Increasing the price of tobacco products through taxation is the most cost-effective measure a government can take to reduce tobacco use. Economic studies by the World Bank and others show that for every 10% increase in the real price of tobacco, consumption drops by about 4% in high-income countries and 8% in low- and middle-income countries. Higher prices have the greatest impact on those with the least disposable income: low socio-economic groups and youth. The cost effectiveness of tax increases – as well as most other tobacco control policies – is comparable to that of immunization in terms of life-years saved relative to the cost of implementation.
Why are governments reluctant to increase tobacco taxes?
Some governments are reluctant to raise tobacco taxes because they fear that this will reduce tobacco tax revenue and increase smuggling. However, evidence from many economically diverse countries shows that this is not the case. In fact, when tobacco tax rates go up, tax revenue also increases.
Furthermore, evidence shows that cigarette taxes and prices are not the most important factor in cigarette smuggling. Many high-tax countries have low levels of smuggling and many low-tax countries have high levels of smuggling. Studies from the World Bank have found that the general level of corruption in a country is a factor that explains accounts for the level of smuggling better than prices.
Corruption is a better predictor of smuggling than cigarette prices. In addition, countries can significantly reduce smuggling through tracking and tracing systems that can quickly identify where and when products “disappear” into the illegal market and through strengthened enforcement and higher penalties. Spain provides a good case study for the reduction of smuggling through these measures.
Myths and facts on tobacco taxation and other tobacco control policies
Background papers on tobacco taxation: