New Report on the Livelihoods of Tobacco and Former Tobacco Farmers Amidst Fierce Public Debates on Tobacco Taxes

Tobacco taxation is proven to be one of the most effective tobacco control policies. A significant increase in tobacco excise taxes typically increases tobacco prices, leading to decreases in tobacco consumption. Indonesia has recently made some advances in tobacco tax policy, while there remains significant room for improvement. The 2nd edition of the Tobacconomics Cigarette Tax Scorecard shows that Indonesia made some improvement between 2018 and 2020, including increases in cigarette prices, reduction of cigarette affordability, and an increase in the tax share of price, though some of the improvement in affordability was the result of economic decline at the beginning of the COVID-19 pandemic. The initial momentum of a good-sized excise tax increase was lost in 2021, when the Ministry of Finance reduced the increase to an average of 12.5%, which is not sufficient to stay ahead of inflation and economic growth. Importantly, there were no advances in efforts to reform the complex multi-tiered tax structure, which hinders the effectiveness of the tobacco excise tax policy, because it gives smokers many opportunities to “trade down” to cheaper products.

One of the persistent narratives against a progressive tobacco tax policy in the public debate—promoted vigorously by the tobacco industry— is the adverse impact taxation would allegedly have on the livelihoods of workers in the tobacco sector, particularly tobacco farmers. Yet this narrative is not backed by any rigorous research about the dynamics of tobacco farming and the alternatives to tobacco farming. In fact, results from surveys of tobacco farming households in several countries show that tobacco farming is often not a profitable endeavor. Consistent to these global findings, studies conducted in Indonesia with former and current tobacco farmers show that former tobacco farmers derived higher incomes farming non-tobacco crops in both good and challenging farming years. Former tobacco farmers were found to have a more diverse economic portfolio, while tobacco farmers relied mostly on agricultural income. A recent study shows that tobacco farming is negatively correlated with the income of farming households. 

To better understand the dynamics of tobacco farming, researchers at the Universitas Gadjah Mada, the Tobacconomics team at the University of Illinois at Chicago, the Australian National University, and McGill University released the report of the third wave survey of tobacco and former tobacco farmers in Indonesia.

The key findings are:

  • A typical former tobacco farmer generated higher income than a typical current tobacco farmer.
  • The more stable and higher household income of former tobacco farmers can be explained, among other things, by their diverse income portfolio.
  • Higher tobacco farming income in Survey Wave 2 and Wave 3 compared to Wave 1 is largely explained by volatility in prices and volume of tobacco leaf sold.
  • At the same time, tobacco farmers bear significantly higher input costs per hectare than former tobacco farmers do. About a quarter of tobacco farmers reported needing loans for tobacco farming inputs partly due to these high input costs.
  • Tobacco farming is a much more labor-intensive endeavor than non-tobacco farming, and therefore, tobacco farmers bear considerably larger costs of household and hired labor.
  • One of the consequences of large labor demands and the poor returns is the persistent use of child labor as evident in the study data (which is based on farmers’ self-reporting and therefore we believe, an underestimate).
  • Consistently across waves, low leaf price is the main cited reason for tobacco farmers’ willingness to shift from tobacco.
  • Poverty rates among tobacco farmers are significantly higher than the nationwide poverty rate

A significant increase in tobacco excise taxes, which is claimed to lower the demand for tobacco, would encourage tobacco farmers to shift to growing non-tobacco crops and open new opportunities to pursue more economically viable and sustainable livelihoods. That said, several challenges face tobacco farmers’ ability to shift away from tobacco farming. For some farmers, tobacco is one of only a few cash crops that can grow in the harsh dry season in Indonesia. 

Therefore, we recommend the following policy options to central and local governments:

  • identify and develop reliable and adequate sources of water and concomitant irrigation systems for non-tobacco farming in the dry season
  • establish agricultural extension services to educate farmers on different cash crops suitable for local conditions
  • incentivize the establishment of farmer groups to develop value chains for common crops
  • provide better information on crops that are in demand in local and adjacent markets through the agricultural extension services or other media
  • utilize the earmarked tobacco excise tax revenue to support the aforementioned programs.