The Economics of Smoking: Dispelling the Myths

The Economics of Smoking: Dispelling the Myths Frank J. Chaloupka, University of Illinois at Chicago Summit on Creation of a Tobacco Endgame for Canada Kingston, Ontario, Canada, 30 September 1 October, 2016 1

@tobacconomics

Tax, Price & Tobacco Use

Tobacco Taxation We [] have a package of six policy measures, known as MPOWER, that can help countries implement the provisions in the Convention. All six measures have a proven ability to reduce tobacco use in any resource setting. But tobacco taxes are by far the most effective. Director General Dr. Margaret Chan, WHO, 2008 @tobacconomics

27,000 Cigarette Price & Consumption Hungary, 1990-2011, Inflation Adjusted 700 25,000 600 23,000 500 Million Sticks 21,000 19,000 400 300 Price, 2011 Forints/Pack 17,000 200 15,000 100 13,000 0 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Consumption, Million Sticks Price, 2011 Forints Linear (Consumption, Million Sticks) Linear (Price, 2011 Forints) www.tobacconomics.org Sources: EIU, ERC, and World Bank

Adult Prevalence & Price, Brazil 16 Adult Smoking Prevalence and Cigarette Price Brazil, Inflation Adjusted, 2006-2013 16 5.4 15 Adult Smoking Prevaleence 15 14 14 13 13 12 4.9 4.4 3.9 Price per Pack, 2013 BRL 12 11 2006 2007 2008 2009 2010 2011 2012 2013 3.4 Sales, Million Sticks Price per Pack, 2013 BRL www.tobacconomics.org Sources: Ministry of Health, Brazil; EIU; World Bank

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 2009 @tobacconomics 7

Cigarette Prices and Cessation US States & DC, 2009 70 % Ever Smokers Who Have Quit 65 60 55 50 y = 0.0283x + 43.083 R² = 0.37104 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 @tobacconomics

Cigarette Price & Youth Smoking Prevalence High School Seniors, United States, 1991-2013 $6.50 36 Price per Pack (1/14 Dollars) $5.75 $5.00 $4.25 $3.50 31 26 21 Smoking Prevalence, 12th Grade Students $2.75 1991 1994 1997 2000 2003 2006 2009 2012 Cigarette Price 12th grade prevalence 16 Sources: Tax Burden on Tobacco, BLS, MTF, and author s calculations www.tobacconomics.org

Price, Consumption & Lung Cancer, France 6.0 # cigarettes/adult/day Number/adult/day and death rates 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 Lung cancer death rates per 100,000 (divided by four): men age 35-44 Relative price 300 250 200 150 100 Price (% relative to 1980) 1.0 1980 1985 1990 1995 2000 2005 2010 50 Year www.tobacconomics.org Sources: Jha & Hill, 2012

Increasing Elasticity with Increasing Price 0 $2.00 $2.50 $3.00 $3.50 $4.00 $4.50 $5.00 $5.50 $6.00 $6.50 $7.00 $7.50 $8.00 $8.50 $9.00 $9.50 $10.00-0.2-0.4 Price Elasticity -0.6-0.8-1 -1.2-1.4-1.6 State tax-paid sales TUS-CPS Prevalence & Consumption Tauras, et al., 2016 Pesko, et al., 2016 @tobacconomics

Disposable ENDS Sales Volume and Price, US 2010-2014 $17.00 10,000 $16.00 Sales Prices (Real 2014 Q4 Dollars) $15.00 $14.00 $13.00 $12.00 $11.00 $10.00 8,000 6,000 4,000 2,000 Sales Volume (Thousand of Pieces) $9.00 $8.00 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 @tobacconomics

Prices and Tobacco Use Similar evidence for variety of other tobacco products and for electronic nicotine delivery systems Generally see evidence of substitution between similar products (e.g. cigarettes, little cigars, roll-your-own Some evidence of complementarity between combustibles and noncombustibles @tobacconomics

South Africa - Taxes, Prices, and Tax 25 Revenues, 1970-2012, Inflation Adjusted 9000 20 8000 7000 Rand per Pack 15 10 6000 5000 4000 3000 Tax Revenues, Million Rand 5 2000 1000 0 1970 1975 1980 1985 1990 1995 2000 2005 2010 Industry Price Excise Tax VAT Excise Tax Revenues 0 @tobacconomics

Turkey Source: Tobacco-Free Kids, 2014

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

Share of the World Population Covered by Selected Tobacco Control Policies, 2014 Note: The tobacco control policies depicted here correspond to the highest level of achievement at the national level, for the definitions of these highest categories, refer to the WHO Report on the Global Tobacco Epidemic 2015: Raising Taxes on Tobacco.Source: World Health Organization. 2015

Economic Impact of Tobacco Use

Smoking-Attributable Spending as Share of Total Health Expenditures, 2012, by Income Group and WHO Region @tobacconomics Source: Goodchild, et al., forthcoming

Economic Costs of Smoking-Attributable Diseases as Share of GDP, 2012, by Income Group and WHO Region @tobacconomics Source: Goodchild, et al., forthcoming

Economic Costs of Tobacco Canada doing better than much of the world Tobacco-attributable health care costs about 3.1% of total health expenditures Economic costs of tobacco about 0.94% of GDP @tobacconomics

Economic Impact of Tobacco Control - Dispelling the Myths

Oppositional Arguments - Impact on Jobs, Business

Impact on Jobs March 9, 2009 Vanguard, AllAfrica.com Nigeria Anti-Tobacco Bill 400,000 Jobs on the Line if passed into law, The National Tobacco Bill which is currently on the floor of the National Assembly will lead to at least 400,000 Nigerians being thrown into the unemployment market. This was the view expressed by the Chairman, Senate Committee on Industries, Senator Kamorudeen Adedbu, while speaking with reporters recently in Iselyn, Oyo State, while speaking at the 2008 Farmers Productivity Day Award Ceremony.

Tobacco Control & Employment Tobacco control will lead to decreased consumption of tobacco products Small loss of jobs in tobacco sector Money not spent on tobacco products will be spent on other goods and services Gains in jobs in other sectors Increase in tobacco tax revenues will be spent by government Additional job gains in other sectors Net increase in jobs in most countries www.tobacconomics.org

Tobacco Control & Business Impact of smoke-free policies on hospitality sector No or small positive impact of smoke-free policies on bar and restaurant business (IARC Handbook 13) Impact of tobacco control policies on convenience stores (Huang and Chaloupka 2012) More business activity where cigarette taxes are higher No impact of smoke-free policies Overshifting and replacement purchase www.tobacconomics.org

Oppositional Arguments - Impact on the Poor

Impact on the Poor July 23, 2010 San Francisco Examiner Democrats are relying more heavily in their midterm 2010 election message that Republicans care nothing about the poor. Conveniently absent from this analysis is Republican opposition to President Barack Obama s cigarette tax increase While higher cigarette taxes do discourage smoking, they are highly regressive. Analyzing a slightly less severe proposal in 2007, the Tax Foundation noted that no other tax hurts the poor more than the cigarette tax. Peyton R. Miller, special to the Examiner. @tobacconomics

Tobacco & Poverty Family falls into poverty Foregone income 3: Breadwinner dies prematurely Poor men smoke Foregone income 2: Treatment cost & Lost working days & income Cycle of tobacco and poverty Breadwinner gets sick due to tobacco use Foregone income 1: More money spent Less money spent on tobacco: on Education, nutrition etc High opportunity cost Source: Yurekli, 2007 @tobacconomics

Who Pays & Who Benefits Turkey - 25% Tax Increase 9% 8.5% 9.7% 4% -1% -6% -2.2% -11% -16% -21% -20.4% -18.5% -26% -31% -36% -35.3% Change in Consumption Change in Taxes Paid Source: Adapted from Önder & Yürekli, 2014 @tobacconomics

Impact of Tobacco Taxes on the Poor Also depends on use of new tax revenues: 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

Oppositional Arguments - Illicit Trade

Impact on Illicit Trade February 11, 2014 Postmedia News Federal budget unveils major tax hike for smokers that will see jump in cost of cigarettes, tobacco and cigars Gregory Thomas, federal director of the Canadian Taxpayers Federation, said the government could have a difficult time trying to collect the more than $3 billion it s expecting in additional revenues over the next five years. The tobacco tax hike will dramatically increase the amount of contraband tobacco in Canada, he said, yet the government is only investing a relatively small amount in combatting the illegal tobacco market. Let s see them try and collect it [the expected additional revenue]. They re demanding a whole lot of conscience on the part of smokers, Thomas said. We all know that tobacco smuggling activity on our borders is a growing problem. @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 35

Illicit Cigarette Market Share & Cigarette Prices, 2012 50.00% Latvia Illicit trade share as % of legal cigarette consumption 45.00% 40.00% 35.00% 30.00% Pakistan Bolivia Iran Lithuania PeruEcuador Brazil Malaysia Dominican Republic South Africa Egypt Poland 25.00% 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 Ireland y = -0.0076x + 0.1752 R² = 0.04959 Sources: Euromonitor, WHO

Determinants of Illicit Tobacco Corruption Weak tax administration Poor enforcement Presence of informal distribution networks Presence of criminal networks Access to cheaper sources www.tobacconomics.org

Smuggling and Corruption, 2011 0.5 Latvia 0.45 illicit cigarette trade volume 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 Netherlands Uzbekistan Morocco AzerbaijanIndonesia Portugal Germany Bosnia Greece China United States Ukraine Argentina Macedonia Slovenia Belgium Singapore Serbia Tunisia Norway Switzerland Finland Russia Colombia Italy Israel Spain Thailand Chile Australia South Korea Japan Belarus Kazkhstan New Zealand Denmark Ireland y = -0.0131x + 0.2028 R² = 0.08146 1 2 3 4 5 6 7 8 9 10 Transparency Index www.tobacconomics.org Sources: Euromonitor, Transparency International

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

Combating Illicit Tobacco Trade Illicit trade protocol to the WHO FCTC Adopted November 2012; currently in process of being signed/ratified; provisions calling for: Strong tax administration Prominent, high-tech tax stamps and other pack markings Licensing of manufacturers, exporters, distributors, retailers Export bonds Unique identification codes on packages Better enforcement Increased resources Focus on large scale smuggling Swift, severe penalties Multilateral/intersectoral cooperation www.tobacconomics.org

Cost-Effectiveness of Tobacco Control

Key Tobacco Control Policies Cost-Effectiveness @tobacconomics

ENDS Taxation

Rationale for ENDS Taxation Improve Public Health Encourage switching from combusted to potentially less harmful products Prevent youth initiation Raise Revenue Replacement revenue source as revenues from cigarettes and other tobacco products fall

ENDS Taxation in the US Minnesota, North Carolina, Louisiana and DC currently tax ENDS 95% of wholesale price in MN; 67% in DC; 40% in PA 5 cents per ml in NC, LA; 7.5 cents/ml in WV; 20 cents/ml in KS Local ENDS taxes: Petersburg AK (45% of wholesale price); Mat Su Borough, AK (55% of wholesale price) Chicago (80 cents per unit, plus 55 cents per ML) Many others have proposed or are considering @tobacconomics

ENDS Taxation Globally Togo: 45% of retail price Republic of Korea: 1799 won/ml (US$1.65/ml) Italy: Mid-2013: 58.5% of retail price Late-2014: 50% of retail price Early 2015: 3.73 per 10 mls May 2015: eliminated Portugal: 0.60/ml Others have proposed or are considering European Union proposal to tax like cigarettes @tobacconomics

Options for ENDS Taxation Low tax relative to cigarette, OTP taxes Little impact in reducing use, uptake Encourages dual use Maximize incentives to switch from combustibles to ENDS Minimal new revenue ENDS tax equivalent to cigarette tax Significant impact on use, uptake Little incentive to switch from combustibles to ENDS Modest new revenue www.tobacconomics.org

Options for ENDS Taxation Significant tax on ENDS coupled with increased taxes on cigarettes and other combustible tobacco products Maintain or increase relative price of combustibles Maximize switching while discouraging initiation and dual use Generates significant new revenues Relatively low cost, legal substitute could help address concerns about illicit trade

Summary

Summary Large, regular tobacco tax increases are single a key component of an Endgame strategy And generate considerable new revenue Tobacco Endgame is good for the economy Economic arguments continue to be significant obstacle False or greatly overstated Tobacco control is highly cost-effective Differential taxation could be a key part of Endgame strategy

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