Global Tobacco Control Updates

New IMF Guide on Designing and Enforcing Tobacco Tax Policies
14 Dec 2016
Research Alert

Tobacco taxation is accepted as a “win-win” for countries. It can provide countries a stable source of government revenue and it is an effective tool to decrease tobacco use and, as a result, improve public health. A ‘How-To Note’ recently published by the International Monetary Fund provides guidance on designing and enforcing tobacco excise taxes. The document discusses methods to determine the appropriate level and mix of tobacco excise taxes, monitoring of the effects of tax (including effects on consumption), earmarking of tax revenue, and administrative tools to combat illicit trade.

Selected Key Points:

  • The appropriate level of excise taxes depends on country-specific considerations including: tobacco consumption, the rate of tobacco use, the price and affordability of tobacco products and how sensitive demand for tobacco products is to tax increases:
    • Demand curves – which describe the relationship between consumption and prices – are typically unknown, yet they are critical to designing ideal taxation of tobacco products. Sustained incremental increases in taxes can allow governments to monitor and better understand the impact of additional taxes on prices and smokers’ consumption.
  • Specific excise taxes are proven to be more effective and less costly than ad-valorem excise taxes.
    • Specific taxes result in higher quality brand products and, ultimately, in higher prices, fewer brands, and less price diversity across tobacco products. In contrast, ad-valorem taxes provide producers strong incentives to cut production costs and increase diversity. Specific excise taxes are also more difficult to avoid and cheaper to administer than ad-valorem excises.
    • The optimal policy mix between specific and ad-valorem excise taxes often depends on practical considerations, such as the existing structure of the tax system, administrative simplicity, revenue stability, inflation, competition policy, protection of domestic industry, employment, farmers transitioning to other crops, and regions’ specific revenue, economic, and health needs.
  • Earmarking can play an important symbolic role in justifying tobacco tax hikes to broadly compensate for tobacco burdens or in warranting source funding for tobacco control and health services programs even though the arguments for earmarking can encounter political difficulties.
  • Border controls are a first line of action to combat illicit trade and must be supported by strong, cohesive legal and administrative tracking systems in order to ensure compliance throughout the entire supply chain.
    • Data collection and analysis are critical to monitor the extent and risk of illicit trade and address it.

Key Messages:

  • Tobacco taxation policy that increases tobacco taxes to reduce the affordability of tobacco can generate substantial new revenue for governments, reduce use of tobacco products and improve public health.
  • The efficacy of tax policy that increases tobacco taxes depends critically on how it is designed, monitored, enforced, and on the strength of tax systems / administrations.
  • Illicit trade can and should be dealt with through strong border controls and strong tobacco tax administration.

The full document [English only] is available online at: http://www.imf.org/external/pubs/ft/howtonotes/2016/howtonote1603.pdf

Full citation: International Monetary Fund (IMF). Fiscal Affairs Department. How To Design and Enforce Tobacco Excises? Washington, DC; November 2016.

Additional Resources:

The International Monetary Fund (IMF) is an international organization that provides financial assistance and advice to its member countries.

If you have questions about the publication or how you may use it in your advocacy efforts, please contact globalresearch@tobaccofreekids.org


TAGS:

taxation, trade