Tobacco use, and its negative health, social and economic impacts, is a significant global health challenge. According to the 2015 World Health Organization (WHO) Report on the Global Tobacco Epidemic, in 2013, 21% of adults globally were current smokers – 950 million men and 177 million women. Despite increasing global population between 2007 and 2013, smoking prevalence has actually declined worldwide from 23% in 2007, preventing an increase in the number of smokers in the world. The total remains at 1.1 billion smokers globally in 2013.
Tobacco use is a leading global disease risk factor and underlying cause of ill health, preventable death, and disability. It is estimated to kill more than 7 million people each year across the globe. If current trends persist, tobacco will kill more than 8 million people worldwide each year by 2030, with 80% of these premature deaths taking place in the developing world.
In 2015, the “Addis Ababa Action Agenda” adopted at the Third International Conference on Financing for Development held in Addis Ababa, Ethiopia -- and later endorsed by the United Nations as part of the Sustainable Development Goals (SDGs) -- recognized that public policies and mobilization, and effective use of domestic resources, underscored by the principle of national ownership, are central to the common pursuit of sustainable development, including achieving the SDGs.
Clause 32 of the Addis Ababa Action Agenda states that price and tax measures on tobacco are viewed as an effective and important means to reduce tobacco consumption and health care costs, and represent a revenue stream for financing for development in many countries. The Action Agenda also stresses that the tobacco tax agenda is fully consistent with obligations acquired by 180 countries that are parties to the WHO Framework Convention on Tobacco Control (FCTC) (an additional seven countries have signed the FCTC but have not ratified it, and only nine countries are neither signatories or parties to the FCTC).
World Bank Group Tobacco Control Program
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 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 2013-2017 in Philippines, Botswana, Ghana, Namibia, Vietnam, Indonesia, and Peru; more recently, for the support of tobacco tax reforms adopted in 2017-2018 in Armenia, Colombia, Moldova, Ukraine, Montenegro, Gabon, Azerbaijan, Indonesia, Belarus, Sierra Leone, and Mongolia. Assessment on tobacco tax system and policy implications have been conducted in 2016 and 2017 in Nigeria, Ethiopia, Senegal, Lesotho, Belarus, China, Turkey, Chile, Indonesia on the employment situation in the tobacco industry, on the European Union tax harmonization process, in Trinidad and Tobago, country members of the Organization of Eastern Caribbean States, Ukraine, and Moldova. Additional work is underway in South Africa, and 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, facilitating peer-to-peer learning and sharing of knowledge and experience. Also, two global events, in 2016, 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, May 23-24, 2016, and in 2017, “Global Conference on Tobacco Taxation at the WBG-IMF Spring Meetings”, Washington D.C., April 18-19, 2017, 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 initiative launched ahead of the Financing for Development Conference in Addis Ababa, held in July 2015, to help member countries 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.” Building on their collective expertise, the Bretton Woods Institutions (BWIs) 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.
More specifically, the program assists government agencies in developing capacity to assess the health and social costs of tobacco use, and design, enact, administer and monitor tobacco taxation policies. Enhanced capacity will enable countries to increase prices and reduce tobacco use, taking into account the macro-economic and fiscal situation of each country, tax laws, and existing tax administration structure and processes. This process includes assessments and discussions related to fiscal revenues and allocation; smoking patterns and taxes at country level; and socio-economic and health impacts of increasing tobacco tax rates, under different tax policy scenarios, and including impacts on employment, smuggling and other likely impacts of tobacco tax reforms.
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, 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.
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, including providing technical support for the design of tobacco tax policies.
Why the emphasis on tobacco taxation?
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.
Country evidence documented by WBG assessments indicates that higher tobacco tax rates could save millions of lives each decade, reduce poverty, and boost public resources for development investment. Yet, today, tobacco taxation remains one of the world’s least-used tobacco control measures. The power to change this situation however exists. Not in the hands of any single leader or institution, but in a global coalition uniting governments, multilateral agencies, civil society, researchers, the private sector, and communities: a coalition dedicated to ensuring that the life-saving impact of tobacco tax reform reaches the largest possible number of people in the shortest possible time.
If leaders want to move forward on tobacco excise taxation, what are the critical steps? What are the common pitfalls they should avoid?
Key Steps include:
• 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.