Tobacco control economics

Background

WHO/J. Holmes

Tobacco use is the leading preventable cause of death. Each year, it kills more than 5 million people. It is on track to kill more than 8 million by 2030, by which time approximately 80% of the deaths would occur in low- and middle-income countries.

The costs of tobacco use are measured in its enormous toll of disease, suffering and family distress. Economies also suffer from increased health-care costs and decreased productivity.

Today, we have a greater understanding of how to reduce the economic and health costs of this deadly epidemic. Such demand reduction policies as higher taxes and comprehensive bans on tobacco marketing and smoking in public places are among the principal cost-effective means to reduce tobacco use and its consequent harms to health and economic development.

"Health, and not economic arguments, are the reason for controlling tobacco, but economic arguments are raised as an obstacle to tobacco control policies," said former WHO Director-General Dr Gro Harlem Brundtland. Indeed, governments have raised concerns that tobacco control measures would have negative economic consequences, specifically by way of: (i) lower tax revenues via reduced demand and increased illicit activities; (ii) decreasing employment in the manufacturing, farming and retail sectors; and (iii) impoverishing smokers with higher prices. Existing evidence from developed countries and emerging data from developing countries show that the economic fears deterring policymakers from taking action are largely unfounded (World Bank, 1999). Despite those fears, approximately 170 countries have shown strong commitment to tobacco control by becoming Parties to the WHO Framework Convention for Tobacco Control and implementing its provisions.

Taxes, revenues and illicit trade

Challenges in implementing effective tobacco control measures still exist and need to be addressed immediately. For example, while tobacco taxes are known to be the most cost-effective tobacco control measure, countries encounter several challenges when a tax increase is at stake. Many countries have a complicated tax structure or a weak tax administration. Consequently, most are unable to monitor and analyze the market in order to increase their taxes, ensure compliance and achieve the main objectives of tax increases: sustainable higher revenues and higher tobacco prices (WHO technical manual on tobacco tax administration, 2010). Furthermore, it is difficult to document the level of illicit trade and production, especially without having monitored the market and conducting appropriate analyses. As a result, without analytical evidence, the arguments for tax-induced illicit trade are often used against tax increase proposals. Increasing taxes should not be concentrated only on cigarettes, the most commonly used tobacco product. All forms of tobacco should be taxed. New tobacco products are evolving in different shapes and types, as well as tobacco products that have existed for many years in some countries (e.g. India), thus bringing further challenges to tax administrations (WHO technical manual on tobacco tax administration, 2010).

Although tobacco and tobacco products generate tax revenues from domestic consumption and trade, the revenues from import duties have been falling globally due to trade liberalization and increasing regional and bilateral trade agreements. Consequently, the importance of excise taxes on tobacco products becomes greater from a revenue perspective as well as that of public health.

Tobacco control and employment in agriculture and manufacturing sector

WHO/Clements

There are many families engaged in tobacco leaf production, and tobacco manufacturers have historically been large employers in the economy. However, as the manufacturers are adopting state-of-the-art technology, the demand for labour in manufacturing has been diminishing. Farmers, on the other hand, face more challenges due to increasing costs of production and declining global prices for tobacco. Indeed, as there are new countries entering into the global supply market, and as yields have improved with new production techniques, global prices for tobacco leaves have been decreasing, encouraging countries to support farmers in diversifying or looking for alternative crops.

Taxes and the poor

WHO

One of the concerns that governments raise is the regressive nature of taxes on poor smokers. As the tax increases, the share of tobacco expenditure on household income also increases, creating an extra burden on a family budget, and especially on poorer smokers. This argument holds for all goods and services. For tobacco products that are harmful to health, the regressivity counter-argument can be made by looking at the benefits and costs of a tax increase beyond the impact on family income. Evidence suggests that the poor are more sensitive to price increases, so as a result it is expected that as the tax increases, the majority of them will more likely reduce or quit smoking. In respect to poor smokers, their families and the society at large, the benefits of quitting are enormous because there will be lower health costs and more resources for other essential goods such as food and education. Moreover, governments could allocate the extra revenues generated by higher tobacco taxes to social programmes that benefit the poor such as affordable and accessible health services, health insurance and smoking cessation programmes (WHO technical manual on tobacco tax administration, 2010).

In order to address the economic arguments used against tobacco control, it is necessary to strengthen the evidence and the technical and analytical skills of government officials, academia and civil society. This will help move forward the tobacco control agenda and improve both the economy and public health.