Policy makers will have to choose between the health of the nation and the health of the nation’s finances when deciding whether to hike cigarette tax in the budget.
Revenue Commissioner economists predict that revenue from cigarettes could take a hit if prices rise any further, with the reduction in the number of smokers outpacing the increase in income from higher taxes.
They look at how responsive cigarette consumption here is to price hikes and say various elasticity calculations now average at -1.8, meaning that for every 10% increase in the price of cigarettes there would be an 18% drop in consumption. That compares to an international average of just -0.3 to -0.5.
In money terms, that means a €1 increase in the price of a pack of 20 would cause a revenue loss of €86m.
Governments have enjoyed a win-win situation on the health and finance fronts with revenues from excise duty on cigarettes falling only slightly despite having a deterrent effect on smokers. That’s because the increase in tax offsets the drop in cigarette sales.
There has also been an assumption that higher taxes resulted in many smokers switching to black market cigarettes and if this trade could be wiped out, the smokers may return to legal supplies with a knock-on boost for revenue.
But the latest report suggests the illegal trade does not account for as much of the drop in legal sales as previously thought. It states: “The analysis supports the view that reduced prevalence [of smoking], and not the illicit trade, may be the driving force behind falling cigarette clearances in more recent years.”
Clearances are the measure of the volumes of cigarettes leaving warehouses after excise duties have been paid.
Those volumes have fallen dramatically over the past decade with more than 6 billion cigarettes cleared from tax warehouses in 2003 compared to only 3.1bn in 2014. That corresponds with health survey results that show the proportion of adults who smoke fell from around 29% to around 20% in the same period.
But while the drop in clearances represented a decline in sale volumes of 51%, the decline in the value of sales in terms of excise receipts was only 21%. It is that relationship that may be reversed in future.
Revenue has clamped down on the illicit trade and has made many seizures of illegal imports in recent years. Vaping has also absorbed some smokers who previously smoked cigarettes.
But the fastest growing substitute for legal cigarettes is legal roll-your-own tobacco. The amount of roll-your-own tobacco cleared from warehouses quadrupled from 2005-2014, from 96,000kg to 385,000kg.
Roll-your-own tobacco is liable for excise but it still only accounts for a small percentage of the smokers’ market and it is taxed at a lower rate than cigarettes.
The report says cigarettes have been classed among the “old reliables” for taxation purpose because of the assumption that “cigarette demand tends to be inelastic because of the addictive nature of the product”.
It says of the latest research: “The elasticity results have policy implications. They suggest that a tobacco tax increase could lead to an overall reduction in the Exchequer receipts associated with cigarettes.”
It continues: “Government may wish to continue to use fiscal policies such as taxation in the pursuit of health goals rather than solely securing tax receipts.”
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