KURT YEO: Tax tobacco products in proportion to their harm

Finance Minister Enoch Godongwana on Wednesday retables a budget that was torpedoed by a proposed two percentage point VAT increase. 

The plan to raise VAT from 15% to 17% has been correctly condemned by political parties and social justice organisations, as well as citizens buckling under immense economic pressure.

The government is in a quandary. It needs to raise R112bn over the medium-term expenditure framework to cover unbudgeted expenses that include the extension of the Covid social relief of distress grant; improvements to health facilities; allocating money to provinces to hire more teachers; and honouring the 5.5% wage deal reached with public sector unions.

Some reports suggest that the Government of National Unity could be receptive to a 50 basis-point VAT increase. If these are to be believed, revised VAT receipts would raise R15bn and R20bn in extra revenue, but not enough to cover the R60bn shortfall for this financial year alone. 

But while Godongwana and his team at the National Treasury sit at the table and ponder where to find more money, some officials could be advocating for higher sin tax increases as a revenue-generating tool.

Excise duties generated R57.6bn for the fiscus in 2024/25. The minister has also announced a further increase in duties on electronic nicotine and non-nicotine delivery systems, known as vapes, to R3.04 per millilitre.

As much as we understand the pressure he and the Treasury are under, such a blanket approach neglects other societal considerations such as reducing tobacco by encouraging more people to switch to much safer alternatives.

According to the World Health Organisation, tobacco kills more than 8-million people annually. That includes more than 7-million deaths resulting from direct tobacco use and about 1.3-million deaths attributed to non-smokers who are exposed to second-hand smoke.

Smoking rates are declining in the developed world because more smokers are switching to less harmful e-cigarettes, vapes, and other non-traditional tobacco products. Taxing vaping products has been proven to undermine efforts to reduce smoking rates.

Vaping is a less harmful alternative to smoking tobacco, and that has been proven by research. According to Public Health England, switching from smoking to vaping can lead to a 95% reduction in health risks associated with nicotine consumption. By making vaping more expensive through taxation, smokers may be deterred from making the switch and instead continue or revert to smoking traditional cigarettes.

Sin taxes do little more than increase the price of products in question because manufacturers and stockists transfer these to the consumer.

A study found that a 10% increase in cigarette taxes led to an 11% reduction in smoking frequencies, but e-cigarette taxes did not show a significant impact on smoking behaviours. That suggests e-cigarette taxes do not encourage smokers to transition away from traditional cigarettes or reduce their overall nicotine consumption effectively.

Further research — the results were published in the National Library of Medicine — estimated the cross-price elasticity of e-cigarettes using a simulated demand procedure. The researchers sampled smokers in New Zealand to indicate their demand for tobacco at a range of prices. They found that cross-price elasticity for e-cigarettes was significantly positive, meaning they were partially substitutable for regular cigarettes at lower prices.

“Simulated demand for regular cigarettes at current market prices decreased by 42.8% when e-cigarettes were available, and e-cigarettes were rated 81% as favourably as own tobacco brand,” according to the research.

The researchers conclude that e-cigarettes are potentially substitutable for regular cigarettes, and their availability would reduce tobacco consumption.

A peer-reviewed meta-analysis of e-cigarette price elasticity, published by F1000Research, sought to understand whether and how much electronic nicotine delivery systems (ENDS) act as economic substitutes for cigarettes.

The analysis found that a 10% increase in the price of ENDS was associated with an 11.5% decrease in their sales, and also decreased the prevalence of their use. These researchers also concluded that increased prices for ENDS were associated with increased smoking prevalence, propensity, and the number of cigarettes smoked. Their data suggested that ENDS were substitutes for cigarettes and that taxing the latter higher instead of the former would encourage the switch from smoking to less harmful products.

“Policymakers should consider using taxation to influence behaviour and tax tobacco products in proportion to their harm,” the analysis states.

From a behavioural economics perspective, the decision-making process regarding nicotine consumption is complex and influenced by various factors beyond price alone. Smokers may prioritise immediate gratification over long-term health benefits when considering whether to switch from traditional cigarettes to e-cigarettes or vice versa. Therefore, simply imposing excise duties may not be sufficient in altering behaviour patterns related to tobacco use.

The other unintended consequence of higher prices is the propensity to drive consumers to cheaper illicit products that are more harmful to their health.

When the government banned the sale of tobacco and alcohol at the height of Covid-19 in 2020, it led to an explosion in the illicit market, which is now estimated to account for about 60% of all cigarettes consumed. You can get a pack of 20s for as little as R12.50c on the black market.

Regulations that are not well intended and high excise duties can never be a substitute for effective harm reduction efforts.

As policymakers and custodians of the public purse, Godongwana and his team at the Treasury have a huge responsibility. Because they remain committed to fiscal consolidation, they have to ensure that every fiscal rand does not go to waste.

Operating within a limited fiscal space constrained by sluggish economic growth means it’s easy to look at sin taxes as low-hanging fruit. However, imposing blanket excise duties without taking into consideration the long-term effect on harm reduction efforts is cutting the nose to spite the face.

The public healthcare system is under strain and can barely cope with the demand for services. Electronic nicotine delivery systems can contribute immensely to harm reduction by encouraging more smokers to switch to safer alternatives. The healthcare system could thus attend to fewer patients each year seeking treatment for tobacco-related illnesses.

Research by the University of Cape Town academics Nicole Vellios and Corné van Walbeek conducted in 2024 revealed how much revenue the government has lost since 2010 due to trade in illicit cigarettes. Vellios, based at UCT’s research unit on the economics of excisable products, said that in 2022 the government lost R17.6bn in excise and VAT revenue. 

“If the SA Revenue Service (Sars) had collected the R17.6bn, an additional 1% would have been added to total revenue. If we look at a longer period, from 2002 to 2022, the total lost excise and VAT revenue is R119bn. The majority of the lost revenue occurred from 2010 to 2022 when R110bn in excise and VAT revenue was lost.”

That is where money is sitting, minister. Give Sars more resources to go after those crooks instead of punishing those seeking less harmful alternatives. 

• Yeo is a former smoker who, after switching to vaping, cofounded the consumer advocacy group Vaping Saved My Life