BRIEF March 30, 2018

Taxing Tobacco: A win-win for public health outcomes and mobilizing domestic resources

Image

The World Bank’s Global Tobacco Control Program helps countries design tobacco tax reforms as a win-win policy measure that achieves public health goals and raises domestic resources to expand fiscal space for priority investments and programs that benefit the entire population. The Program has helped 16 developing countries adopt important tobacco tax policy reforms, provided assistance for assessing policy reforms in 4 additional countries, and is currently supporting related work in 16 additional countries. 


CHALLENGE

  • Tobacco use poses an unparalleled health and economic burden across countries, hindering development gains worldwide. Cigarette smoking is the top cause of preventable death, leading to almost 7 million deaths per year - more than that from HIV/AIDS, TB and malaria combined. Smokers face a three-fold higher risk of death than non-smokers, losing at least one decade off their life span.
  • Smoking-related illness costs billions of dollars each year, imposing a heavy economic toll on countries, both in terms of direct medical care costs, lost productivity, employment and income.  A 2016 U.S. National Cancer Institute (NCI)/World Health Organization (WHO) study finds that tobacco-related diseases account for US$422 billion in healthcare expenditures annually, representing almost 6 percent of global spending on health. The total economic cost of smoking (after including productivity losses from premature death and disability) amounts to more than US$1.4 trillion per year, equivalent to 1.8 percent of the world’s annual GDP.
  • At the same time, for most developing countries, domestic revenues are the largest resource available to fund their national development plans and achieve the Sustainable Development Goals (SDGs). A country’s ability to mobilize domestic revenues and spend them effectively lies at the core of financing for development.

APPROACH

  • Raising tobacco taxes to make these deadly products unaffordable is the most cost-effective measure to reduce tobacco use and improve health outcomes for individuals and communities. 
  • Increasing tobacco taxes also helps expand a country’s tax base, increasing tax revenue to fund priority investments and programs, including expansion of universal health coverage, education for all, and other activities to help countries achieve the Sustainable Development Goals (SDGs). 
  • Tobacco use also disproportionately affects the poorest people. More than 80 percent of the world’s smokers live in low- and middle-income countries, harming health, incomes, earning potential, and labor productivity. The good news is that the poor tend to be more responsive to higher cigarette prices and hence to reduce consumption and the risk of developing tobacco related diseases and the impoverishment impact of high out of pocket payments for treating these diseases in countries with no universal health coverage.
  • In some IBRD countries, tobacco taxation is a trigger for World Bank Development Policy Operations (DPOs) financing, which provide rapidly disbursing policy-based financing.  Examples from 2017 are the US$600 million Fiscal DPO in Colombia, the US$50 million Fiscal DPO in Armenia, the EURO 80 million Fiscal DPO in Montenegro, and an upcoming Fiscal DPO in Moldova.  In other cases, the work has been included as part of WBG-funded Public Expenditure Review under a RAS (ongoing in Trinidad and Tobago) and Public Finance Report in Ukraine. 

RESULTS

The World Bank’s Global Tobacco Control Program has helped 16 countries adopt tobacco taxation policy reforms in both IBRD and IDA countries: Armenia, Azerbaijan, Belarus, Botswana Colombia, Gabon, Ghana, Indonesia, Moldova, Mongolia, Montenegro, Nigeria, Philippines, Sierra Leone, Tonga, and Ukraine.  Work done in Ethiopia, Lesotho, Senegal, and Trinidad and Tobago helped assess alternative policy reforms as contribution to policy debate in 2018. Additional work to inform policy making has been conducted or is underway in Afghanistan, Bangladesh, Cape Verde, China, the nine member-states of the Organization of Eastern Caribbean States (OECS), Chile, Guinea Bissau, Macedonia, Russian Federation, South Africa, and Vietnam. 

Total population in countries covered: about 900 million.

Highlighted results from IBRD countries: 

  • Armenia: The tobacco taxation system in Armenia was changed in 2017 as stipulated in the Tax Code approved in 2016. The excise tax (a tax paid when purchasing a product) will rise from being 31 percent of the average price of the most prevailing segment of cigarettes smoked in the country to 62 percent by 2020. The cumulative burden of indirect taxes (VAT plus excise taxes) on tobacco will increase from 57 percent to 94 percent of the average price for the most prevailing segments. Tobacco tax increases adopted in 2016 for 2017-2021 are estimated to increase tax revenues by 40 percent and to help reduce the risk of non-communicable diseases (NCDs), which account for 75 percent of all deaths in Armenia.
  • Colombia: As part of a broad fiscal reform package approved by Colombia’s Congress in 2016, the new taxes on tobacco products will nearly triple prices in 2017-2018 and annual adjustments will be made for inflation and a mandated specifi­c increase in subsequent years. The tobacco tax is estimated to generate about US$350 million in additional revenue through 2022; and contribute to improved health outcomes.
  • Moldova: As approved by Parliament in 2016 and part of the 2017-2019 budget submitted by the Ministry of Finance, tobacco taxes will increase significantly. The average excise tax burden (excise tax as percentage of retail price) will increase from 39 percent in 2016 to 45 percent in 2017 and the total tax burden (including excise taxes, VAT and other duties on tobacco as a percentage of retail price) will increase from 56 percent in 2016 to 62 percent in 2017. Tobacco tax increases over 2017-2019 are estimated to generate about 1.5 percent of GDP, up from less than one percent.
  • Ukraine: In 2016 Ukraine’s Parliament approved the 2017 budget submitted by the Ministry of Finance, which includes a 40 percent specific excise tax increase on tobacco products over the 2016 level. The average excise tax burden will increase from 41 percent in 2016 to 46 percent in 2017 and the total tax burden will increase from 63 percent in 2016 to 67 percent in 2017. 

BANK GROUP CONTRIBUTION

  • The World Bank’s Tobacco Control work is also supported via a US$10 trust fund jointly financed by the Bill and Melinda Gates Foundation and the Bloomberg Philanthropies.
  • The World Bank provides rapidly disbursing policy-based financing to support tobacco taxation through Development Policy Operations (DPOs), including the US$600 million Fiscal DPO in Colombia, the US$50 million Fiscal DPO in Armenia, the EURO 80 million Fiscal DPO in Montenegro, and an upcoming Fiscal DPO in Moldova.  In other cases, work on tobacco taxation has been included as part of WBG-funded Public Expenditure Review through reimbursable advisory services (RAS) as in Trinidad and Tobago, and a Public Finance Report in Ukraine. 

PARTNERS

The World Bank’s Tobacco Control Program coordinates closely with the World Health Organization (WHO), the European Union, Campaign for Tobacco Free Kids, and other key partners, including the Bloomberg Philanthropies and the Bill and Melinda Gates Foundation.

MOVING FORWARD

  • Taxing tobacco is one of the most cost-effective measures to reduce consumption of products that kill prematurely; make people ill with diseases such as cancer, heart disease, and respiratory illnesses; and cost health systems enormous amounts of money to treat often-preventable diseases.
  • Data from different countries indicate that the annual tax revenue from excise taxes on tobacco can be substantial. Hence, besides the public health benefits, increasing tobacco taxes can help expand a country’s tax base to mobilize needed additional public revenue to fund vital investments and essential public services that help build a country’s human capital. For example, the Philippines raised US$3 billion or close to 1 percent of its GDP from 2013-2015 through its tobacco tax policy. The tobacco tax increases in countries such as Colombia, Moldova, Montenegro, the Philippines, and Ukraine are resulting in an increase in total tobacco tax revenue of about 1-2 percent of GDP. Accumulated evidence and country experiences show that tripling the excise tax worldwide offers a way to achieve the Sustainable Development Goal of reducing NCD deaths by 30 percent.
  • The WBG is committed to supporting the implementation of the global tobacco control effort outlined in the Framework Convention on Tobacco Control (FCTC), particularly tobacco taxation. Effective tobacco tax regimes that make tobacco products unaffordable are a 21st-century intervention to tackle the growing burden of NCDs.

BENEFICIARIES

  • The Philippines’ experience shows that fundamentally restructuring the tobacco and alcohol excise tax – by reducing the number of tiers, indexing tax rates to inflation, and substantially increasing the tax rate to have a public health impact – is good for both fiscal and public health.
  • Through this reform effort, which was supported by the World Bank, WHO and other international partners, about 80 percent of the US$ 3.9 billion in additional revenues generated from the Philippines’ Sin Tax Law in its first four years of implementation is accounted for by tobacco. The additional fiscal space increased the Department of Health’s budget threefold and increased the number of families receiving government-funded health insurance from 5.2 million in 2012 to 15.3 million in 2015 (about 50 million people).