The Science Behind Tobacco Taxation

Transcription

1 The Science Behind Tobacco Taxation Frank J. Chaloupka University of Illinois at Chicago National Conference on Tobacco or Health Fundamentals of Tobacco Tax Increases: Science, Methods, and Messaging Kansas City MO, August 16,

2 Overview Overview of tobacco taxation Impact of taxes/prices on tobacco use, consequences of use Industry price marketing Earmarking tobacco tax revenues for tobacco control programs Counterarguments Myths & Facts 2

3 Overview of Tobacco Taxation 3

4 Why Tax? Efficient revenue generation Primary motive historically and still true in many countries today Very efficient sources of revenue given: Historically low share of tax in price in many countries Few producers and few close substitutes One of many goods/services that satisfies the Ramsey Rule This vice brings in one hundred million francs in taxes every year. I will certainly forbid it at once as soon as you can name a virtue that brings in as much revenue Napoleon III on tobacco tax 4

5 Federal Cigarette Tax and Tax Revenues Inflation Adjusted, $1.05 $0.95 $16, Tax Per Pack (June 2012 dollars) $0.85 $0.75 $0.65 $0.55 $0.45 $14, $12, $10, Revenues (Million June 2012 dollars) $0.35 $8, $0.25 $ Year $6, Federal Tax Tax Revenues 5 Source: Tax Burden on Tobacco and author s calculations

6 Why Tax? Promote public health Increasingly important motive for higher tobacco taxes in many high income countries Based on substantial and growing evidence on the effects of tobacco taxes and prices on tobacco use Particularly among young, less educated, and low income populations We [] have a package of six policy measures, known as MPOWER, that can help countries implement the provisions in the Convention. All six measures have a proven ability to reduce tobacco use in any resource setting. But tobacco taxes are by far the most effective. Director General Dr. Margaret Chan, WHO,

7 Taxes, Prices and Health: US,

8 Why Tax? Cover the external costs of tobacco use Pigouvian tax Less frequently used motive Account for costs resulting from tobacco use imposed on non-users Increased health care costs, lost productivity, caused by exposure to tobacco smoke among non-smokers Can also include internalities that result from addiction, imperfect information, and time inconsistent preferences 8

9 Economic Costs & Tax Revenues United States Tax Revenues Publicly Financed Health Care Costs Economic Costs $0 $20 $40 $60 $80 $100 $120 $140 $160 $180 $200 Billion Dollars 9 Sources: CDC/SAMMEC, CTFK, Tax Burden on Tobacco, and author s calculations

10 Federal Tobacco Taxes Federal cigarette tax Specific (per unit) excise tax initially adopted in 1864 Raised during war time/lowered during peace time Set at 8 cents per pack in 1951 Doubled to 16 cents per pack in 1983 Eventually raised to 39 cents per pack in 2002 Less than 60% of inflation adjusted value of 1951 tax Significant increase cents April 1, 2009 Earmarked for S-CHIP expansion

11 Federal Tobacco Taxes Specific federal excise taxes on most other tobacco products, including cigars: $ per pack on small cigars; 52.75% of price for low priced cigars; cap of cents per cigar for high priced cigars chewing tobacco: 3.1 cents per ounce moist snuff: $1.51 per pound roll-your-own tobacco $24.78 per pound pipe tobacco: $2.83 per pound rolling papers: 1.26 cents per pack Until latest increases, most were lower than cigarette tax; more equivalent now Similarly infrequent increases in taxes

12 State Tobacco Taxation State cigarette taxes First adopted by IA in 1921; NC last to adopt in 1969 Specific excise tax in all states Currently: 17.0 cents/pack (MO) to $4.35/pack (NY) Average $1.49 per pack (48.5 cents in tobacco growing states; $1.63 in other states) Several proposing additional increases

13 State Tobacco Taxation State taxes on other tobacco products All but PA tax other tobacco products Mostly ad valorem taxes, but increasing movement towards specific taxes Typically applied to wholesaler/distributor price Highest taxes include: Wisconsin 100%; Washington - 95% Lowest taxes include: South Carolina 5%; Tennessee 6.6% Average about 35% Generally below equivalent rate on cigarettes

14 Local Taxation in the U.S. Many localities add additional cigarette tax Typically a few cents/pack; some exceptions:»$1.50 in New York City» $2.68 in Chicago/Cook county Sales tax applied to tobacco products in most states Usually, but not always, applies to price inclusive of excise taxes

15 State Cigarette Excise Tax Rates 2012 CA OR WA NV AK ID AZ UT Anchorage $3.45 MT WY CO NM HI ND SD NE KS OK TX MN WI IA IL MO AR MS LA IN TN MI AL KY Chicago $3.66 OH GA FL PA WV VA SC NC NY VT ME NJ DE MD D.C. NH MA RI CT NYC $5.85 $3.00 per pack $2.00-$2.99 per pack $1.50-$1.99 per pack $1.00-$1.49 per pack cents per pack <50 cents per pack 15

16 $6.00 Cigarette Taxes & Prices Inflation Adjusted, United States, $5.00 $4.00 $3.00 $2.00 $1.00 $ Federal Tax State Tax MSA Costs Industry Price Source: Burden on Tobacco and author s calculations

17 Impact of Tax and Price on Tobacco Use 17

18 Prices and Tobacco Use Increases in tobacco product prices: Induce current users to try to quit Many will be successful in long term Keep former users from restarting Prevent potential users from starting Particularly effective in preventing transition from experimentation to regular use Reduce consumption among those who continue to use Lead to other changes in tobacco use behavior, including substitution to cheaper products or brands, changes in buying behavior, and compensation 18

19 30300 Cigarette Prices and Cigarette Sales Inflation Adjusted, United States, $ $ $5.00 Sales (million packs) $4.50 $4.00 $3.50 $3.00 Price (April 2012 dollars) $ $ Year $1.50 Sales Price 19 Source: Tax Burden on Tobacco and author s calculations

20 Cigarette Prices and Adult Smoking Prevalence, United States, , Inflation Adjusted $5.50 Adult Prevalence $5.00 $4.50 $4.00 $3.50 $3.00 $2.50 Price Per Pack (April 2012 dollars) $ Year $1.50 Prevalence Price Source: NHIS, Tax Burden on Tobacco, 2009, and author s calculations Note: green data points for prevalence are interpolated assuming linear trend 20

21 200,000 Monthly Quit Line Calls, United States 11/04-11/09 4/1/09 Federal Tax Increase 150,000 1/1/08 WI Tax Increase 100,000 50,

22 70 Cigarette Prices and Cessation US States & DC, 2009 % Ever Smokers Who Have Quit y = x R² = Average price (in cents) Source: BRFSS, Tax Burden on Tobacco, 2010, and author s calculations

23 45 Cigarette Price and Less than Daily Smoking Prevalence, Adults, US States &DC, 2009 % of Smokers that Smoke Some Days y = x R² = Average price, (in cents) Source: BRFSS, Tax Burden on Tobacco, 2010, and author s calculations

24 27 Cigarette Prices and Youth Smoking Prevalence US States & DC, Prevalencel y = x R² = Average price (in cents) 24 Source: YRBS, Tax Burden on Tobacco, 2010, and author s calculations

25 Cigarette Price and Youth Smoking Prevalence Inflation Adjusted, United States, $ Price per pack (8/11 dollars) $5.50 $4.75 $ Smoking Prevalence $ $ Year 5.5 Cigarette Price 12th grade prevalence 10th grade prevalence 8th grade prevalence Source: MTF, Tax Burden on Tobacco, and author s calculations 25

26 Taxes, Prices and Health: US,

27 Industry Price Marketing 27

28 $16,000.0 $14,000.0 Cigarette Company Marketing Expenditures, by Type, M i l l i o n D o l l a r s $12,000.0 $10,000.0 $8,000.0 $6,000.0 $4,000.0 $2,000.0 $ Advertising Pub.Entertainment Placement Price Merchandise Other Source: author s calculations from data reported in FTC (2011)

29 Tobacco Industry Efforts to Offset Tax Increase On February 4th, 2009, the Federal Government enacted legislation to fund the expansion of the State Children's Health Insurance Program (SCHIP) that increases excise taxes on cigarettes by 158%. As a result, you will see the price of all cigarettes, including ours, increase in retail stores. We know times are tough, so we'd like to help. We invite you to register at Marlboro.com to become eligible for cigarette coupons and special offers using this code: MAR1558 Thank You, Philip Morris USA

30 Earmarking Tobacco Tax Revenues for Tobacco Control 30

31 Tobacco Industry is Outspending Prevention Efforts 22:1 FY State Tobacco Revenue (taxes and settlement funds) $25.6 billion 25 (Dollars (in billions) Tobacco Industry Marketing & Promotion Expenditures (2008) $9.9 billion Total CDC- Recommended Spending Level $3.7 billion State Tobacco Program Budgets <$0.5 billion 0 Campaign for Tobacco Free Kids, Federal Trade Commission, American Heart Association, American Cancer Society, American Lung Association, SmokeLess States National Tobacco Policy Initiative

32 Comprehensive Programs Impact of state program funding Increased funding associated with: Reductions in overall cigarette sales Lower youth smoking prevalence Lower adult smoking prevalence Increased interest in quitting, successful quitting Much of impact results from large scale mass-media anti-smoking campaigns 32

33 State Tobacco Control Program Funding and Youth Smoking Prevalence 37 $1, Total Funding $Millions (FY10 dollars) $800 $600 $400 $ Percent Current Smoking $ Year 19 total state program funding high school prevalence 33 Source: ImpacTeen Project, UIC; YRBS

34 Common Oppositional Arguments Myths & Facts 34

35 Impact on Revenues By J Scott Moody, 4/2/08, from an AP story: AUGUSTA A coalition of health groups today urged lawmakers to increase the cigarette tax by a $1 per pack, saying the increase will encourage more people to quit smoking and generate more money for health programs. Translation: Fewer people smoking equals more cigarette tax revenue? Someone needs a math lesson.

36 $0.40 Cigarette Tax and Tax Revenues Georgia, $0.35 $200.0 T a x p e r P a c k $0.30 $0.25 $0.20 $0.15 $0.10 $150.0 $100.0 $50.0 T a x R e n u e s ( M i l l i o n s ) $0.05 $ $0.0 Tax Revenues (Millions) Tax per Pack

37 Positive Effect of Tax Increase on Revenue Results from: Low share of tax in price: state taxes account for about 25% of price total taxes account for less than half of price Implies large tax increase has much smaller impact on price Less than proportionate decline in consumption: 10% price increase reduces consumption by 4%

38 Positive Effect of Tax Increase on Revenues Example with significant tax avoidance Price $4.00, State tax $1.00, Sales 500 million packs Revenues: = $500 million Double tax to $2.00; price rises to $ % tax increase; 25% price increase 25% price increase reduces sales by 20% (reduced consumption plus tax avoidance) new sales 400 million packs 80% of original sales at double the tax increases revenues by 60% new revenues = $800 million

39 Impact on Jobs JULY, 14, 2010 The Associated Press RICHMOND, Va. The tobacco industry is running a full-court press ahead of a federal scientific panel's meeting to discuss how to regulate menthol cigarettes, a still-growing part of the shrinking cigarette market. The union representing nearly 4,000 tobacco workers sent a letter to the Food and Drug Administration committee examining the public health effects of the minty smokes, warning that a ban could lead to "severe jobs loss" and black market cigarettes.

40 Impact on Jobs Tobacco excise tax will lead to decreased consumption of tobacco products Small loss of jobs in tobacco sector Money not spent on tobacco products will be spent on other goods and services Gains in jobs in other sectors Increase in tax revenues will be spent by government Additional job gains in other sectors Net increase in jobs in most states

41 Tax Avoidance 8% US Smokers, Last Purchase, November 2002-June % 6% 5% 4% 3% 2% 1% 0% Nov 02 - Dec 02 May 03 - Sep 03 Jun 04 - Dec 04 Oct 05 - Jan 06Oct 06 - Feb 07 Sep 07 - Feb 08 Oct 08 - Jul 09 Jul 10 - Jun 11 Reservations Cross Border Direct Other Source, ITC project, US survey, Waves

42 25 Tax Avoidance & Evasion Do NOT Eliminate Health Impact of Higher Taxes Cigarette Prices and Adult Prevalence, New York, $6.75 Prevalence $6.25 $5.75 $5.25 $4.75 $4.25 $3.75 $3.25 $2.75 Pric Prevalence Price (2008 dollars) Source: Tax Burden on Tobacco, 2008 and BRFSS 42

43 Tax Avoidance & Evasion Do NOT Eliminate Revenue Impact of Higher Taxes Cook County Cigarette Tax and Tax Revenues - FY01-FY06 $1.75 $1.55 $1.35 $225,000,000 $205,000,000 $185,000,000 $165,000,000 Tax per Pack $1.15 $0.95 $0.75 $0.55 $0.35 Chicago tax rises from 16 to 48 cents Chicago tax up to 68 cents, 1/1/06 Chicago smoking ban, 1/16/06 $145,000,000 $125,000,000 $105,000,000 $85,000,000 $65,000,000 $45,000,000 Tax Revenues $ Fiscal Year $25,000,000 Tax Revenues 43

44 Combating Tax Evasion High-tech tax stamps Licensing of all involved in distribution and sale Strong enforcement Swift, severe penalties Focus on large scale, criminal activity Coordinated efforts NAAG efforts targeting Internet Agreements with tribes 44

45 Impact on the Poor July 23, 2010 San Francisco Examiner Democrats are relying more heavily in their midterm 2010 election message that Republicans care nothing about the poor. Conveniently absent from this analysis is Republican opposition to President Barack Obama s cigarette tax increase While higher cigarette taxes do discourage smoking, they are highly regressive. Analyzing a slightly less severe proposal in 2007, the Tax Foundation noted that no other tax hurts the poor more than the cigarette tax. Peyton R. Miller, special to the Examiner.

46 Impact on the Poor Concerns about the regressivity of higher tobacco taxes Tobacco taxes are regressive, but tax increases can be progressive Greater price sensitivity of poor relatively large reductions in tobacco use among lowest income populations, small reductions among higher income populations Health benefits that result from tax increase are progressive 46

47 Who Pays& Who Benefits Impact of Federal Tax Increase, U.S., % 67.4% 60.0% 50.0% 46.3% 40.0% 30.0% 29.5% 20.0% 20.7% 24.2% 11.9% 10.0% 0.0% <poverty line 1-2* poverty line >2* poverty line Share of Tax Increase Share of Reduced Deaths Source: Chaloupka et al., in progress; assumes higher income smokers smoke more expensive brands

48 Impact on the Poor Need to consider overall fiscal system Key issue with tobacco taxes is what s done with the revenues generated by the tax Greater public support for tobacco tax increases when revenues are used for tobacco control and/or other health programs Net financial impact on low income households can be positive when taxes are used to support programs targeting the poor Concerns about regressivity offset by use of revenues for programs directed to poor

49 Summary 49

50 Summary Tobacco tax increases have significantly reduced tobacco use in the US Increased quitting Prevented initiation Reduced intensity Taxes generate significant revenues and revenues increase when tax increases Added reductions in use/consequences when revenues earmarked for prevention/control efforts Adverse economic impact false or overstated 50

51 For more information: