Earmarking tobacco tax revenues. Anne-Marie Perucic Economist Prevention of Noncommunicable Diseases WHO

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1 Earmarking tobacco tax revenues Anne-Marie Perucic Economist Prevention of Noncommunicable Diseases WHO 1

2 Why tax tobacco? Public health justification: Tobacco tax increases that increase prices are the most-cost effective policy for tobacco use reduction. Economic justification: Correcting for negative externalities and imperfect information. Public finance justification: Easy to collect (few producers), Demand price-inelasticity => increased taxes increase revenues. Win-win policy: for revenues and public health 2

3 Types of consumption (indirect) taxes imposed on tobacco products Which is used for earmarking? General tax on consumption: Value-Added Taxes or Sales Taxes general tax on consumption, applied (usually) as a single rate and on a broad range of goods and services Excises selective taxes, confined to a narrow range of goods, the consumption of which governments wish to discourage, for example, for health and environmental reasons "sin taxes" Customs/import Duty tax on a selected commodity imported in a country and destined for domestic consumption (i.e., the goods are not in transit to another country) 3

4 Earmarking practices around the world About 30 countries from all regions of the world earmark tobacco tax revenues for health purposes Tobacco control NCDs Health Insurance/UHC Iceland, Iran, Switzerland, Viet Nam Algeria (cancer control and other health programmes) Costa Rica (incl. tobacco control), Nepal, Panama (incl. tobacco control) Congo, Egypt, Philippines Other/more general health programmes Argentina, Bangladesh, Cape Verde, Colombia, Comoros, Côte d'ivoire, El Salvador, Guatemala, India (incl. tobacco control), Indonesia, Jamaica, Madagascar, Korea, Romania, Thailand, Macedonia, USA Tobacco earmarking recently terminated in Mongolia and Poland. Source: WHO Report on the Global Tobacco Epidemic,

5 Revenue potential from tobacco taxes Recent publication in the WHO Bulletin (February 2016) shows that: In 2014, the total amount of excise revenue generated globally from the sale of cigarettes was estimated to be $ 402 billion international dollars in Purchasing Power Parity terms (or US$ 328 billion). Raising cigarette excise by 1 international $ per pack (US$ 0.8) in all countries would increase revenue by 47% giving an extra $ 190 billion international dollars (US$ 141 billion) to governments. Source: Goodchild M, Perucic AM, Nargis N. Modelling the impact of raising tobacco taxes on public health and finance. Bulletin of the World Health Organization 2016;94:

6 Nine countries case studies Summary analysis (upcoming WHO publication)

7 Arguments for and against earmarking Pros Population more supportive of tax increases when they know they will be used for targeted social programmes Help guarantee funding for under-resourced programmes, in this case, health. Can also lead to better health outcomes Closer connection between tax and expenditure: increases accountability Closer connection between tax and expenditure: increases efficiency of public expenditure Can educate people about the cost of a particular program/service Cons Introduces rigidities in the budgetary process, limiting availability of funds for alternative and (sometimes) more urgent purposes. Leads to waste of resources when not carefully planned by recipient institution/programme Pro-cyclical, susceptible to booms and busts Leads to fragmentation of pooling and lack of integration of health policy in other sectors Will eventually shrink as consumption of harmful/unhealthy products goes down Compiled in Earmarked tobacco taxes: lessons learnt from nine countries. WHO

8 Analysis of 9 country experience in tobacco tax earmarking Diverse countries with diverse backgrounds with recent (Botswana 2014) or long history in earmarking tobacco taxes for health (Iceland 1972). Nine countries are: Botswana, Egypt, Iceland, Panama, Philippines, Poland, Romania, Thailand and Viet Nam. 8

9 Fund manager and expenditure Botswana Egypt Iceland Panama Philippines Romania Thailand Vietnam Fund manager Ministry of Health The General Authority of Health Insurance Directorate of Health (DH) Ministry of Health (MINSA) Department of Health (DOH) Ministry of Health (MOH) Thai Health Promotion Foundation (ThaiHealth) Autonomous fund manager supervised by Prime Minister. Ministry of Health/ VNTCF Tobacco Control Fund. Semiautonomous Intersectoral Managmt Board. Expenditure 9 Health promotion Students medical insurance Tobacco control and general health promotion activities NCDs and tobacco control UHC Health systems infrastructu re, public health programs Health promotion Tobacco control

10 Earmarked funding and magnitude of funds Country Year earmarking tobacco tax established Funding source Botswana % of production cost of tobacco products Egypt piasters on each pack of 20 cigarettes Iceland 1972 (first) 2001 (latest amendment) 0.9% of gross tobacco sales value (2001) Panama % of selective consumption tax on cigarettes and other tobacco products Estimated annual total funds from earmarked tax : BWP 4 million (US$ 0.48 million) Annual funds from tobacco earmarked tax as percentage of general government expenditure on health (2013) General government expenditure on health as percentage of GDP (2013) NA 3.1% : EGP 392 million (US$ million) Earmarked taxes only 1.8% of total taxes on cigarettes 1.086% 2.1% 2014: ISK million (US$ 0.89 million) 0.083% 7.0% 2014: US$ 27.8 million 1.322% 5.2% Philippines 1997 (first) 2012 (latest) 85% of incremental revenue from excise on tobacco and alcohol products 2014: PHP billion (US$ 1.18 billion) NA 1.4% Poland 2000 (terminated in 2015) State budget (0.5% of the value of the excise tax on tobacco products) 2013: PLN 1 million (US$ million) from general budget 0.001% 4.6% Romania 2005 Earmarked tax on tobacco and alcohol 10 /1000 cigarettes, 10 /1000 cigars, cigarillos and other tobacco products for smoking, 13 /kg of smoking tobacco Thailand % surcharge tax on tobacco and alcohol 2014: Lei 1.1 million (US$ 0.33 million); 14.4% of total health budget 2014: THB million (US$ million) 1.78% of Ministry of Health budget and 1.84% of National Health Security Fund 0.004% 4.2% 0.932% 3.7% Viet Nam 2012 Compulsory contribution by tobacco manufacturers and importers to Viet 10 Nam Tobacco Control Fund : 1% of factory price effective from 1 May 2013, (1.5% in 2016 and 2% in 2019) 2014: VND billion (US$ million) 0.5% of national health budget 0.335% 2.5%

11 Lessons learned

12 Lessons learned from earmarking tobacco tax Common threads for success: revenues Earmarked tax revenue from an additional tax (not taking away from existing revenues/expenses), Seeking policy opportunity to gain political support (e.g. WHO FCTC), Strong partnerships and policy synergies (intersectoral, mainly MoH and MoF, but also with civil society), Careful presentation of arguments in favour of earmarking and sound proposal based on evidence and needs, Effective countering strong opponents (Tobacco industry, government sectors influenced by TI). 12

13 Lessons learned from earmarking tobacco tax Further discussion: revenues Investment in prevention (incl. tobacco control) very cost effective and cheap (cost of scaling up tobacco control 0.11$ pc*), Revenue potential of tobacco taxes not insignificant (and taxes should be increased on a regular basis), Earmarking tobacco tax revenues augments the positive health impact of tobacco taxes, Earmarking tobacco tax revenues for prevention: strong link between tax payer, revenue and benefit, Earmarked amounts: relatively small amounts make a difference and do not introduce significant rigidities, Autonomous/semi-autonomous fund managers: independence and accountability. 13 * Source:Scaling up action against noncommunicable diseases: How much will it cost? WHO (for 42 LMIC)

14 US$ per capita Tobacco excise tax revenues and expenditure on tobacco control Governments collect nearly US$ 270 billion in tobacco excise tax revenues each year, but spend around US$ 1 billion combined on tobacco control 91% of this is spent by high-income countries Per capita excise tax revenue from tobacco products Per capita public spending on tobacco control High-income Middle-income Low-income Source: WHO Report on the Global Tobacco Epidemic,

15 Specific country experiences/success stories

16 Country examples: Australia Following large increases in tobacco taxation and tax revenues in 1983, the Tobacco Act passed in 1987 in Australian State of Victoria led to the establishment of the Victorian Health Promotion Foundation which would administer tax revenues to be used for health proportion and tobacco control programmes. Parts of the funds were initially used to replace tobacco sponsorship and promotion funds for sports and racing organizations, therefore facilitating the implementation of bans of tobacco promotion advertising and sponsorship. This led the way for other States to replicate the model. Their model also inspired other countries such as Thailand. Earmarking was repealed later in 1997 (found unconstitutional for states to collect tobacco, alcohol and petrol taxes) but the health foundations kept receiving funding from the Federal (source of funding changed). 16 Source: The establishment and use of dedicated tobacco taxes for health. Manila: WHO Regional Office for the Western Pacific Region; 2004.

17 Country examples Thailand Thailand s Health Promotion Foundation Act of 2001 established that a 2% surcharge on tobacco and alcohol excise would be earmarked to secure funding for the Foundation (ThaiHealth) ThaiHealth spent more than $US 100 million on health promoting activities a year ($US 125 million in 2014) covering a wide range of activities (including tobacco and alcohol control, traffic injury management, promotion of physical exercise and sports for health, and promoting healthy eating) ThaiHealth is widely regarded as a model for ensuring that health promotion activities receive adequate support. It has inspired models developed in other countries such as Viet Nam. 17 Source: Earmarked tobacco taxes lessons learnt from nine countries. Upcoming. WHO 2016.

18 Country examples: USA - California California funded its comprehensive state tobacco control program with an earmarked tobacco tax since late 1988, following an increase in its taxes: 0.25$ per pack Annual budget of 100 million US$. This resulted in reduction of adult and youth smoking prevalence leading to lung and bronchus cancer rates in nearly falling four times more than in the rest of the United States Estimated impact: person-years of life saved and over person-years of treatment averted for the 14.7 million male California residents alive in Net healthcare savings estimated to be $107 billion in 1990 dollars (only men covered). 18 Source: Miller LS et al. Evaluation of the economic impact of California s Tobacco Control Program: a dynamic model approach. Tobacco Control 2010; 19(Suppl 1):i68-i76.