The Intersection of Tobacco Taxes and Tobacco Farming in Indonesia

Last month (December 2020), Indonesia’s finance minister announced a small increase in tobacco excise taxes—approximately 12.5% on average. Though the public health community typically welcomes any tax increase, to have a meaningful effect on tobacco prices and therefore consumption, increases must be larger than the ones proposed. To make tobacco taxation more effective, not only do increases need to be larger, there also needs to be an increased effort to simplify the tax structure as regulated on the now eliminated Excise Simplification Roadmap. The tiered structure with very different tax rates among cigarette and kretek products continues to generate opportunities for smokers to “trade down”—i.e., switching to cheaper kretek or cigarette brands.

It is important to note that the minister raised the specific issue of balancing tobacco farming and tobacco tax increases. Importantly, some key relevant issues were overlooked.  Whereas the minister correctly identified that about 500,000 households are engaged in tobacco farming, two crucial dynamics were excluded. First, recent research on tobacco farming suggests that for the vast preponderance of tobacco farmers, a small percentage of their income is from farming. In the most recent rigorous and nationally representative empirical study on this, 80 percent of tobacco farmers reported that less than half of their household income came from tobacco farming.  Non-tobacco farmers derived higher income because they have a more diverse economic portfolio. Even more consequential perhaps, recent research shows that tobacco income is negatively related to income: in other words, most farmers wishing to increase their household income are better off growing other crops.

In late 2020, researchers at the University of Gadjah Mada, the Tobacconomics team at the University of Illinois at Chicago, the Australian National University, American Cancer Society and McGill University released a report that examines the complexities of tobacco farming.  The main findings include:

  • Though 2018 was an above-average year for most tobacco farmers, most non-tobacco farmers still do better overall because other crops perform better and more consistently over time.
  • Most tobacco farmers who switch to other crops increase their profits even in the first season after the switch.
  • Tobacco farming has far higher agricultural input costs per hectare compared to non-tobacco crops.
  • Tobacco growing’s costs are very high: on average, typically requiring twice the household labor hours compared to non-tobacco crops.
    • These are lost opportunities for members of tobacco farming households to pursue other economic activities with those hours.
  • Most farmers greatly underestimate the costs of tobacco growing and overestimate their returns.
  • Most tobacco farmers are living below the national poverty line.
  • Many tobacco farmers use child labor and many report green tobacco sickness symptoms (a form of acute nicotine poisoning).

The evidence clearly demonstrates that tobacco farming is NOT an excuse to go light on tax increases—in fact, the report suggests that policies such as tobacco taxation that lessen demand for tobacco would hopefully hasten a move away from tobacco to more prosperous livelihoods.

To help move farmers to alternative livelihoods, Indonesia’s national and/or subnational governments have several policy options:

  • Identify viable alternative crops suitable to the region.
  • Educate farmers by improving agricultural extension services.
  • Promote linkages between farmers and agri-industries.
  • Devise and provide financial incentives and credit schemes for non-tobacco farming.
  • Improve farming infrastructure (e.g., roads, irrigation, and water reservoirs) to promote non-tobacco crops farming.
  • Help develop farming corporations or community enterprises.

Read this blog in Bahasa Indonesian here

The Report is available in English and Bahasa Indonesian here.

The Fact Sheet is available in English and Bahasa Indonesian here.