price Pall Mall Red / Blue / Silver 8.00 Pall Mall Red / Blue 100 s 8.00 Pall Mall KS Click On 8.20 Vogue Perle Capsule 8.50 Lucky Strike Red / Blue 9.20 Carrolls Number Vogue Menthe 9.25 Consulate King Size 9.50 Rothmans King Size 9.50 Major 9.50 Dunhill International 9.60 Roll-your own Cutters Choice (12.5g) 5.15 Samson Original Blend (25g) John Player, June 2013 Cigarettes Recommended retail price L&M Red / Blue 8.05 Marlboro Gold Touch 8.20 Lambert & Butler Silver / Gold 8.85 Superkings Black / Blue 9.10 John Player Blue 9.40 JPS Red 25s (25 cigarettes) 9.90 John Player Blue 23 s (23 cigarettes) Marlboro Red / Gold / Menthol 9.40 Roll-your-own Golden Virginia Green (12.5g) 5.10 Drum (12.5g) 5.15 Drum (25g) Gallaghers, January 2013 Cigarettes Recommended retail price Mayfair Super Kings 8.10 Camel Lights 8.40 Benson & Hedges Silver 8.40 Benson & Hedges King Size 9.30 Silkcut Blue / Red 9.30 Silkcut Purple (23 cigarettes) Benson 23s (23 cigarettes) Roll your own tobacco 14 Gilmore, A. (2012). Understanding the vector in order to plan effective tobacco control policies: An analysis of contemporary tobacco industry materials. Tobacco Control 15

16 Amber Leaf (25g) 9.90 Clearly, the tobacco industry s strategy has undermined tobacco control efforts by Government because smokers can simply downtrade to cheaper brands rather than quitting smoking. This is why we recommend that the Government increases the specific tax rate to ensure that the cost of the cheapest brand of cigarettes increases in real terms. Figure 7: Annual trends in taxes and retail prices, in cents, over time 15. While the tobacco industry earns its current profit margin, significant resources can be directed into efforts aimed at circumventing existing health legislation. Some examples include investment in product marketing, lobbying Government and financing front groups for the industry. We don t believe that Government policy can be achieved while this anomaly exists and increasing the specific tax rate is a mechanism to achieve the Government s goal of a lower smoking rate. Summary We recommend that the Government increases the specific tax rate to its maximum allowable level of 76.5%. Coupled with the current ad valorem rate, this would achieve optimal tobacco tax policy because it would result in one of two desired effects one is to increase the price of cigarettes and the second is to squeeze tobacco industry profits so health policies aren t undermined. We encourage Government to consider this request to change the tobacco tax structure alongside our other tobacco policies such as committing to an annual tax escalator, as in the UK. Using the full suite of policies available to us, the smoking rate in Ireland and the cost burden associated with it, can be reduced. 15 Fenton Howell (2011) The Irish tobacco industry position on price increases on tobacco products ; Tob Control doi: /tobaccocontrol

17 RECOMMENDATION 3: Introduce a price escalator for tobacco taxes Commit to an annual price escalator for tobacco taxes on all tobacco products of at least 5% above the rate of inflation. Tobacco taxes in Ireland have risen through small, gradual rises in taxation rates. Relatively small increases have less impact on consumption than higher increases, as smokers adjust to them more easily. Figure 9: Tobacco tax increases in Budgets Budget Year April Tobacco increase tax 25c N/A N/A 25c 50c 30c 50c N/A N/A 25c 50c Source: Department of Finance, Budget information. In order to achieve a significant decline in the number of smokers and to establish a source of consistent tax revenue, we recommend the introduction of a tax escalator for tobacco of 5% per year above the rate of inflation. An annual increase at least 5% above the rate of inflation would mirror the successful strategy employed in the UK. An annual inflation rate of 1.2% is reported for For 2014, we therefore recommend a 6.2% increase in tobacco taxes. Based on a retail selling price of 9.20 for 20 cigarettes, this would result in a price increase of Such a policy is supported by emerging evidence from financial analyst reports, tobacco industry documents and research on industry lobbying. All these sources suggest that regular, moderate tax increases can benefit industry while large intermittent tax increases have a greater impact on demand (Gilmore, 2012). Reducing the affordability of tobacco in this way should be accompanied by the provision of adequate resources to assist smokers to quit

18 RECOMMENDATION 4: Commit to a comprehensive Smuggling Strategy Draft and implement a comprehensive Smuggling Strategy that includes a commitment to reduce the rate of smuggled tobacco by 1% per annum. Smuggled tobacco costs the Exchequer 240 million in lost taxation (excise and VAT) 17 which deprives the general public of services that are beneficial to everyone. Furthermore, the availability of smuggled tobacco undermines health legislation that is designed to stop people smoking. Tackling tobacco smuggling is a key Government and health objective. A more fulsome discussion of the illicit tobacco market is provided in Appendix 2. Ireland needs a new Tobacco Smuggling Strategy that recognises the potential of a partnership approach between health and revenue objectives. The two are not mutually exclusive in the UK there is considerable evidence that if enforcement of smuggling laws is adequate, the price of cigarettes can be increased significantly on an annual basis without concerns about any impact on smuggling rates. The Revenue Commissioners, Irish Customs Service and other agencies, including the Naval Service and the Gardaí, play a fundamental role in the seizure of contraband cigarettes and tobacco in Ireland. Their work is essential in reducing the smuggling of contraband, which has serious implications, not only on public health but also for the Exchequer. 18 However, these enforcement bodies are under significant staffing pressures and have increasing workloads. For example, the Revenue Commissioners have reduced their staff numbers from 6,581 in January 2009 to 5,962 in January We want Ireland to follow the example provided by the UK which cut its smuggling rate from 21% in 2001 to 9% in 2011, whilst imposing such substantial increases in tobacco taxation that premium brand cigarettes are more expensive in the UK than in Ireland. We are creating an environment that aims to ensure our next generation does not smoke. This is a stated objective of the Irish Government. The Government is using legislative and health interventions to make smoking unattractive, but this will only work if smuggled tobacco is not easily available. Recommendations for smuggling strategy Commit to reduce the illicit market by specified target by The Revenue Commissioners and the Government should set and publish a quantified objective by which it aims to reduce the market share of illicit cigarettes and hand-rolled tobacco We believe a 1% annual reduction is possible (based on the UK s success) if resources are directed to this effort. Develop an inter-sectoral anti-smuggling strategy 2. The UK s comprehensive National Anti-Smuggling Strategy hinges on a multi-layered collaborative approach across Government Departments, law enforcement agencies and 17 Dail Eireann Parliamentary Questions, 8 May 2013, Department of Finance, Illicit Trade in Tobacco In July 2010, the Revenue Commissioners initiated a programme of nationwide blitz-type tobacco operations, which concentrated additional Revenue resources at ports, airports and at various retail points for the purpose of identifying and seizing illicit tobacco products. Three such operations were mounted in 2010, resulting in the seizure of more than 15 million cigarettes and 370kgs of tobacco (Revenue Commissioners 2010 Annual Report). The overall value of combined seizure of cigarettes and tobacco for 2010 was 76.4 million. 19 Revenue Commissioners (Feb. 2012) Revised Action Plan for the Revenue Commissioners under the Public Service /Croke Park Agreement, 18

19 community partnerships. The Irish Heart Foundation and Irish Cancer Society argue that a similar approach to smuggling in Ireland is urgently required. Provide necessary resources staffing and equipment 3. Expenditure on anti-smuggling operations such as enforcement and supply chain control should be increased by around 8 million per year equivalent to what the UK spends on these activities per head of the population. This would support the achievement of a 1% annual reduction in the size of the illicit tobacco market. 4. We want better enforcement measures so that it is harder to bring illegal tobacco into Ireland. Ireland needs two additional scanners at Irish ports in the short term and this should be increased to six over the medium to long term. Funding from the tobacco industry for scanners should not be accepted, not least because of its long history of involvement in smuggling and the fact that 86% of the illicit market is made up of its own products. 20 The stated objective of the Government is to reduce the number of people who smoke an objective that is directly opposed to the tobacco industry s efforts to increase the smoking rate. Supply-side controls and sanctions 5. Reduce the minimum indicative levels for travellers to the smallest amount allowable under EU rules. At European level, continue to support the further reduction of these EU-set limits. 6. Ensure sanctions for smugglers and sellers of illicit tobacco are comprehensive, including: Seizure of goods, vehicles and the cash proceeds of crime; Criminal prosecution with custodial sentences; Confiscation of assets as part of the proceeds of crime; Assessment of the loss of duty and financial penalties of up to 100% of the duty due; Civil action including winding up orders and bankruptcy; Fines for selling illicit tobacco not bearing Irish duty paid fiscal markings; Prohibition on the sale of tobacco products for up to six months; and Travel restrictions on repeat tobacco smugglers. 21 Demand-side controls and sanctions 7. Legislation should be drafted that makes it illegal to buy non-duty paid tobacco. This would bring tobacco in line with the penalties for the purchase of other smuggled goods. Supply chain controls 8. Given the high level of contraband tobacco in the illicit market in Ireland, the Department of Finance should introduce financial penalties on tobacco companies whose product is smuggled. In the UK, the Government has made it a legal duty for tobacco manufacturers not to facilitate smuggling and companies which fail to take sufficient steps to prevent their products being smuggled into the UK face fines of up to 5 million. 22 When HMRC launched its first Tackling Tobacco Smuggling strategy in the UK in 2000, most large cigarette seizures consisted of genuine UK brands that had been exported by tobacco companies to overseas markets, but were subsequently smuggled back into the UK with no tax paid. Following court cases and reports by the Parliamentary Health Select Committee and the Public Accounts Committee, major UK tobacco manufacturers agreed in 2002 to do more to tackle smuggling by each signing up to a Memorandum of Understanding with the HMRC. Crucially, cigarette manufacturers agreed to do more to control the oversupply of cigarettes to certain countries, which had been fuelling the illicit trade. For example, in 1997, Andorra was supplied with 3.1 billion packets of 20 See Cigarette Consumption Surveys of the Revenue Commissioners. 21 HM Revenue & Customs and UK Border Agency (2011) Tackling Tobacco Smuggling building on our success. y_miscellaneousreports&propertytype=document&columns=1&id=hmce_prod1_ See, UK Finance Act 2006, see 19

20 cigarettes equivalent to every Andorran smoking seven packets a day most of these were then smuggled to other European countries. Four years later these Memorandums in the UK were reinforced by new laws (as part of the Finance Act, 2006), which put legal provisions in place, including fines of up to 5m, for tobacco manufacturers who fail to take sufficient steps to prevent their products being smuggled into the UK. We recommend that a similar approach is taken here given that 86% of the smuggled tobacco market is made up of contraband cigarettes. A recent answer to a Parliamentary Question 23 to Minister Michael Noonan shows that tobacco companies have had to make substantial payments because contraband cigarettes are still finding their way onto the market: Figure 8: Payments to Ireland under international tobacco agreements Year Total Payments Received , , ,224, ,325, ,558 This represents a poor return in comparison to the tax being lost to the State each year through the smuggling of tobacco industry products. International activities 9. The Government should sign and ratify the Framework Convention on Tobacco Control (FCTC) Illicit Trade Protocol as soon as possible, and begin consideration of how its provisions will be brought into effect in the Irish market. 10. The Revenue Commissioners and the Government need to consider how the tracking and tracing provisions of the FCTC Illicit Trade Protocol will be implemented in Ireland. In particular they must assess whether the Codentify system promoted by the major tobacco manufacturers meets the terms of Article 8 of the Protocol; whether it allows for effective tracking and tracing throughout the supply chain; and whether it could compromise the integrity and independence of enforcement action by public agencies The Government should take a lead in the European Union in supporting effective action against illicit trade, for example by urging the EU anti-fraud office OLAF to continue to give this work a high priority and in particular to act where there is evidence that the EU legal agreements with the major manufacturers have been broken. 12. The Government should support the draft EU Tobacco Products Directive recommendations on tracking and tracing, with some appropriate amendments to reflect the FCTC Illicit Trade Protocol: The tracking and tracing system should be in line with the FCTC International Protocol on Illicit Trade in Tobacco Products, which clearly specifies that tracking and tracing to the tobacco industry should be avoided ~ /$File/Daily%20Book%20Writtens%20Unrevised.pdf?openelement 24 See, All Party Parliamentary Group on Smoking and Health (2013) Inquiry into the illicit trade in tobacco products. 20

21 The unique identifier should ensure a simple link between all levels of packaging (from pack level, through carton to master case). The third party chosen for data storage should be chosen by Member State Governments rather than the industry. The proposed auditor of the system should be chosen by and answerable to the European Commission. Tobacco taxation 13. The Revenue Commissioners and the Government should not accept the tobacco industry position that tax rises and other tobacco control measures will necessarily lead to an increase in illicit trade. The Government should introduce a tobacco tax escalator at 5% above inflation and support legislation to introduce plain standardised packaging of tobacco products. Limit contact with the tobacco industry Data 14. The Government should ensure, as far as possible, that the costs of implementing the provisions of the Protocol on Illicit Trade are borne by the tobacco industry, in line with Article 36.7 of the Protocol. 15. The Revenue Commissioners and the Government should limit their interaction with the tobacco industry as per Article 5.3 of the FCTC. They should also make a policy commitment to meeting the terms of Article 5.3, FCTC. Meetings with the industry should only occur at official level and only on issues directly related to the regulation of the industry. Any such meetings should be open and transparent, with all minutes made publicly available. 16. We are concerned with the methodology, data collection and reporting practices used in tobacco industry funded or commissioned reports about the illicit trade. They often infer that the illicit market is much bigger than the evidence from the Revenue Commissioners shows. We encourage the Revenue Commissioners and the Department of Finance to publically challenge tobacco industry figures when the industry goes to the media seeking support for their anti-health policies. 17. Regarding quality data, the UK HM Revenue and Customs 25 and the World Bank 26 have developed a methodologies for estimating tobacco smuggling rates which we recommend should be mirrored in Ireland. Promote appropriate public health messages The Revenue Commissioners new strategy should not include the view (as per the previous strategy) that counterfeit tobacco is more dangerous to health than manufactured tobacco. This is a view which is promoted by the tobacco industry. All cigarettes, whether they are manufactured by tobacco companies or by counterfeiters, are extremely dangerous. Cigarettes including the shop-bought legal variety contain 4,000 chemicals, such as carbon monoxide (the same poisonous gas found in car exhaust fumes), ammonia (found in toilet cleaner), arsenic, methanol (rocket fuel) and the industrial solvent toluene. It is inappropriate and inaccurate to imply that manufactured tobacco products are somehow healthier, or safer. The fact is that legal cigarettes are responsible for the overwhelming majority of Ireland s estimated 5,200 tobacco related deaths each year. 25 See HM Customs and Revenue (Dec 2009). Measuring Tax Gaps Available at: 26 World Bank. Economics of tobacco toolkit - understand, measure and combat tobacco smuggling. Available at 21

22 CONCLUSION The Department of Finance can use Budget 2014 to meet the Government s fiscal goals of increasing revenue and reducing tax evasion, while also tackling the economic and health damage caused by tobacco use in Irish society. Sustained reductions in smoking prevalence can only be achieved through co-ordinated action focusing particularly on tax policy, smoking cessation, anti-smuggling measures and legislation. We know that the measures taken by successive Governments to curb tobacco use in Ireland have achieved success the adult smoking rate has dropped from over 29% in 2007 to fewer than 22% in We urge the Department of Finance to continue playing its part to achieve further reductions in smoking rates. Smoking has serious consequences on the fiscal health, as well as the physical health of the population. 6-15% of the total health budget is spent on treating tobacco related disease this amounts to between 1-2 billion every year. In 2008, smoking attributable diseases accounted for an estimated 280 million in hospital costs alone. There are also significant productivity losses due to excess absenteeism, smoking breaks and lost output due to premature death. (Government of Ireland, 2013, Healthy Ireland, p. 11). It is not just the responsibility of the Department of Health to reduce the social, health and economic consequences of smoking. To date we believe that tobacco taxation policy has primarily focused on revenue-raising, with limited consideration of the health implications of imposing significant and regular tax increases. If the Department of Finance is to live up to its responsibilities under the wholeof-government Healthy Ireland agenda, it must begin to consider the health as well as the fiscal impacts of taxation measures. While the Irish Cancer Society and the Irish Heart Foundation recognise that existing revenue streams have to be protected and grown where possible, tobacco cannot be seen solely as a revenue raiser. We are calling on the Department of Finance to utilise the full breadth of its policy arena to bolster the Government commitment to improving the physical and economic health of the nation. The tobacco industry has leveraged the market failures that exist to manipulate Government taxation and health policies to its own advantage. The Department of Finance must lead the defence of Government policy against the insidious activities of the tobacco industry. It must be forceful in voicing its opposition to the tactics of the tobacco industry to undermine Government revenue streams. The tobacco industry has a clear conflict of interest in supplying data about tobacco smuggling and about the optimum taxation policy for Government. Tobacco companies need to maintain profits. While the tobacco industry in Ireland actively lobbied against tobacco tax increases, arguing they would lead to increased smuggling, they were simultaneously increasing their own prices year on year. If the tobacco industry truly believed that high price leads to smuggling, this would not be part of their business model. The tobacco industry also continues to question and undermine the official illicit tobacco market data prepared by the Revenue Commissioners. While the ultimate goal must be a tobacco free society, in the medium term, as demonstrated in this submission, there continues to be additional revenue available for the Government from the sale of tobacco in Ireland. In Budget 2014, we are calling on the Government to take a new approach to tobacco control by reducing the industry s profitability; structuring taxation to benefit the State finances; maintaining the real price of tobacco products; and eradicating tax evasion through tobacco smuggling, so that the tobacco industry begins to contribute to the costs it imposes on the State and its citizens. For further information contact: Cliona McCormack, Irish Heart Foundation cmccormack@irishheart.ie (01) Rachel Foley, Irish Cancer Society rfoley@irishcancer.ie (01)

23 REFERENCES All Party Parliamentary Group on Smoking and Health (2013) Inquiry into the illicit trade in tobacco products. Branston, R. and Gilmore, A. (2013) The case for Ofsmoke: the potential for price cap regulation of tobacco to raise 500 million per year in the UK. Tobacco Control, doi: /tobaccocontrol Eriksen, M., Mackay, J. and Ross, H. (2012) The Tobacco Atlas 4 th Edition. Georgia: American Cancer Society. Gilmore, A. (2012). Understanding the vector in order to plan effective tobacco control policies: An analysis of contemporary tobacco industry materials. Tobacco Control, 21, doi: /tobaccocontrol Gilmore, A., Branston, R. and Sweanor, D. (2010) The case for OFSMOKE: how tobacco price regulation is needed to promote the health of markets, government revenue and the public. Tobacco Control, doi: /tc Government of Ireland (2013) Healthy Ireland Framework: Dublin: The Stationery Office. HM Revenue & Customs and UK Border Agency (2011) Tackling Tobacco Smuggling building on our success. Available at: e&_pagelabel=pagelibrary_miscellaneousreports&propertytype=document&columns=1&id =HMCE_PROD1_ HM Customs and Revenue (Dec 2009). Measuring Tax Gaps Available at: Howell, F. (2012) The Irish tobacco industry position on price increases on tobacco products. Tobacco Control, 21(5), Kelly, C., Gavin, A., Molcho, M. & Nic Gabhainn, S. (2012). The Irish Health Behaviours in School-aged Children (HBSC) study Dublin: Department of Health Revenue Commissioners (Feb. 2012) Revised Action Plan for the Revenue Commissioners under the Public Service /Croke Park Agreement, Revenue Commissioners, Cigarette Consumption Survey Available at: World Bank. Economics of tobacco toolkit - understand, measure and combat tobacco smuggling. Available at 23

24 Appendix 1: Note on the Irish data on price regulation of the tobacco market 1. Confidence in the data The data has been cautiously designed to underestimate the profitability of the companies (see no. 3 below). Overall, the data is close to that which has been produced for the UK (Branston and Gilmore, 2013). This would be expected as Ireland and the UK are similar markets, with similar tobacco brands, prices and companies in operation. The cost of the regulator is adapted from the cost of current regulatory regimes in Ireland (figure 4 above). This is likely to overestimate the cost of tobacco industry regulation, given the likely simplicity of regulating the very small number of tobacco companies operating in the market. The revenue to the Exchequer would be likely to be higher; especially if the additional companies which make up the final 10% of the market (outside the main three companies) are also included in the regulatory system. This portion of the market is not included in current calculations. 2. Limitations of the data The estimates are based on the data available from the financial reports provided by tobacco manufacturers to the Companies Registration Office in Ireland, or where Irish accounts were not available, are extrapolated from European market accounts. The level of Irish specific data varies from company to company. o PJ Carrolls (British American Tobacco) report the most comprehensive financial data for Ireland. o JTI s accounts do not present revenue after duty (so the level of duty paid had to be estimated). o Imperial do not present accounts for their smaller markets. Instead they report for the whole of Europe, with details of their largest markets (UK, Spain and Germany). During the period JTI reported a big goodwill charge of 30 million. This was excluded from the calculations. 3. Estimates of revenue for Government are likely to be an underestimate The estimates presented in this proposal are likely to considerably underestimate the likely revenue for Government from the introduction of price regulation: The estimate assumes that tobacco companies pay corporation tax on all profits. However, in reality companies are able to claim various deductions from the operating profit used to calculate corporation tax; therefore the tax being paid by tobacco companies is likely to be lower than assumed here. Due to the limited nature of Irish-specific data, the estimates assume that tobacco companies operating in Ireland are only as profitable as European average. This is likely to underestimate profitability in a high tax market such as Ireland. The estimate assumes that all the costs declared by the tobacco companies would be considered legitimate by the regulator. However, it is unlikely that the regulator would accept all costs, such as money spent by firms on marketing activities. The estimates do not include the revenue Government would gain through regulation of the profits made by companies outside of the three main tobacco companies in the market. 24

25 Appendix 2: Illicit Tobacco Market in Ireland Smuggling is not about high price Research from the World Bank (summarised by Merriman, 2002) suggests that the main factors leading to increased smuggling are: The tobacco industry s own role in facilitating smuggling; Unlicensed distribution of cigarettes and other tobacco; Lax anti-smuggling legislation; Weak enforcement of anti-smuggling legislation; Official corruption; The existence of entrenched smuggling networks. The World Bank suggests four general categories of policies to combat smuggling including: Reducing incentives for smuggling by harmonising tax and pricing policies; Reducing the supply of smuggled tobacco by regulating transport and retail sales; Reducing demand for illicit tobacco by influencing consumers not to purchase smuggled products; Increasing the certainty and severity of punishment through enhanced law enforcement and prosecution. The World Bank states (2011a); high tax increases may provide financial incentives for smuggling when enforcement and tax laws are weak, penalties are small and it takes a long time to prosecute smugglers [but] increased smuggling does not automatically follow tax increases; good governance is a more important determinant of smuggling than differences in tax rates. Countries should strengthen tax administration and customs enforcement capacity, particularly where there are high levels of smuggling and/or tax evasion. The final blow to the argument that high price leads to smuggling is that European countries with the lowest price have the highest smuggling rates. For instance, in Latvia, Lithuania and Romania, the smuggling rate is over 30% but the price of a packet of cigarettes is between 0.89 and As with other countries around the world, smuggling does not arise in Ireland because the price of cigarettes is high. A high priced market is certainly an incentive for criminal gangs to try and find channels to smuggle cheaper tobacco into the country and undercut the legal trade, but if they are successful it is because these channels are open to exploitation and because of enforcement issues. Arguing that smuggling occurs because the price of cigarettes is high is disingenuous. 25