Research on Tobacco Taxation - PDF Free Download

Research on Tobacco Taxation Frank J. Chaloupka, University of Illinois at Chicago South Eastern Europe Tobacco Tax Workshop Warsaw, Poland, 10 May 2018

"Sugar, rum, and tobacco, are commodities which are no where necessaries of life, which are become objects of almost universal consumption, and which are therefore extremely proper subjects of taxation. www.tobacconomics.org

Taxes, Prices & Tobacco Use Aggregate demand studies Variety of studies: Pooled cross-sectional time-series studies State, provincial, other subnational data Time-series studies Many countries, states Alternative modeling of addiction No accounting for addiction Myopic addiction Rational addiction 3

Taxes, Prices & Tobacco Use Aggregate demand studies Modeling issues Account for opportunities for tax avoidance and evasion Use of tax paid sales data will overstate elasticity when significant opportunities exist Control for other policies Potential endogeneity of prices, policies Functional form Fixed/random effects models for CSTS data

Sales (million packs) Price per Pack (2014 Dollars) 30000 Cigarette Prices and Cigarette Sales United States, 1970-2014 $6.00 28000 $5.50 26000 $5.00 24000 $4.50 22000 $4.00 20000 $3.50 18000 $3.00 16000 $2.50 14000 $2.00 12000 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 $1.50 Year Sales Price Source: Tax Burden on Tobacco, 2015, and author s calculations

Ţigări per Capita RON pe pachet Prețurile țigărilor ajustate la inflație şi consumul de țigări pe cap de locuitor, România, 2001 2015 2100 Elasticitatea de preț: - 0,58 în 2016 15 1900 13 1700 11 1500 9 1300 7 1100 2001 2003 2005 2007 2009 2011 2013 2015 Consum Per Capita Preţ Real 5

Taxes, Prices & Tobacco Use Individual/household demand studies Variety of data: Cross-sectional data on prevalence, frequency, consumption Repeat cross-sectional data Retrospective data Cohort/longitudinal data Expenditure data Alternative modeling of addiction No accounting for addiction Myopic addiction Rational addiction 7

Compensatory Model of Price Effects No effect Quitting Switch to discount brands Reduction in prevalence Switch to cheaper sources (e.g., Internet, Indian reservations, Freddy s van ) Tax Increase More efficient purchases (cartons vs. packs; greater use of promotions) Cutting back More efficient smoking (e.g., smoking more of the cig, deeper breaths, less time out of mouth) Dissonance-reducing activities (e.g., self-exempting beliefs) Reduction in consumption

Taxes, Prices & Tobacco Use Individual/household demand studies Modeling issues Price data Matched from external sources; less concern about endogeneity From self-report - endogeneity of price a problem Treatment of opportunities for tax avoidance and evasion Use of external price data will understate elasticity when significant opportunities exist Consider impact on multiple behaviors Prevalence, frequency, intensity, initiation, cessation, substitution, brand choice, purchase behavior, tax avoidance. Examine impact in different populations By age, gender, race/ethnicity, SES.. 9

Prevalence Price per Pack (2014 Dollars) 38 37 36 35 34 33 32 31 30 29 28 27 26 25 24 23 22 21 20 19 18 17 Cigarette Prices and Adult Smoking Prevalence United States, 1970-2014 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 Year $6.00 $5.50 $5.00 $4.50 $4.00 $3.50 $3.00 $2.50 $2.00 $1.50 Prevalence Price Source: NHIS, Tax Burden on Tobacco, 2015, and author s calculations Note: green data points for prevalence are interpolated assuming linear trend

200,000 Monthly Quit Line Calls, United States 11/04-11/09 4/1/09 Federal Tax Increase 150,000 1/1/08 WI Tax Increase 100,000 50,000 0 2004 2005 2005 2005 2006 2006 2006 2007 2007 2007 2008 2008 2008 2009 2009 11 2009

% Ever Smokers Who Have Quit Cigarette Prices and Cessation US States & DC, 2009 70 65 y = 0.0283x + 43.083 R² = 0.371 60 55 50 45 350 400 450 500 550 600 650 700 750 800 850 Average price (in cents) Source: BRFSS, Tax Burden on Tobacco, 2010, and author s calculations

Price per Pack (2014 Dollars) Smoking Prevalence, 12th Grade Students $6.50 Cigarette Price and Youth Smoking Prevalence Seniors, United States, 1991-2014 $5.75 33 $5.00 28 $4.25 23 $3.50 18 $2.75 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Year 13 Cigarette Price 12th grade prevalence Source: MTF, Tax Burden on Tobacco, 2015, and author s calculations

Taxes, Prices and Health: US, 1980-2005 www.tobacconomics.org

Prices and Tobacco Use Similar evidence for variety of other tobacco products Generally see evidence of greater elasticity for non-cigarette tobacco products Substitution among similar products, particularly combustible products Some complementarity among combustible and non-combustible products @tobacconomics

Sales Price (Real 2014 Q4 Dollars) Sales Volume (Thousands of Pieces) Reusable ENDS Sale Volume and Price, US 2010-2014 $35.00 3,000 $30.00 2,500 $25.00 2,000 $20.00 1,500 $15.00 $10.00 1,000 $5.00 500 $- Q1 2010 Q2 2010 Q3 2010 Q4 2010 Q1 2011 Q2 2011 Q3 2011 Q4 2011 Q1 2012 Q2 2012 Q3 2012 Q4 2012 Q1 2013 Q2 2013 Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014 - Real Price Volume

E-Cigarette Prices & Sales Stoklosa, Drope & Chaloupka (2016) 2011-2014 monthly Nielsen data on e-cigarette sales in six EU countries (Estonia, Ireland, Latvia, Lithuania, Sweden, and UK) Own price elasticities range from -0.83 to -0.87 E-cigarette sales generally positively associated with cigarette prices, but mostly not statistically significant

Georgia Armenia Macedonia Uzbekistan Malta Ireland Germany Tajikistan Kyrgyzstan Sweden Bulgaria Latvia Austria United Kingdom Slovakia Denmark France Albania Iceland Czechia Finland Czechia Kazakhstan Belgium Norway Netherlands Luxembourg Israel Lithuania Portugal Estonia Moldova San Marino Croatia Italy Belarus Romania Hungary Slovenia Turkey Poland Cyprus Greece Bosnia and Herzegovina Ukraine Spain Russian Federation Serbia Azerbaijan Montenegro Turkmenistan % Change in Relative Income Price 15.00% Cigarette Affordability European Region, 2008-2016 10.00% 5.00% 0.00% -5.00% Notes: Relative income price is the percentage of annual per capita GDP required to buy 100 packs of most popular brand of cigarettes. Source: WHO 2017 @tobacconomics

Relative Income Price, 100 packs Adult Smoking Prevalence Affordability & Tobacco Use Adult Smoking Prevalence, Indonesia, 2001-2014 0.085 36.00 0.075 35.00 34.00 0.065 33.00 0.055 32.00 0.045 31.00 0.035 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Affordability Smoking Prevalence 30.00 www.tobacconomics.org Sources: Euromonitor, EIU, World Bank, and Authors Calculations

Price Elasticity Increasing Elasticity with Increasing Price 0-0.2-0.4-0.6-0.8-1 -1.2-1.4-1.6 State tax-paid sales TUS-CPS Prevalence & Consumption

1961 1963 1965 1967 1969 1971 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Excise tax per pack (constant 2012 Rands) Excise tax revenue (Billions of 2012 Rands) Tobacco Taxes and Revenues 12 South Africa, 1961-2012 12 10 10 8 8 6 6 4 4 2 2 0 0 Excise tax per pack Excise revenue www.tobacconomics.org

Total Funding $Millions (FY10 dollars) Percent Current Smoking State Tobacco Control Program Funding and Youth Smoking Prevalence, United States, 1991-2009 37 $1,000 35 $800 33 31 $600 29 $400 27 25 $200 23 21 $0 1991 1994 1997 2000 2003 2006 2009 Year 19 total state program funding high school prevalence Source: ImpacTeen Project, UIC; YRBS www.tobacconomics.org

Potential Impact $1.50 Increase in cigarette excise tax in Oklahoma would: Raise $183.9 million in new tax revenue Prevent 28,200 kids from taking up smoking Encourage 30,400 adult smokers to quit Prevent 16,700 premature deaths from smoking Reduce smoking-complicated pregnancies and births by 4,900 in first 5 years Save $3.9 million in Medicaid spending in first 5 years Source: CTFK, ACS-CAN & Tobacconomics, 2016

Estimated Future Cigarette Tax Revenues Oklahoma Without Increase With $1.50 Increase $450 $400 $350 $300 $250 $200 $150 $100 $50 $0 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 Est. 2017 Est. 2018 Est. 2019 Est. 2020 Est. 2021 Est. 2022 Source: CTFK, ACS-CAN & Tobacconomics, 2017

Health Impact of Tax Increases: Philippines 50% of price accounted for by uniform tax Uniform specific tax of 28.3 pesos per pack (current maximum) Uniform specific tax of 30 pesos per pack New average cigarette tax 23.8 28.3 30.0 New average cigarette pack price 47.6 52.6 54.5 Cigarette excise tax as a percentage of price 50.0% 53.8% 55.0% 3.20 4.05 4.37 Reduction in number of current smokers (millions) Reduction in number of future smokers (millions) 3.35 4.24 4.57 Total reduction in number of smokers (millions) 6.55 8.29 8.95

Health Impact of Tax Increases: Philippines 50% of price accounted for by uniform tax Uniform specific tax of 28.3 pesos per pack (current maximum) Uniform specific tax of 30 pesos per pack Reduction in Premature Deaths Caused by Smoking 1.12 1.42 1.53 among Current Smokers (Millions) Reduction in Premature Deaths Caused by Smoking 1.67 2.12 2.29 among Future Smokers (Millions) Total Reduction in Premature Deaths Caused by 2.79 3.54 3.82 Smoking (millions) Percentage of premature deaths in current and future 19.3% 24.4% 26.4% smokers averted by higher taxes Additional Excise Tax Revenues (PhP billions) 52.6 53.8 53.3

Price and taxation per pack ($PPP) Figure 5: Excise tax structure: Specific and mixed relying more on the specific component tend to lead to higher prices 5.91 5.46 4.57 4.25 4.08 3.98 2.17 2.70 2.26 2.09 2.02 0.00 Specific excise Mixed system Relying more on specific excise Mixed system (all) Ad valorem excise Mixed system Relying more on ad valorem excise No excise Retail price, PPP Other taxes, PPP Excise tax, PPP Source: WHO 2017 GTCR data; unpublished figure. Notes: Averages are weighted by WHO estimates of number of current cigarette smokers ages 15+ in each country in 2015; Prices are expressed in Purchasing Power Parity (PPP) adjusted dollars or international dollars to account for differences in the purchasing power across countries. Based on prices as of July 2016 for 53 high-income, 100 middle-income and 27 low-income countries with data on prices of most sold brand, excise and other taxes, and PPP conversion factors.

Standard Deviation, Prices of Top 5 Brands Excise Tax Structure and Price Variability 0.60 0.50 0.40 0.30 0.20 0.10 0.00 www.tobacconomics.org Source: Chaloupka, et al., 2014

Oppositional Arguments

Figure 6 - State Cigarette Excise Tax Rates, United States, April 2015 CA OR WA NV AK ID AZ UT Anchorage $3.45 MT WY CO NM HI ND SD NE KS OK TX MN WI IA IL MO AR MS LA IN TN MI AL KY Chicago$ $6.16 OH GA FL PA WV VA SC NC NY VT D.C. ME NJ DE MD NH MA RI CT NYC $5.85 $3.00 per pack $2.00-$2.99 per pack $1.50-$1.99 per pack $1.00-$1.49 per pack 50-99 cents per pack <50 cents per pack 30

@tobacconomics

Tax Avoidance & Evasion Do NOT Eliminate Health Impact of Higher Taxes www.tobacconomics.org Source: Schroth, 2014

Tax Avoidance & Evasion Do NOT Eliminate Revenue Impact of Higher Taxes Cook County Cigarette Tax and Tax Revenues - FY01-FY06 $1.75 $1.55 $1.35 $225,000,000 $205,000,000 $185,000,000 $165,000,000 Tax per Pack $1.15 $0.95 $0.75 $0.55 $0.35 Chicago tax rises from 16 to 48 cents Chicago tax up to 68 cents, 1/1/06 Chicago smoking ban, 1/16/06 $145,000,000 $125,000,000 $105,000,000 $85,000,000 $65,000,000 $45,000,000 Tax Revenues $0.15 2001 2002 2003 2004 2005 2006 Fiscal Year $25,000,000 Tax Revenues 33

Cigarette Excise Tax Revenue Tax Avoidance/Evasion & Tax Revenues $800,000,000 39.0% Cigarette Tax Revenues, Illinois and Neighboring States July 2011 - June 2012 $700,000,000 $600,000,000-1.2% $500,000,000 0.9% $400,000,000 $300,000,000 $200,000,000 0.2% -6.6% $100,000,000-2.6% $0 Illinois Indiana Iowa Kentucky Missouri Wisconsin July 2011 - June 2012 July 2012 - June 2013 34

Illicit trade share as % of legal cigarette consumption Illicit Cigarette Market Share & Cigarette Prices, 2012 50.00% Latvia 45.00% 40.00% Pakistan Bolivia Lithuania Malaysia Dominican Republic y = -0.0076x + 0.1752 R² = 0.0496 35.00% 30.00% Iran PeruEcuador Ireland Brazil South Africa 25.00% Egypt Poland Bulgaria Tunisia Estonia Venezuela 20.00% Nigeria Slovakia UAE Mexico Austria Canada Costa Rica Uruguay Cameroon India Croatia Colombia Bosnia France 15.00% Philippines Kenya Guatemala Saudi Arabia Romania Vietnam Turkey Greece United Kingdom Serbia Georgia Indonesia Portugal Netherlands Sweden 10.00% AlgeriaMoroccoSlovenia UkraineChina Azerbaijan Spain USA GermanySwitzerland Argentina Finland Singapore Norway Uzbekistan 5.00% Hungary Italy Macedonia Chile Australia Israel Begium New Zealand Russia Thailand Denmark Kazakhstan South Korea Japan 0.00% Belarus 0 2 4 6 8 10 12 14 Price USD www.tobacconomics.org Source: NCI/WHO, 2016

Drivers of Illicit Tobacco Corruption Weak tax administration Poor enforcement Presence of informal distribution networks Presence of criminal networks Access to cheaper sources Sources: NRC/IOM 2015; NCI/WHO 2016 www.tobacconomics.org

illicit cigarette trade volume Smuggling and Corruption, 2011 0.5 Latvia 0.45 0.4 0.35 0.3 0.25 0.2 0.15 0.1 0.05 0 Dominican Republic Pakistan Iran Bolivia Ecuador Bulgaria Malaysia Brazil Lithuania Peru South Africa Poland Estonia Mexico Nigeria Venezuela Guatemala Slovakia United Arab Emirates Canada Egypt Croatia 0.16 India Uruguay Philippines Romania Turkey Saudi Arabia Kenya Vietnam Hungary France Austria Sweden Algeria Georgia Costa Rica United Kingdom Morocco Netherlands Uzbekistan AzerbaijanIndonesia Portugal Germany Greece Bosnia China United States Ukraine Argentina Macedonia Slovenia Belgium Singapore Serbia Tunisia Norway Switzerland Finland Colombia Italy Russia Israel Spain Thailand Chile Australia Japan Belarus Kazkhstan South Korea New Zealand Denmark Ireland y = -0.0131x + 0.2028 R² = 0.0815 1 2 3 4 5 6 7 8 9 10 Transparency Index @tobacconomics Source: NCI/WHO, 2016

Figure 12 Estimated Volumes of Cigarettes Consumed in the U.K. Duty paid, illicit, and crossborder shopping, 2000-01 2013-14 @tobacconomics Source: HM Revenue & Customs, 2014

California s Encrypted Cigarette Tax Stamps 2005-2010 2011-present

Cigarrette Stamps Sold (in thousands) Cigarette Tax Stamps Sold projected and actual, California, 2000-2013 1,400,000 1,300,000 1,200,000 1,100,000 1,000,000 2005 Stamp 900,000 2010 Stamp 800,000 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Actual Expected 3% Decline Source: CDC/Chaloupka et al., 2015

Who Pays& Who Benefits Impact of Federal Tax Increase, U.S., 2009 70.0% 67.4% 60.0% 50.0% 46.3% 40.0% 30.0% 29.5% 20.0% 20.7% 24.2% 11.9% 10.0% 0.0% <poverty line 1-2* poverty line >2* poverty line Share of Tax Increase Share of Reduced Deaths

Impact on the Poor Need to consider overall fiscal system Key issue with tobacco taxes is what s done with the revenues generated by the tax Greater public support for tobacco tax increases when revenues are used for tobacco control and/or other health programs Net financial impact on low income households can be positive when taxes are used to support programs targeting the poor Concerns about regressivity offset by use of revenues for programs directed to poor www.tobacconomics.org

Tobacco Taxes and Small Businesses More recent argument that higher taxes will harm convenience stores Huang & Chaloupka (2012) Number of convenience stores, by state, 1997-2009 State cigarette tax rates and smoke-free air policies Economic conditions (income, unemployment, gas prices) Multivariate, fixed effects econometric models Find that higher taxes associated with increase in convenience store business Likely due to spending on other products, overshifting of taxes www.tobacconomics.org

Summary and Potential Impact of Tax Increase

Bridging the Gap University of Michigan Lloyd Johnston, Project Director Institute for Social Research Monitoring the Future (MTF) University of Illinois at Chicago Frank Chaloupka, Project Director Health Policy Center Youth, Education and Society (YES!) ImpacTeen www.bridgingthegapresearch.org

Bridging the Gap - Tobacco State and National Annual collection of state policies and commercial data (UIC) Local and Community State tobacco excise taxes Local youth smoking cessation programs Past and potential future annual community data collection (UIC) School and Organizational Annual YES (ISR-UM) survey Individual and Household Local smokefree air policies Strength of tobacco control infrastructure State level smoke-free air policies Local tobacco taxes Outdoor antismoking advertising State-level limits on youth access to tobacco and PPU policies School tobacco use prevention curriculum Availability of tobacco products Annual MTF surveys (ISR-UM) Allocations to state tobacco control programs Self-reported tobacco use, risk perceptions, attitudes towards tobacco, purchase experiences, and perceived availability School-based youth smoking cessation programs Local youth tobacco prevention programs School policies limiting tobacco use School programs to prevent youth tobacco use Outdoor tobacco product advertising State tobacco control program activities Local policies limiting youth purchase, use or possession of tobacco products Point-of-sale tobacco product marketing State tobacco control program expenditures Market-level anti-smoking advertising 46

www/tobacconomics.org @tobacconomics 48

US Surgeon General s Reports 49

The World Bank WHO 50

IARC Cancer Control Handbooks 51

WHO Framework Convention on Tobacco Control 52

Illicit Tobacco Trade 53

Bloomberg Initiative - UIC & Tobacconomics

Bloomberg Initiative Ongoing effort to support implementation of evidence based tobacco control measures in highest tobacco using low- and middle-income countries Partnership among multiple organizations: World Health Organization US Centers for Disease Control and Prevention and CDC Foundation Campaign for Tobacco-Free Kids International Union Against Tuberculosis and Lung Disease Johns Hopkins University Bloomberg School of Public Health Vital Strategies University of Illinois at Chicago Successful efforts on many policies, but little impact on tobacco taxes @tobacconomics

www.tobacconomics.org Source: WHO, 2017

Bloomberg Initiative UIC Engage with think tanks in priority countries/regions to develop local evidence for tobacco tax reform and tax increases Indonesia, Vietnam, Latin American, Bangladesh, Pakistan, South-Eastern Europe Engagement with high level decision makers to build technical capacity and political support for tobacco tax policy Develop/disseminate resources (policy briefs, white papers, etc.) on tobacco taxation to build knowledge and support for tobacco tax policy @tobacconomics

Evidence Gaps Regional/country specific evidence on economic impact of tobacco taxation Impact on demand for tobacco products Impact on tax revenues Impact on employment Impact on development www.tobacconomics.org

Evidence Gaps Regional/country specific evidence on impact of tobacco taxes on poverty Progressivity/regressivity of tobacco tax increases Impact of tobacco use on poverty Effectiveness of tobacco taxation in reducing disparities in tobacco use and its health/economic consequences

Evidence Gaps Regional/country specific evidence on illicit trade Extent of illicit trade Changes in illicit trade in response to tobacco tax increases Determinants of illicit trade Impact of measures to control illicit trade www.tobacconomics.org

For more information: Tobacconomics http://www.tobacconomics.org @tobacconomics fjc@uic.edu