Government should not raise taxes on cigarettes, says economist
State revenues from excise duties have been declining, despite higher consumption rates and higher duties
The government should not raise excise taxes on tobacco products until it manages to rein in the thriving illicit cigarette market, says Azar Jammine, director at economic consultancy Econometrix.
Despite successive tax hikes, state revenues from excise duties on cigarettes declined by R1.9bn in the past two financial years as more consumers turned to illegal brands that evade these taxes, according to an Econometrix study commissioned by British American Tobacco SA. And even though the consumption of cigarettes has been rising, state income from the industry has fallen well short of National Treasury’s own forecasts in recent years, the study shows.
“Any further increases in excise duties will damage rather than enhance revenue collection for the government,” Jammine said.
“The most effective thing to do right now is freeze the excise duty — it won’t increase revenue for government but at least it will not cause a decrease, which other alternatives risk doing.”
This was not a permanent solution, Jammine said, “but until you get rid of the illicit cigarette trade, you’ve got to do something as a stop-gap measure and this is about the best that we can hope for”.
A separate study by research house Ipsos in 2018 found that the top-selling cigarette in SA was RG, an allegedly illegal brand that regularly sells for R10 per pack of 20. This is significantly less than the R17.85 minimum tax owed on a pack of 20.
Jammine said SA had “got to the point of taxation now where it’s becoming counterproductive”, adding that this applied to other taxes, including on personal income.
In 2017, the government said it would start taxing high-income earners at 45% of their taxable income, from 41%.
Previously the luxury vehicle market had remained buoyant during recessions while the entry-level market suffered, but that trend had reversed, said Jammine.
“In the past two years the luxury market has really taken a hammering, which suggests to me that the massive increase in the average tax rate of the middle-income group was over the top. It was the straw that broke the camel’s back. That’s the analogy I draw with cigarettes.”
Jammine said excise duty hikes on cigarettes had only served to prompt consumers to switch to cheaper, usually illegal, alternatives.
“Considering the high price elasticity for tobacco products, holding excise at current levels is the only way to prevent further erosion of the tax base while enforcement measures are implemented to curb the illicit tobacco trade,” said Jammine.
Econometrix also recommended that the state enforce a minimum price for a pack of cigarettes of R23. This comes after Batsa notified SA's only tobacco processor, Limpopo Tobacco Processors, that it may have to consider buying foreign tobacco if the illicit market continues to surge.