Since the 1990’s, the World Bank Group is guided by a corporate mandatory operational policy that precludes lending, provision of grants, investing 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, including providing technical support for the design of tobacco tax policies to increase prices, reduce consumption, mobilize domestic resources, and enhance equity.
The World Bank Group’s Global Tobacco Control Program assists countries in designing tobacco tax policy reforms and increasing tobacco tax rates as a win-win-win policy measure to: (i) achieve public health goals by hiking prices, reducing smoking, and preventing initiation among youth, (ii) raise domestic resources for investments that benefit the entire population, and (iii) enhance equity by reducing health risks associated with tobacco-attributable diseases and the risk impoverishment due to high out-of-pocket expenditures among the lowest income population groups, who tend to be more responsive in reducing consumption when facing higher tobacco prices. In addition, it supports countries in addressing illicit tobacco trade by strengthening customs systems.
Over the 2013-2018, support has been provided for the enactment of tobacco tax policy reforms in several countries across the world: Armenia, Azerbaijan, Belarus, Botswana, Colombia, Gabon, Ghana, Indonesia, Moldova, Mongolia, Montenegro, Nigeria, Philippines, Senegal, Sierra Leone, and Ukraine. Assessment on tobacco tax system and policy implications, as well as on the progressive nature of tobacco taxation, have been conducted in 2016-2018 in other countries such Afghanistan, Bosnia & Herzegovina, Chile, China, Ethiopia, Indonesia, Lesotho, Macedonia, Moldova, Rep. of Korea, Russia, Senegal, South Africa, Trinidad and Tobacco, Turkey, Ukraine, and Vietnam, as input for policy discussions; on the economics of employment in the tobacco industry in Indonesia, on the European Union tax harmonization process; on challenges and options for tobacco tax harmonization in the country members of the Organization of Eastern Caribbean States; and tobacco affordability in Indonesia and Russia. Additional work is underway on selected country and regional case studies on mechanisms adopted to control the illicit trade of tobacco.
A World Bank Group global report “Tobacco Tax Reform: At the Crossroads of Health and Development” was launched as part of a Special Session on Tobacco Taxation that was organized during the WBG-IMG Annul Meetings in October 2017 and presided by WBG President J.Y. Kim and former New York City Mayor and Philanthropist Michael Bloomberg with the attendance of ministers of finance and other high level officials from across the world.
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, and the Joint Learning Network Module (JLN), which connects practitioners and policymakers across countries. The organization of two global events, both the special session “Expanding the Global Tax Base: Taxing to Promote Public Goods, Tobacco Taxes Panel Session” held as part of “Winning the Tax Wars: Global Solutions for Developing Countries” Conference, on May 23-24, 2016, and the “Global Conference on Tobacco Taxation at the WBG-IMF Spring Meetings”, Washington D.C., on April 18-19, 2017, as well as the JLN event in Nairobi, Kenya in February 2018, and the 2018 Global Conference on Tobacco or Health in Cape Town, in March 2018, facilitated knowledge sharing involving officials from across the world.
The preparation of a Tobacco Taxation Module as part of WBG/IMF Tax Policy Assessment Framework (TPAF) is underway as part of a new WBG/IMF/OECD/UN initiative launched in February 2018 at the UN in New York City, is geared to help member countries assess and strengthen their tax systems. One of the pillars of the initiative includes the development of “improved diagnostic tools to help member countries evaluate and strengthen their tax policies.” To this end, the program supported the development of a tobacco tax policy toolkit in English, Spanish, and French, for wider dissemination globally.
The Bank team engaged in this program is multi-sectoral, and includes experts in health, governance, and macro-economics and financial management, as well as poverty and equity, agriculture, and trade. Collaboration with the International Monetary Fund’s Fiscal Affairs team has been established. The Bank team is also working closely with other international partners, such as the World Health Organization and the Campaign for Tobacco-Free Kids.
The Bank’s Tobacco Control Program is implemented through a multi-donor trust fund financed by the Bill & Melinda Gates Foundation and the Bloomberg Philanthropies. These donors take part in governance of the trust fund and participate in the selection of priority countries included for support under the program.
Moving forward the tobacco taxation agenda globally
• Go big, go fast. Tax strategies should focus on health gains first, then on fiscal benefits. This means going for big tobacco excise tax rate increases starting early in the process. Adopting a slow, cautious timeline might sound prudent. But it means condemning large numbers of people to avoidable illness and premature death. In tobacco taxation, the rewards go to those who act boldly.
• Attack affordability. Tobacco taxes only reduce tobacco consumption if they reduce cigarette affordability. In most LMICs, wages are rising. Thus, cigarettes will become de facto more affordable for consumers, increasing consumption, unless tobacco taxes rise even faster. Effective strategies will generally involve combining big initial tax increases with recurrent hikes over time, to keep cigarette prices climbing more steeply than per capita real income growth (including inflation).
• Change expectations. Communication with the public is also critical. Governments must make sure consumers know that a tax-rate hike is not just a one-off, but that cigarette prices will keep going up. This is a motivator for current smokers to quit and young people not to start.
• Tax by quantity. Tobacco tax rates should be simplified and based on the quantity of cigarettes, not their price. This is done in two ways, both of which preempt smokers’ switching to cheaper cigarette brands after a tax-rate hike on the brands they previously smoked (a response called “downward substitution”). The first key move is to use specific excises, as opposed to ad valorem (value-based) excises or other taxes. A key factor that needs to be considered is that specific rates require to be adjusted over time to at least keep pace with inflation and, preferably, at a faster rate so that affordability is reduced over time. Any strategy for adopting them should be therefore accompanied by a framework/instrument to allow for annual increases over time (such as the United Kingdom’s tobacco duty escalator). The second is to merge the multiple tobacco tax “tiers” used by most developing countries. This way, tax hikes raise prices by the same large amount on all brands at once, pushing smokers to quit completely, rather than switch.
• “Soft earmarks” can win support. Earmarking tax revenues through legislation is criticized by fiscal experts as contributing to rigidities, fragmentation, and eventual distortions in public expenditures. However, “soft” earmarking of funds — for example, linking increased taxes to increased health spending — has helped generate grassroots support for the tax hikes. This has been shown by experience in other sectors, and it has worked for tobacco taxes in countries like Australia, Philippines, and the United States.
• Regional collaboration can boost results. Momentum for ambitious tobacco tax reform can be enhanced, and cross-border threats like cigarette smuggling minimized, when countries work together in a regional structure. The European Union (EU) provides an example. The EU experience shows that regional cooperation can help countries achieve the dual goals of reducing tobacco consumption while increasing government revenues. Lessons also concern the pace of reforms. EU lawmakers faced early political pressure to “go slow,” by setting a low initial minimum tobacco excise rate to apply to all Member States. However, the EU accelerated progress by convincing Member States to agree up front to relatively high minimum tobacco excise rates, with longer transition periods authorized for some countries facing special challenges.
• Build broad alliances. Country leaders face sharp resistance to tax rate increases and other tobacco control measures from the tobacco industry. The industry is both financially powerful and politically astute. Tobacco industry advice to governments promotes the most ineffective interventions and seeks to undercut and weaken tax measures. To counter these pressures requires robust scientific and economic analysis, as well as multi-sectoral policy development. It also demands the mobilization of civil society and opinion leaders. Support from international partners is also required, particularly in low-income countries, to strengthen country capacity for lining up and coordinating all parts of government, while engaging a wide set of stakeholders outside of government.