Effective Tobacco Tax Reform: Evidence from China Rose Zheng Director, WHO Collaborating Center for Tobacco and Economics Professor, University of International Business and Economics (UIBE), Beijing, China Taipei, Taiwan 4-5th Sep. 2017
1. Tobacco industry and cigarette market in China China is the largest producer and consumer of tobacco products in the world, where thirty percent of the world s cigarettes are consumed. Figure 1: Cigarette consumption in China 2017/9/20
Cigarette production and consumption(2000-2016) Figure 2 Cigarette production volume (2000-2016) Figure 3 Cigarette sales volume (2000-2016) 2017/9/20 3
In 2016, CNTC produces 89 cigarette family brands which provide 870 different domestic produced cigarettes with the price varying between 2.5RMB (0.4 USD)/ Pack to 100RMB(15.4USD) /Pack. ClassI: Baisha (Hetianxia) 160RMB/pack ClassII:Baisha ( Tezhijingping) (9RMB/pack) ClassIII: Baisha ( Yingchunxiang) (7RMB/pack) ClassIV: Baisha (Ruan) (5RMB/pack)
State tobacco monopoly system STMA (CNTC) Provincial Tobacco Monopoly Bureau (Company) (31) Provincial Tobacco Industrial Corporation Local Municipal Tobacco Monopoly Bureau (Company)(200) Cigarette Factory (30) Leaf Re-drying Factory China tobacco industry is controlled by a government run monopoly STMA. STMA also functions as the state owned company CNTC, which operates almost entirely in China with little competition from other companies. Tobacco Monopoly Bureau at County Level (Company)(1800) 2017/9/20 5
2. China Tobacco Tax Structure Table 1 China tobacco tax structure Type of Tax Tax level tax base Tax Rate Revenue Beneficiary Tobacco leaf tax agriculture value of tobacco 20% 100% local government leaf Value-added tax at cigarette manufacture (VAT) Produce, wholesale and retail added value at each level 17% 75% central government 25% local government (50%-50% since 2016) Specific excise tax (* Tax increase in 2015) produce wholesale 0.06 RMB/pack 0.10RMB/pack * Ad valorem excise tax (* Tax increase in 2015) produce, wholesale allocation price(without VAT) 100% central government Urban maintenance and construction tax and extra charges of educational fee ( C&E Tax) 70 RMB per carton 56% < 70 RMB per carton 36% wholesale 5% 11%* produce, wholesale, tax amount of VAT 12% in average retail and excise tax 100% local government 2017/9/20 6
3. Cigarette Price (weighted average price), 2001-2016 Yuan/Pack 14.00 12.00 10.00 8.00 6.00 4.00 2.00-12.81 13.09 11.61 10.27 10.80 9.33 5.63 6.25 6.43 6.14 6.71 7.27 5.04 4.12 4.32 4.61 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Yuan/Pack 10.00 9.03 9.12 9.00 8.36 7.74 7.94 8.00 7.22 7.00 5.80 5.69 5.65 5.30 5.92 6.00 4.12 4.36 4.59 4.84 5.13 5.00 4.00 3.00 2.00 1.00 0.00 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Figure 4 Cigarette nominal weighted average retail price (2001-2016) Figure 5 Cigarette real weighted average retail price (2001-2016) 2017/9/20 7
4. Cigarette affordability 250% 1400 200% 150% 1200 1000 800 100% 50% 600 400 200 0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 0 Cigarette consumption Annual growth rate of GDP Annual growth rate of per capita disposable income nationwide Fixed base growth rate of nominal weighted average price Fixed base growth rate of real weighted average price Figure 6 Cigarette consumption, prices, GDP and per capita income growths 2017/9/20 8
Cigarette affordability trends presented by RIP method 12.00% 10.00% 10.15% 9.56% 9.23% 8.93% 8.84% 8.67% 8.00% 6.00% 7.51% 6.18% 6.12% 5.81% 6.40% 6.16% 5.90% 5.76% 5.83% 5.50% 4.00% 2.00% 5.07% 4.85% 4.58% 4.09% 4.30% 3.90% 4.83% 5.25% 4.85% 3.38% 3.58% 3.16% 2.65% 2.38% 2.63% 2.43% 0.00% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 RIP average RIP cheap brands Figure 7 RIP average and RIP cheap brands 9
5. Tax as % of retail price (Tax incidence) Figure 8 Tax as % of retail price (2001-2016) Figure 9 Excise as % of retail price (2001-2016) 2017/9/20 10
80.0% 70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% 50% Taxes as % of retail price of the most sold cigarette brand 73.1% 64.4% 62.0% 53.4% 55.4% 74.3% 66.2% 60.4% 41.6% Figure 10 Tax as % of retail price Compared with Asian countries Data source: WHO Tobacco control country profiles http://www.who.int/tobacco/surveillance/policy/country_profile/en/ 2017/9/20 11
6. Cigarette consumption - 2.4% -5.6% Figure 11 Cigarette sales volume (2000-2016) 2017/9/20 12
Cigarette consumption keeps decreasing over time Table 2 Impact on consumption Simulated 8 months later 12 months later 19 months later price elasticity -0.4-0.23 -.0.45-0.52 Retail price 2014 RMB/pack 11.61 11.61 11.61 11.61 Retail price 2015 RMB/pack 12.81 12.81 12.81 12.81 (price) RMB/pack 1.19 1.19 1.19 1.19 % (price) % 10.29% 10.29% 10.29% 10.29% % (sales volume) % -4.11% -2.35% -4.61% -5.6% 2017/9/20 13
Government s revenue---revenue generated from tobacco industry as % of government s total fiscal revenue (2000-2016) Figure 12 Tobacco tax and tobacco profit contribution as % of fiscal revenue (2000-2016) 2017/9/20 14
7. Impact of 2015 tax adjustment on public health Within 12 months followed by the 2015 tax increase, the total number of smokers would decrease by about 5 million, the expected smoking attributable deaths would decrease by about 1 million. Real retail price adapted by inflation Table 4 Impact on public health 2014 2015 % /Pack 11.61 12.43 0.82 7.07% Adult smokers Million 318.92 313.84-5.08-1.59% Smoking rate (all) % adults 28.0% 27.5% -0.44% -1.59% Smoking rate % (age 15-19) 8.60% 8.46% -0.14% -1.59% Future smokers Million 1.40 1.38-0.02-1.59% Total smokers Million 320.32 315.22-5.10-1.59% Expected SADs Million 106.77 105.64-1.13-1.06%
Change (RMB/Pack) 8. Does the tobacco industry interfere tax increase by pricing strategy? YES! Wholesale level: There was absorption for each category 2.80 2.55 2.30 wholesale price Tax at wholesale Net Effect Net Effect' 2.05 1.80 1.55 1.30 1.05 0.80 0.55 0.30 0.05-0.20-0.45-0.70 Class I (A) Class I (B) Class II Class III Class IV Class V Total in average Over shift Absorption Figure 14 Net effect at wholesale level 2017/9/20 16
Consumer level: Over shifting for most price categories, absorption for middle price category 3.5 3.0 Retail price Tax at retail Absorbtion/Overshift 2.5 2.0 1.5 1.0 0.5 0.0-0.5-1.0-1.5 Class I (A) Class I (B) Class II Class III Class IV Class V Total in average Figure 15 Net price effect for consumers Over shift Absorption 2017/9/20 17
9. Conclusions (1) Raising tobacco tax and price proves to be a win-win strategy (2) The effectiveness of tobacco tax increase is enhanced when implemented as part of a comprehensive tobacco control strategy. - Beijing (3) Tax increases should reduce the affordability of tobacco products.- Shenzhen Figure 16 Cigarette sales volume before and after smoking free legislation in 4 cities 2017/9/20 18
10. Challenges (1) Cigarette price is still very cheap and becomes more affordable over years, the tax as % of retail price still very low compared to WHO recommended standard (2) The state monopoly STMA and company CNTC have super pricing power and profitability to interfere with tobacco tax policy (3) The complicated tobacco excise structure provides the industry incentives and possibilities for price manipulation. 2017/9/20 19
11. Next steps (1) Sustained tax and price increase, particularly to optimize excise structure by: Lean more on specific tax Unify two tiered ad valorem tax rates into an unified rate for all price categories (2) To introduce automatic adjustments mechanism to address inflation and affordability (3) Earmark tobacco tax to support public health and SDGs (4) Fundamental research such as employment /the low income/smoking burden help to provide supportive evidence for policy makers. 2017/9/20 20
THANK YOU! Contacts: rosezheng@uibe.edu.cn zr3377@gamil.com 2017/9/20 21