Price taxation and smuggling

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• Price -taxation and smuggling
• The next steps
• Ailsa Rutter- Director of Fresh and
• Regional Tobacco Policy Manager for the North
  East

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PRICE

• There are three main reasons for tobacco
  taxation
• Raise revenue- tobacco taxes are very
  efficient-large, captured consumer market paying
  taxes because they cannot quit, or they are not
  price sensitive due to lower taxes (UK current
  around 10 billion revenue annually)
• Correct for externalities- a tobacco tax helps
  defray the external costs of tobacco consumption,
  such as diseases.
• Discourage use of the product.
• World Bank 2008

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Public health reasons

• Price is a very effective way of reducing
  smoking-WHO, World Bank and International
  Monetary Fund
• Encourages smokers to quit or reduce their
  smoking
• Discourage ex-smokers from starting again
• Deter non-smokers (especially young people) from
  starting

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Effect on consumption

• 1 rise in relative cigarette rises results in
  the range -0.25 to -0.5 fall in consumption-
  price elasticity (Chaloupka, et al 2002).
• In the UK the current long run estimate is that
  price elasticity is around 0.72, taking into
  account the smuggled market (HMRC 2003)
• World Bank (1999)- 10 rise increase in the
  price of cigarettes on average reduces demand by
  4 in high-income and by as much as 8 in middle
  or low-income countries

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Fear of price

• Government worries that higher prices will lead
  to increased smuggling, or that the prices are
  increasingly seen as a tax upon the poor.
• Tobacco industry lobbying e.g. South Africa,
  industry predicted massive smuggling when
  government announced series large rises in
  tobacco taxes- smuggling did increase but not on
  the massive scale predicted- from 1 to 6 of
  cigarettes smoked.

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Smuggling overview

• Illicit trade in tobacco products represents a
  major problem for the following reasons
• Smuggled cigarettes are sold at lower prices-
  quitting, uptake impact
• Smuggling deprives governments of billions of
  pounds in taxation, so reducing funding for
  public health and other policies.
• Smuggling makes top international brands
  available at affordable prices to low-income
  consumers, and to image-conscious young people
  who often regard such products as sophisticated
  and stylish.

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Smuggling overview

• Illicit trade in tobacco products represents a
  major problem for the following reasons
• Smuggled and counterfeit cigarettes can lead to
  the evasion of health regulations, such as
  prohibitions on selling to minors, package
  warning and other labelling requirements, and
  regulations on additives.
• Smuggling of tobacco products represents a
  significant law and order problem, as it is often
  carried out by organised crime and terrorist
  organisations, undermining national security and
  law and order.

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THE REALITY

• By the late 1990s cigarette smuggling in the UK
  had reached epidemic proportion- 25-30 of the
  total market was illegal
• Was costing the Government more than 3billion a
  year in lost revenue
• Tackling tobacco strategy launched 2000- lead
  agency HM Revenue and Customs (formerly Customs
  and Excise)
• All of the major multinational tobacco companies
  are implicated in tobacco smuggling

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THE REALITY

• Helped reduce the proportion of smuggled
  cigarettes to approx 16 of the UK market
• 16 cigarettes
• Half of hand rolled tobacco in UK is illicit
  resulting in net loss to Govt now of more than
  2billion a year
• Counterfeiting increasing- in 2005/6 51 of large
  illegal cigarettes seizures by Customs were
  counterfeit

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NORTH EAST INSIGHT

• We know big trade in cheap tobacco in the region-
  strongly linked to most deprived wards
• High demand therefore high supply
• Cheap retail price 2.50 pack
• Seen as the norm in many communities
• North of England Summit 6th December 2007
• 200 delegates from across the UK
• www.freshne.com to see presentations, reports

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SUMMARY OF KEY RECENT FRESH FINDINGS

• Four focus groups, in deprived communities-
  peripheral buyers and recent quitters

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SUMMARY OF KEY RECENT FRESH FINDINGS

• Consumer language crucial
• A smokers life is getting harder thanks to a
  widespread acceptance of the smokefree law
• Quitting feels a little easier for smokers post
  1st July
• Cheap cigarette industry is embedded into the
  fabric of society - a way of life
• There is a wide spectrum of involvement in the
  industry, those on periphery offer most potential
  i.e. easiest to impact / change behaviour (Last
  Resort and Opportunistic buyers)

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SUMMARY OF KEY RECENT FRESH FINDINGS

• No perceived problem buying or selling smuggled
  cigarettes (duty not paid)
• Getting one over on the Tax Man is to be
  applauded bending the law not really breaking
  it
• Spending less is the ultimate aim (poor
  communities and heavy smokers), cost is the major
  drive
• Naively believe they are smoking genuine duty
  frees
• Opportunity to challenge buyers faith in their
  cheap cigarette supplier and their product (and
  for some introducing the idea of fakes for the
  first time) ...and to educate them as to how
  distasteful (in their mind) fakes really are

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WHERE THE PERIPHERY BUY FROM
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CHEAP CIGARETTE SELLER A MODERN DAY ROBIN HOOD
community figures leaders
neighbours friends
parental rules parent to child tone of voice
traffic wardens other authority figures we
love to hate
Robin Hood is an apt analogy, he is a working
class hero redressing injustices of the
underprivileged - he is outside of the law but on
the side of (perceived) moral good. The Sheriff
of Sherwood is on the right side of the law, but
morally unjust
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Other recent useful insight

• BMRB Omnibus Survey is this Roberts study??
• Fieldwork conducted January 2008
• First of three waves of data
• 391 smokers
• 68 smokers included illicit sources among the
  places they report buying cigarettes from

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Where do you buy your cheap tobacco?

• Cheap tobacco includes illicit and tobacco
  bought abroad for own use
• Many smokers have a range of sources for cheap
  tobacco
• Women and older smokers appear less likely to use
  multiple sources
• SEG AB buy almost as much cheap tobacco but buy
  it abroad for own use

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So what should we be considering to do about
this situation?

• What did we ask for in the Budget on Wednesday?
• A real price escalator on top of inflation of 3
  should be reintroduced, which we estimate would
  add 10 pence above inflation to a packet of
  premium priced cigarettes.
• Also asked for VAT to be maintained at 5 on NRT
  products to help smokers to quit
• UK Government to
• Sign Phillip Morris agreement
• Advance the illicit trade article
• National tobacco smuggling strategy, with new PSA
  targets

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What did we get?

• Maintaining high levels of tax on tobacco helps
  to reduce overall tobacco consumption. Therefore
  Budget 2008 announces that, from 6pm on 12 March
  2008, tobacco duties will increase in line with
  inflation, adding 11 pence to the price of a
  packet of cigarettes.
• The rate of VAT on smoking cessation products was
  reduced to 5 per cent on 1 July 2007. Since then
  retail prices of these items have dropped while
  sales have increased. To further support the
  Governments objective to reduce smoking
  prevalence, this reduced rate will be continued
  beyond its original expiry date of 30 June 2008.
• To reinforce its efforts to prevent the supply of
  cheap illicit tobacco, the Government announces
  that the UK Border Agency will develop a
  comprehensive strategy to exert further downward
  pressure on the volume of tobacco smuggling, with
  the intention that the agencywill publish the
  strategy by the time of the 2008 Pre-Budget
  Report

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Other issues International

• Importance of the Illicit Trade Protocol-
  international problem, requires international
  solutions
• Marking of tobacco products so they can be
  tracked and traced from manufacture to point of
  sale and illicit products, including counterfeit,
  can be identified
• Licensing of participants within the supply chain
  
• Obligations on manufacturers to control the
  supply chain for their products, with serious
  financial penalties for those that fail to do so.
  
• Enhanced law enforcement measures
• Good progress at recent WHO negotiations

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Other issues- regional and local

• Any National Tobacco Strategy needs to be linked
  to international work, and there must be regional
  and local delivery piggybacked to these.
• North of England - three month consultation on
  plan to piggyback with international and national
  to reduce demand and supply.
• Six key areas proposed
• Developing partnerships
• Developing the role of health professionals
• Intelligence sharing
• Mapping informal markets
• Marketing and communications
• Working with business