Maybe Tobacco Taxes Aren’t So Special After All

This week, CGD hosted a roundtable discussion focused on the political economy of raising tobacco taxes in low- and middle-income countries, with special attention to successes (like the Philippines) and failures (like Vietnam). In the past, I’ve highlighted how tobacco taxes are unique in the world of public policy, going so far as to argue that tobacco taxes are the single best health policy in the world. And while I still think tobacco taxes are special, the roundtable pointed out important ways in which tobacco taxes are not all that different from other taxes.

First, let’s not forget the context: the tobacco epidemic is large and growing. Smoking cigarettes still causes more deaths in low- and middle-income countries than any single infectious disease (4.3 million per year compared to 3.7 million per year for TB, malaria and AIDS combined). Unless tobacco control measures improve, 800 million people in developing countries will die from smoking-related illnesses in this century. And tobacco control measures are incredibly cost-effective: tobacco taxes discourage smoking while raising revenues. These two features—the high disease burden and proven cost-effectiveness—do indeed make tobacco taxes very, very special.

But aside from that, tobacco taxes are still a lot like other taxes. For example, Frank Chaloupka (professor of economics at the University of Illinois at Chicago, co-author of “Economics of Tobacco Control,” and key player at Tobacconomics) pointed out at the roundtable that tobacco taxes are often higher in countries with less illicit trade and smuggling. This may seem counterintuitive because the incentives to smuggle are certainly higher in places with higher taxes. Nevertheless, this is not really a paradox when more effective governments are simultaneously more likely to raise taxes and more capable of enforcing laws. Like other taxes, raising revenues requires well-designed tax structures and effective enforcement.

Another similarity is that simpler taxes are easier to administer. Kai Kaiser, senior economist at the World Bank and co-author of Sin Tax Reform in the Philippines, noted during his presentation that the Philippines succeeded in enacting tobacco tax increases by framing the law as a tax reform rather than a tax increase. It did this by eliminating tax provisions that favored specific companies and by replacing a complex multi-tiered tobacco tax with a single (and high) uniform rate.

Kaiser also described how the Philippines’ Sin Tax Law was driven in part by pressures to respond to a World Trade Organization ruling against its system of alcohol taxes; and in part by pressures from the bond markets which were looking for evidence that the Philippines could reform its complex and ineffective revenue system. By incorporating tobacco taxes in this broader framework, the government was able to generate a “win-win” strategy which helped form a successful coalition between health advocates, tax specialists, and trade officials.

Raising and effectively implementing tobacco taxes requires stronger tax collection institutions, which is an integral part of the global domestic resource mobilization agenda. In the process of reforming and increasing tobacco taxes, countries learn “on-the-job” about control mechanisms like tracing and tracking, supervision, and surveillance. These same administrative tools can then be applied to improving the effectiveness of other excise taxes and, sometimes, even other forms of tax collection.

So tobacco taxes are unique in their impact on health but still share a lot in common with other taxes. Even without the health benefits, tobacco taxes are part of the fiscal revenue agenda. Raising, simplifying, and improving the administration of tobacco taxes would fulfill international commitments (Framework Convention on Tobacco Control Article 6), increase domestic revenues (Addis Ababa Action Agenda paragraph 32), and modernize public administration (at the World Bank and the IMF). It is time for the major international financial institutions to give higher level attention to tobacco taxes as an important part of both the domestic revenue agenda and the health agenda.