The Potential Benefits of Effective Cigarette Tax Policies: Evidence from Latin America
As part of the Tobacconomics Think Tank Project, we have been partnering with think tanks in low- and middle-income countries to produce economic evidence on effective tobacco taxation. Through our work, we set out to answer six questions that guide our research core competencies (shown below), which reflect common arguments made by the industry against effective tobacco taxation. It is crucial to address these concerns because currently, most countries are failing to implement best practices for cigarette tax policies (check out the Tobacconomics Cigarette Tax Scorecard to learn about current policies). As a result, governments are missing out on the fiscal and public health benefits from effective cigarette tax policies.
This blog explores the research produced under the second core competency in Latin America. This is a part of a larger series, where each blog highlights the evidence related to a core competency from one of the three regions where we work: Asia, Latin America, and Southeastern Europe.
| # | Research Core Competency Questions |
| 1 | How do consumers of tobacco respond to tobacco taxes, and how would consumers respond to tax increases and other structural reforms to fiscal policies? |
| 2 | How would a given fiscal policy affect the price of tobacco products, and how would this change in price affect government revenues, consumption, and health outcomes? |
| 3 | How would the fiscal policy affect the poor? |
| 4 | What are the health and economic costs of a given unhealthy behavior and how can the fiscal policy address these costs? |
| 5 | How would the fiscal policy affect employment and economic growth? |
| 6 | To what extent is the fiscal policy related to illicit trade of tobacco products? |
To examine the impact of tax increases and alternate tax structures, researchers in the Latin America developed simulations to estimate tax revenue, cigarette consumption, and public health impact. Their results support existing literature and suggest that implementing more optimal tax policies would raise additional tax revenue, while improving health. We hope that these findings can inform more effective tobacco taxation in countries across the region.
Brazil
In Brazil, the government employs a complex excise tax structure on tobacco, which is hindered by very low prices. Our partners in the country examined the impact of alternate tax structures and rates.
UCB analyzed proposed tax reform (PL887-2020) which would yield a higher tax burden through a 22% ad valorem tax rate and specific tax of BRL 1.10 per pack. Simulating three scenarios based on the possible price-setting behaviors of manufacturers in response to the reform, researchers assessed changes to consumption and revenue (Table 1). The first scenario assumed that manufacturers would implement the minimal price adjustment needed to ensure positive profits for all brands. Under Scenario 2, manufacturers would maintain the average markup margin from before the reform. Finally, in Scenario 3, the industry would increase prices to the maximum markup margin pre-reform. In each of the scenarios, the government would collect additional tax revenue, while reducing cigarette consumption. The reform would also promote uniformity, reducing price differences between brands and states.
|
Table 1 |
Consumption of low-price brands (compared to status quo) |
Consumption of medium-price brands (compared to status quo) |
Consumption of high-price brands (compared to status quo) |
Tax revenue (BRL) |
|
Baseline |
N/A |
N/A |
N/A |
17.75 billion |
|
Scenario 1 |
-38.1% |
-3.2% |
-9.6% |
23.20 billion |
|
Scenario 2 |
-58.6% |
-33.5% |
-25.5% |
21.92 billion |
|
Scenario 3 |
-71.5% |
-44.6% |
-40.5% |
20.53 billion |
UCB also simulated the effect of different tobacco excise tax rates, to reflect possibilities in the proposed tax reform (Bill 45/2019), which would unify taxes across the states (Table 2). The first scenario assumes that the government would set the excise rate to be 50.85%, to ensure that no state loses tax revenues. Under Scenario 2, the government would maximize the tax revenue while ensuring that no state would lose revenue, setting the rate at 55.95%. Scenario 3 assumes that the government would keep the ad valorem-specific tax structure and add a specific excise tax of BRL 3.89 per pack. The tax reform would reduce consumption and increase revenue collection to different magnitudes depending on the excise rate chosen by policy makers. Further, researchers simulate the impact of a 10% reduction in the illicit market. This change in the illicit market would increase tax collection by an average of BRL 1.6 billion in the scenarios.
|
Table 2 |
Consumption of low-price brands (compared to status quo) |
Consumption of high-price brands (compared to status quo) |
Tax revenue (BRL) (compared to status quo) |
|
Scenario 1 |
-9.9% |
-20.9% |
+27.3% |
|
Scenario 2 |
-25.3% |
-39.9% |
+8.5% |
|
Scenario 3 |
-6.7% |
-1.0% |
+8.3% |
Mexico
Mexico administers a uniform mixed excise tax on cigarettes. Three think tanks in the country modelled alternate tax rates and structures to determine their public health and fiscal implications.
Ethos considered five tax policy options and modelled their impact from 2018 to 2022 (Table 3). In Scenario 1 the specific component would be adjusted only for inflation. For the second scenario, the specific component would increase by MXN 0.25 each year. Researchers simulated an annual increase of 35 percentage points for the ad valorem component. Under Scenario 4, both components would increase and by 2022, the ad valorem would be 260% of the producer price and the specific component would be MXN 0.80 per cigarette. Finally, in the fifth scenario, the researchers set Mexico’s prices to the average price for a pack of cigarettes in high-income countries. The findings show that increasing both the specific and ad valorem components would be the most effective policy to ensure that consumption is reduced and additional revenues are raised, while avoiding substitution and other unintended effects.
|
Table 3 |
Packs consumed (compared to status quo) |
Consumers (compared to status quo) |
Change in tax revenue (compared to status quo) |
|
Baseline |
+16.2 million |
+0.4 million |
-2.2% |
|
Scenario 1 |
+3.3 million |
+0.3 million |
+0.2% |
|
Scenario 2 |
-229.0 million |
-1.2 million |
+33.4% |
|
Scenario 3 |
-129.4 million |
-0.5 million |
+21.6% |
|
Scenario 4 |
-176.2 million |
-1.4 million |
+37.8% |
|
Scenario 5 |
-620.0 million |
-3.6 million |
+44.7% |
Starting in 2020, the specific excise tax per cigarette was updated to 0.49 (and the law included an automatic annual update for inflation) following the adoption of a tax reform in January of 2020. CIAD estimated its impact on consumption and revenues compared to the baseline and an alternate tax increase (Table 4). The first scenario represented the adopted tax reform, which increased the fixed component of the excise tax to MXN 0.49 per cigarette for inflation (retroactive to the last tax increase in 2011). In the second scenario, the specific component would increase to MXN 1.35 per cigarette. The second scenario reduces consumption more than the adopted tax reform. At the same time, it raises more revenue for the government. The researchers also find that the burden of the tax increase in both scenarios would fall largely on high-income smokers, meaning that the tax would be progressive.
|
Table 4 |
Specific tax per cigarette (MXN) |
Consumption (compared to status quo) |
Change in tax revenue (compared to status quo) |
|
Baseline |
0.35 |
N/A |
N/A |
|
Scenario 1 |
0.49 |
-4.81% |
+9.3% |
|
Scenario 2 |
1.35 |
-33.95% |
+38.2% |
CIEP updated their simulation to increase the specific component of the excise tax to MXN 1.49 per cigarette (Table 5). Similarly, this tax increase would lead to significant public health and fiscal benefits.
|
Table 5 |
Specific tax per cigarette (MXN) |
Sales of cigarette packs |
Tax revenue (pesos) |
Change in tax revenue |
|
Baseline |
0.49 |
1,381.3 million |
54,741.3 million |
N/A |
|
Scenario 1 |
1.49 |
874.5 million |
78,592.7 million |
+43.6% |
CIAD modeled the impact of increasing the specific component of the excise tax to MXN 1.49 per cigarette on the consumption of tobacco, alcohol, and sugary beverages. Cigarette consumption would decrease by 33.08%, alcohol consumption would decrease by 0.96%, and sugary beverage consumption would decrease by 3.54% in this scenario. On the other hand, examining the notion that there might be proportionally more impact if taxes are raised for all products, if the specific component of the excise tax was increased for all three product types, cigarette consumption would decrease by 40.46%, alcohol consumption would decrease by 6.88%, and sugary beverage consumption would decrease by 7.22%. Researchers also find that smokers with comorbidities would be more sensitive to the proposed price increase, with 170,000 quitting.
In another study, CIEP considered three possible scenarios for alternate tax rates (Table 6). The baseline reflects the current law, under which the excise tax is updated for inflation annually. In Scenario 2, which has been proposed in legislation, the specific component of the excise tax would increase to MXN 1.49 per cigarette. Finally, the third scenario would maximize revenue by increasing the specific component to MXN 2.60 per cigarette.
|
Table 6 |
Specific tax per cigarette (MXN) |
Sales (compared to status quo) |
Change in tax revenue (compared to status quo) |
|
Baseline |
0.49 |
-1.5% |
+2.0% |
|
Scenario 1 |
1.49 |
-18.1% |
+31.8% |
|
Scenario 2 |
2.60 |
-36.9% |
+42.5% |
Peru
Cigarettes are subject to a uniform specific excise tax in Peru. Our think tank partner modeled possible tax policies.
IEP simulated four different scenarios of cigarette price increases from 2019 to 2030. The researchers found that even increasing the excise tax by only 5% per year would significantly reduce consumption and increase revenues. On the other hand, if the government increased the tax by 10% annually, cigarette consumption would fall by 26.6% and reduce tobacco-related morbidity and mortality. This larger tax increase would increase revenues by 110.1%.
The evidence produced by our think tank partners demonstrates the untapped potential of cigarette taxes in the region. Higher taxes and more effective tax structures increase revenue collection, while decreasing consumption and reducing harm to public health. Policy makers in the countries discussed should utilize these economic simulations in order to reach their policy goals.
Next up in our blog series, is the discussion of alternate tobacco tax systems in Southeastern Europe, check it out here!