Tobacco use, and its negative health, social and economic impacts, is a significant global health challenge. Smoking is a leading global cause of preventable disease and death. The total economic cost of smoking exceeds US$1.4 trillion per year, equivalent to 1.8% of the world’s annual gross domestic product (GDP).
Around 22% of adults are smokers, according to the World Health Organization. Nearly 80% of the world’s 1.3 billion smokers live in low-and middle-income countries. The tobacco use epidemic is one of the biggest public health threats across the world, killing around 6 million people a year – more than 5 million due to direct tobacco use while more than 600,000 deaths are among non-smokers exposed to second-hand smoke.
Tobacco is causally linked to diseases of nearly all organs of the body. Smoking also causes more deaths each year than HIV/AIDS, tuberculosis and malaria combined. Smoking reduces workers’ productivity and cuts their careers short because of chronic illness and premature death.
Increasing tobacco taxes is a win-win for health and the economy
Higher taxes on tobacco products reduce tobacco consumption and improve public health, while also increasing government revenues that can be used to fund priority investments and programs that benefit the entire population.
Findings in the 2015 WHO Report on the Global Tobacco Epidemic show that while only 33 countries impose taxes that constitute more than 75% of the retail price of a pack of cigarettes—the taxation level recommended to have an impact on consumption —most countries that do tax tobacco products have extremely low tax rates. And some countries do not have a special tax on tobacco products at all.
Raising taxes on tobacco products is one of the most cost-effective measures to reduce consumption of products that increase mortality, while also generating substantial domestic revenue for health and other essential programs—investments that benefit the entire population. Given this, the World Bank Group Tobacco Control Program gives priority attention to tobacco taxation.
World Bank Group Tobacco Control Program
The World Bank Group’s Global Tobacco Control Program assists countries in fostering and implementing tobacco tax reforms to achieve public health goals by reducing tobacco affordability and consumption, and for mobilizing domestic resources to expand the fiscal space to fund priority programs and investments that benefit the entire population, and controlling illicit trade on tobacco by strengthening customs systems.
The World Bank Group’s Global Tobacco Control Program assists countries in designing tobacco tax reforms as a win-win policy measure to: (i) achieve public health goals by increasing prices, reducing smoking, and preventing initiation among youth, and (ii) raise more domestic resources for investments that benefit the entire population. In addition, it supports countries in fighting the illicit tobacco trade by strengthening customs systems. Work has been carried out over 2013-2016 in Philippines, Botswana, Ghana, Namibia, Vietnam, Georgia, Indonesia, and Peru; more recently, for the support of tobacco tax reforms adopted in 2017 in Armenia, Colombia, Moldova, Ukraine, and Montenegro, and assessments done over 2016-2017 in Nigeria, Ethiopia, Senegal, Lesotho, Belarus, China, Turkey, Chile, Gabon, Azerbaijan, Indonesia on the employment situation in the tobacco industry, and on the European Union tax harmonization process. Work is currently underway in Sierra Leone, Trinidad and Tobago, country members of the Organization of Eastern Caribbean States. In addition, the program supports knowledge exchange, including peer-to-peer advice and support, among selected countries on the economics of tobacco control (for example, through the World Bank Group Flagship Training Program on Health Reform targeting national officials).
The preparation of a Tobacco Taxation Module as part of WBG/IMF Tax Policy Assessment Framework (TPAF) is underway. This is part of a new WBG/IMF initiative launched to support the implementation of the Financing for Development Addis Ababa Action Agenda adopted in 2015 to help countries strengthen their tax systems. Building on their collective expertise, the WBG and IMF teams aim to play a fuller role in enabling all of their member countries to assess tax policy performance in order to identify priority tax policy reforms, and design the requisite support for their implementation. The TPAF is a diagnostic framework to provide systematic and structured assessment of a country’s tax policy system, and to develop options for improving such system given a set of policy objectives.
Key lessons emerging
Some important lessons from international experience about how to effectively implement tobacco taxation policy to achieve public health objectives can be adopted and adapted in policy dialogue and operational support to countries. Such lessons include (WHO 2015, Petit and Nagy, 2016):
- While nearly all countries tax tobacco products, an excise tax is the most important type of tobacco tax, since it applies uniquely to tobacco products and raises prices relative to prices for other goods and services.
- Simpler tobacco tax structures are more effective than complex ones, since tiered tax structures are difficult to administer and can undermine the health and revenue impacts of tobacco excise taxes.
- Use of specific excise taxes enhances the impact of tobacco taxation on public health by reducing price gaps between premium and lower-priced alternatives, which limits opportunities for users to switch to less-expensive brands in response to tax increases. Taxing all tobacco products comparably reduces incentives for substitution.
- Ad valorem taxes are difficult to implement and weaken tax policy impact. Since they are levied as a percentage of price, companies have greater opportunities to avoid higher taxes and preserve or grow the size of their market by manufacturing and selling lower-priced brands. This also makes government tax revenues more dependent on industry pricing strategies and increases the uncertainty of the tobacco tax revenue stream.
- Specific excise taxes need to be adjusted for inflation to remain effective.
- Tax increases should reduce the affordability of tobacco products. In many countries, where incomes and purchasing power are growing rapidly, large price increases are required to offset growth in real incomes.
- Strong tax administration is critical to minimize tax avoidance and tax evasion, to ensure that tobacco tax increases lead to higher tobacco product prices and tax revenues, as well as reductions in tobacco use and its negative health consequences.
- Regional agreements on tobacco taxation can be effective in reducing cross-border tax and price differentials and in minimizing opportunities for individual tax avoidance and larger scale illicit trade.
The World Bank’s work on tobacco control is made possible with the support of the Bill and Melinda Gates Foundation, Bloomberg foundation, and in collaboration with the World Health Organization.
In 1991 the World Bank adopted a mandatory operational policy not to lend, invest in, or guarantee investments or loans for tobacco production, processing, or marketing. The Bank’s activities in the health sector discourage the use of tobacco products.
Patricio V. Marquez, Lead Public Health Specialist, World Bank Group Health, Population and Nutrition Global Practice, email@example.com
Sheila Dutta, Senior Health Specialist, World Bank Group Health, Population and Nutrition Global Practice, firstname.lastname@example.org
Last Updated: Oct 12, 2017