The tobacco industry lobbies against tax increases, arguing that high taxes cause illicit trade. However, the World Bank has concluded that tobacco taxes play only a minor role in illicit trade and can be reduced by countries strengthening their tax administration and enforcement.
The ASH law guide provides links to regulations on tax and illicit trade.
ASH, in collaboration with academic experts, regularly makes submissions to HM Treasury recommending improvements to tobacco taxes, and strategies to control the illicit trade.
High tobacco taxes are recognised as important revenue raising and public health interventions in the UK and internationally by the World Health Organization. The UK government has a tobacco tax escalator in place until the end of the current parliament of at least 2% above inflation. See Budget 2020.
Increasing tobacco taxes increases government revenues, as the increase in tax normally outweighs the decline in consumption of tobacco products. This is because tobacco is addictive, so demand is inelastic which means that as price goes up demand falls less than the price rise, so tax revenues increase.
Price rises have biggest impact on low income smokers who are more likely to respond to price increases by quitting or cutting down. However, the impact of price rises for those who don’t quit is also greatest on those on low incomes. For that reason ASH and other public health organisations argue that government should spend more money on measures to achieve the Government’s smokefree 2030 goal, focused on motivating disadvantaged smokers to quit.
- Health Foundation. Why greater investment in the public health grant should be a priority. 2021
- HMRC Tobacco Bulletin statistics on tax revenues by product type updated quarterly
- HM Treasury. Tobacco Levy: response to consultation. September 2015 includes UK estimates of elasticity of demand for tobacco
- Tobacco Tactics on industry price and tax strategies
- WHO FCTC Article 6 guidelines on tobacco taxes
Illicit trade in tobacco
The illicit trade in the UK ballooned after the UK government introduced a tobacco tax escalator above inflation in the 1993 Budget explicitly to reduce smoking. Big Tobacco’s response was to fuel a parallel market of cheap smuggled cigarettes, which sustained their profits, while undermining government revenues.
In the early 1990s the illicit cigarette market was around 3% by 2000 it was 21% and still growing, with associated losses to government revenues. Smoking rates among adults had changed little during the 1990s, and smoking among children had increased.
Big Tobacco argued the solution was to stop increasing taxes. Instead the UK government implemented a comprehensive anti-smuggling strategy in, while continuing to increase taxes. As a World Bank report and annual monitoring by the UK of the illicit market shows, UK Government’s strategy has been very successful, and has been strengthened by the coming into force of the WHO FCTC Illicit Trade Protocol, which requires governments to control the legal trade in tobacco and prevent diversion into the illicit market.
In 2000-01 one in five cigarettes smoked in the UK were illicit, now it is around one in ten. In 2000-01 over 60% of handrolled tobacco smoked in the UK was illicit, now it is around a third. Because smoking rates have fallen significantly over that time, the volume of illicit tobacco has fallen to an even greater extent than the market share. The volume of illicit manufactured cigarettes is only 15% that of 2000-01, and for handrolled tobacco 70%. from 17 billion to 2.5 billion cigarettes and 5.6 to 4 million kgs of rolling tobacco and revenue losses have also declined by around 70%.
To quote the World Bank, “Contrary to tobacco industry arguments, raising tobacco taxes is not the primary cause of illicit trade. Accumulated evidence indicates that the illicit cigarette market is relatively larger in countries with low taxes and prices, while relatively smaller in countries with higher cigarette taxes and prices. Non-price factors such as governance status, weak regulatory framework, and the availability of informal distribution networks appear to be far more important factors.”
- HMRC. Measuring tax gaps. Updated annually
- HMRC. Measuring tax gaps tables 2021
- Tobacco Tactics: Tobacco smuggling
- WHO FCTC Protocol to Eliminate Illicit Trade in Tobacco Products
- World Bank report Confronting Illicit Tobacco Trade. Chapter 7 contains a detailed analysis of the evolution of the UK’s tax and anti-smuggling strategies