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China Just Raised Tobacco Taxes. Smokers Might Not Notice

China’s 300 million smokers just learned that, as of Sunday, their government will more than double the consumption tax on cigarettes to 11 percent—a move that ordinarily would draw unqualified support from the World Health Organization.

China loses 1 million people each year to smoking-related diseases, and raising the nation’s current 5 percent tax rate is seen by health advocates as one of the most effective ways to reduce that grim toll. Last year WHO even adopted the theme “Raise Taxes on Tobacco” at its May 31 World No-Tobacco Day.

Still, in China, where the state serves as both the tobacco regulator and the cigarette manufacturer, a tobacco-tax increase isn’t always what it appears to be. The 5 percent consumption tax was introduced in 2009, along with higher taxes on manufacturing cigarettes. But smokers were largely shielded from the impact. “The day after the announcement, the tobacco regulator said it would swallow the additional cost and kept the retail price unchanged,” Jiang Yuan, a director of the National Tobacco Control Office, told Caixin Media last year. She was referring to the State Monopoly of Tobacco Administration, which runs China National Tobacco Corp., the world’s biggest cigarette maker. The People’s Daily called the 2009 tax increase “a dumpling with no fillings.”

Given that history, WHO’s China representative was cautious today in praising the latest tax increase, which is reportedly forecast to raise 20 billion yuan ($3.2 billion) in taxes this year. The health organization declared itself pleased to see the increase, which also includes a 0.005 yuan tax on every cigarette sold. “But it is crucial that the increase be passed on to retail prices,” WHO’s Bernhard Schwartländer said in an e-mail to Bloomberg.

If the tax isn’t passed to consumers, it would come directly from China National Tobacco’s earnings. As a rule, the state-owned enterprise sends the government 20 percent of its net profit as a dividend each year. The State Monopoly of Tobacco Administration couldn’t be reached for comment. While the tobacco company’s recent financial results haven’t been made public, China National Tobacco’s net profit in 2012 was 165 billion yuan ($26.6 billion).

The new announced tax increase comes just a few months after Li Keming, the brother of Chinese Premier Li Keqiang, stepped down as the tobacco regulatory agency’s deputy director after 30 years with STMA. His departure for another job was viewed by some observers as a signal that China may take new action to reduce smoking.

Health experts in China are optimistic that retail prices will be increasing this time. “I’m happy for those pressured by a price hike for cigarettes. I wish more people could not afford to buy,” Xu Guihua, deputy director of the Chinese Association on Tobacco Control, a nongovernmental organization, wrote on her microblog. She punctuated her post with a smiling emoji.

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