The application of an excise tax on tobacco is considered to be the most effective mechanism by the World Health Organisation3 in achieving the health objectives in reducing tobacco consumption, thereby improving the overall health of the general population. Seen by some as a punitive measure, tobacco taxation has come under scrutiny, mainly from organisations such as the Tobacco Manufacturer’s Association4 and consumer representation groups such as Forest5 - while proponents of taxation, such as Action on Smoking & Health (ASH) suggest that the benefits outweigh detrimental effects – such as consumption rate declines along with a benefit to the national economy.
The WHO Framework Convention on Tobacco Control (FCTC) Article 66 - recently amended following the Conference of the Parties 6th session – stipulates that tobacco use creates a “significant economic burden on society at large.” with “Higher direct health costs associated with tobacco-related disease”. Article 66outlines six key guiding principles that underpin its implementation:
All parts of the guidelines respect the sovereign right of the Parties to determine and establish their taxation policies, as set out in Article 6.2 of the WHO FCTC
Effective tobacco taxes significantly reduce tobacco consumption and prevalence
Effective tobacco taxes are an important source of revenue
Tobacco taxes are economically efficient and reduce health inequalities
Tobacco tax systems & administration should be efficient and effective
Tobacco tax policies should be protected from vested interests
When does a tobacco tax cease to be effective? In a broad sense, any punitive taxation becomes more ineffective as the rate of taxation increases. Referred to as the Laffer Curve7 one implication of the curve is that increasing taxation rate beyond a certain point will be counter-productive for raising further revenue, which would cast doubt on the key guiding principle outlined in Article 6 section 1.3.
Data provided by UK HM Revenue & Customs8 suggests that taxation has proved to be a useful tool in decreasing tobacco use while providing – initially a growing, now steady stream of income. HMRC receipts totalling ~£5 – 8 billion for cigarettes (excluding VAT) between 1992 (earliest recorded receipts available in the data) and 2015. Receipts for cigarettes show a declining trend since 2011/12 and current forecasts suggests approximately £8 billion for 2016. Total for all tobacco (including cigars and handrolled) has levelled at around £9.5 billion between 2011-12 and 2014-15.
Data from the Tobacco Manufacturers Association9 indicates the proportion of taxation applied.
Cigarette consumption comprises both UK Duty Paid cigarettes and Non-UK Duty Paid – which includes cigarettes that are smuggled, counterfeit, crossborder shopped and duty-free.
The estimate of the non-UK duty paid (NUKDP) cigarette consumption, having peaked in 2000, has dropped but still indicates that many smokers are sourcing their cigarettes from elsewhere to avoid paying UK prices. This is somewhat reflected in the figures from HM Revenue & Customs Tobacco tax gap estimates10 that shows a decline in duty paid cigarette sales between 2010/11 and 2014/15 (from 45.7 billion sticks to 32.7 billion sticks). The Office for National Statistics suggests that the smoking prevalence (aged 16 and over) has remained largely unchanged since 2010, yet duty-paid sales of cigarettes has declined.
As the smoking prevalence rate has remained relatively unchanged and sales of UKDP tobacco cigarettes has declined, this would therefore suggest that – for the UK at least – the rate of excise duty on cigarettes has started to become less effective as a preventative measure. In a situation where there may be limits to how much tax can be raised on tobacco, and where tobacco sales are falling and hence potential revenue from tobacco tax may fall, will governments now turn to taxing other nicotine products?
E-cigarettes and tax
With the taxation on cigarettes, and tobacco in general there are concerns that the EU in particular – through the Fiscalis Project11 - may impose taxation on new nicotine products, as in a recent announcement on the fact that e-cigarettes fall outside of tobacco tax provisions 12:
“...some of the products, such as e-cigarettes, defined in Directive 2014/40/EU on the approximation of the laws, regulations and administrative provisions of the Member States concerning the manufacture, presentation and sale of tobacco and related products, do not fall into any of the categories of products subject to excise duty under Directive 2011/64/EU”.
In the same draft conclusions document, the European Council continues that the anomaly:
“Underscores that, in this context, a solution for excise taxation of e-cigarettes, heated tobacco, other novel tobacco products and, where relevant, of products related to tobacco products, needs to be practical and foresighted, and strike the right balance between the revenue, expenses of tax administration and public health objectives.”
Some confusion surrounds this statement, with the UK government distancing itself from it. In an answer to a Parliamentary Question on 8th March 2016, Damian Hinds, Exchequer Secretary to the Treasury, responded that:
"There are no plans to mandate EU-level rules on taxing e-cigarettes and no legislative proposals have been submitted. As the EU Commission clarified last week, all that has happened is that the Commission has been asked to further analyse the issue of e-cigarettes as part of a wider review of the Tobacco Duties Directive (2011/64/EU). Any proposal would need the unanimous support of all 28 EU governments for it to be approved."
Furthermore, a debate in the UK House of Lords13 touched on the subject of taxation in the context of how taxes have failed to achieve the results in terms of a continual decline in tobacco prevalence.
It is though, in a European context14, very much a matter of keeping a watchful eye on these discussions. A duty imposed on the sale of new nicotine products would diminish the benefits of the products as the mantra “to lower consumption, tax is needed to dissuade demand” would no doubt apply. That tactic would likely have disastrous consequences for public health.
1 EU Observer: https://euobserver.com/tickers/132598
3 World Health Organisation – Tobacco Free Initiative: http://www.who.int/tobacco/economics/taxation/en/
4 Tobacco Manufacturer’s Association – Taxation: http://www.the-tma.org.uk/policy-legislation/taxation/
5 Forest: http://www.forestonline.org/
6 WHO FCTC Treaty Instruments – Article 6, Price & Tax Measures to reduce the demand for tobacco: http://www.who.int/fctc/treaty_instruments/Guidelines_Article_6_English.pdf?ua=1
7 Laffer Curve: https://en.wikipedia.org/wiki/Laffer_curve
8 Data from HMRC Statistical Bulletins: https://www.uktradeinfo.com/Statistics/StatisticalBulletins/Pages/BulletinArchive.aspx?viewname=Tobacco+Duties+Archive
9 Tobacco Manufacturer’s Association – UK cigarette prices: http://www.the-tma.org.uk/tma-publications-research/facts-figures/uk-cigarette-prices/
10 HMRC Tobacco Tax gap estimates 2014-15: https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/469995/HMRC-tobacco-tax-gap-estimates-2015.pdf
11 European Commission – Taxation & Customs Union: http://ec.europa.eu/taxation_customs/taxation/tax_cooperation/fiscalis_programme/fiscalis_2020/index_en.htm
12 Council of the European Union – Draft Conclusions: http://data.consilium.europa.eu/doc/document/ST-6420-2016-INIT/en/pdf
13 Smoking: E-Cigarettes, Hansard, House of Lords Debate: http://www.publications.parliament.uk/pa/ld201415/ldhansrd/text/150203-0001.htm#st_18
14 EU Observer: https://euobserver.com/science/132510