Context
Tobacco use, and its negative health, social and economic impacts, is a significant global health challenge.
http://www.worldbank.org/en/topic/health/brief/tobacco
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 5 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 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. Work has been carried out over 2013-2016 in Philippines, Bostwana, Ghana, Namibia, Vietnam, Georgia, Indonesia, and Peru; more recently, for the support of tobacco tax reforms adopted in 2017 in Armenia, Colombia, Moldova, and Ukraine, and assessments done over 2016-2017 in Nigeria, Ethiopia, Lesotho, Belarus, Turkey, Chile, and on the European Union tax harmonization process. Work is currently underway or being initiated in the Indonesia, Sierra Leone, China, and Montenegro. 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 Joint Learning Network, which includes more than 30 countries).
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. Initial discussions are being held to mobilize knowledge and expertise from the International Monetary Fund’s Fiscal Affairs team. 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.
Joint Learning Network Module: The Joint Learning Network (JLN), connects practitioners and policymakers across countries, facilitating peer-to-peer learning and sharing of knowledge and experience. As part of the Bank’s program, the network is currently developing a Tobacco Tax and Illicit Trade on Tobacco Module targeting member countries in Asia, Africa, Latin American and the Caribbean, and Europe, as well as a diverse group of international, regional, and local partners. The module is expected to focus on tobacco taxation, tax administration, and illicit trade control measures.
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.
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.
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.
Given this situation, the World Bank Group’s program supports governments to look at accumulated country evidence and use tax measures to increase the retail price of tobacco products as one of the best available public health policy measures.
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:
- 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.
For more information, please contact:
Patricio V. Marquez
Lead Public Health Specialist
World Bank Group Health, Population and Nutrition Global Practice
Email address: pmarquez@worldbank.org
Blanca Moreno-Dodson
Lead Economist
World Bank Group Macro Economics and Fiscal Management Global Practice
bmorenododson@worldbank.org