Health taxes: some observations from the 2022 budget

In the recent budget speech finance minister Enoch Godongwana announced a 5.5% increase in the excise tax on cigarettes, and a 4.5%-6.5% rise in the excise tax on alcohol. While these tax increases are marginally higher than the inflation rate, they are substantially smaller than last year’s 8% excise tax increases. Sadly, this year’s tax increases are so small that they will have only a limited impact on public health.

Last year then finance minister Tito Mboweni explicitly indicated that an increase in the price of a product, even alcohol and tobacco, caused people to decrease their consumption. This motivated him to increase the excise tax by well above the inflation rate. The new minister could have done much better.

Still, the alcohol and tobacco industries are likely to be unhappy with these increases because higher excise taxes reduce their profitability. The alcohol industry has been particularly vocal about its discontent with increases in the alcohol excise tax. Before the budget speech SAB made a public call for the  minister not to increase the excise tax on alcohol above the rate of inflation. Portraying itself as an industry battered by high excise taxes and sales restrictions during Covid-19 surges, the company threatened to move some of its manufacturing operations to Mozambique.

However, analysis of the figures in the 2022 Budget Review show that the alcohol industry’s presentation of itself as a struggling industry is far removed from the truth. In fact, per capita alcohol consumption in 2021 was the highest it has been in the past decade. As for SAB’s “struggling” beer industry, per capita consumption is higher than it was in 2019, before the start of the pandemic. Despite sporadic sales bans in the past year, people have clearly been able to stock up their alcohol supplies, which would have delighted the industry.

A side effect of this increase in alcohol consumption is that the government has also been able to generate more revenue. The National Treasury expects to collect R18.3bn in beer excise taxes in the 2021/22 fiscal year, 66% more than it collected last year and 18% more than it collected two years ago. For all alcohol, revenue for the 2021/2022 financial year is expected to be R35.7bn, which is 62% more than last year and 23% more than two years ago.

The tobacco industry was surprisingly quiet during the run-up to this year’s budget speech. Its standard argument is that higher taxes cause an increase in illicit trade. The Budget Review data indicates that the legal market has only partially recovered in 2021 after being hammered in 2020. In 2020 the sale of cigarettes was banned for 20 weeks.

Legal consumption of cigarettes in the 2021/22 financial year is estimated to be 40% less than two years ago. The sad conclusion is that even though the illicit cigarette market is smaller than it was in 2020, it is substantially larger than it was before the start of the pandemic.

While the tobacco industry will probably claim that the decrease in legal cigarette consumption is the result of high excise taxes, the true underlying cause of illicit trade is weak tax administration. Since 2010 the illicit cigarette market in SA has grown though the excise tax has increased by barely more than the inflation rate. In contrast, between the mid-1990s and 2009 the excise tax increased by nearly 10% more than the inflation rate each year, yet there was no noticeable increase in the size of the illicit market. The removal of specialist units in at the SA Revenue Service (Sars) during Tom Moyane’s tenure gave the tobacco industry free rein.

The growth in the illicit cigarette market points to the need for urgent intervention by Sars. In fact, intervention is long overdue. Guidelines on appropriate measures  for intervention are documented in the International Protocol to Eliminate Illicit Trade in Tobacco Products, an international treaty developed under the auspices of the World Health Organization. SA has not yet ratified the protocol, despite having a huge illicit trade problem.

Ratification will require SA to implement measures that have been proven to be effective in the battle against illicit trade. These include the introduction of digital tax stamps, track and trace technology, licensing protocols, and rules that hold tobacco companies accountable for the distribution of their product. The situation is critical. There is no time to waste.

The authors are with the Research Unit on the Economics of Excisable Products at the University of Cape Town.