EDITORIAL: Taxing cigarettes is a tricky business
Hiking taxes on tobacco products risks making the illicit market bigger and more lucrative
With the exception of tobacco companies and their shareholders, it’s hard to find anyone who disputes that having fewer smokers would be a good thing.
Governments all over the world have tinkered with their tax policies to encourage citizens to kick the nicotine habit even though it means less tax revenue, because that would be more than balanced out by fewer people seeking medical care in public hospitals.
When SA moved to level two of the national lockdown in August, the sale of cigarettes and other tobacco products had been completely banned since late March, ostensibly to fight the spread of coronavirus among smokers who share hand-rolled tobacco This was based on reasoning by co-operative governance & traditional affairs minister Nkosazana Dlamini-Zuma, which became a YouTube sensation.
Dlamini-Zuma has said that the ban has been worth it because it had led to almost 1-million people giving up smoking. That was always going to be impossible to sustain in a free society such as ours, and the claims of success are also subject to debate. University of Cape Town researchers said early in June that just 16% of smokers in their sample had successfully quit smoking during the lockdown.
This also speaks to the addictive power of cigarettes. Indeed, it does seem wrong that companies are able to sell a product that kills millions when used exactly the way it’s supposed to be. Unfortunately, as the researchers showed, draconian measures such as an outright ban do not necessarily lead to a change in behaviour. About 90% of those who hadn’t quit smoking indicated they had purchased cigarettes during the lockdown, a sign that the crusade merely served to entrench an already flourishing illicit tobacco market.
Also made obvious was how price-insensitive demand for cigarettes is, due to the addictive nature of the product, with millions spending three to four times the regular price to acquire it. That has spawned the idea that there is scope to increase taxes on tobacco to achieve two objectives: collect more, to revamp the creaking health infrastructure, and to make people kick the habit.
That also has to be approached with caution.
The danger is that the country could end up losing more as the appeal of illicit trade increases due to the prices of the legal product rising to levels that make the consumer reconsider. SA was losing roughly R7bn a year through tax evasion related to the illicit market even before the government’s experiment with prohibition handed the initiative to underground criminal syndicates.
Even when the SA Revenue Service (Sars) was ranked among the best tax collection agencies in the world before being gutted during the state capture years, the illicit market was thriving, with three in 10 smokers already buying contraband cigarettes.
In August Sars commissioner Edward Kieswetter asked for additional resources to strengthen the organisation’s investigative capacity to deal with an increase in its workload due to tax evasion. “Unless we significantly boost the resources at Sars — specifically in ... technical, investigative areas — then we are fighting a losing battle, and I have to say that very transparently,” Kieswetter said. He would probably give up the fight if more people, driven by prohibitively high prices, are driven to the illicit tobacco market.
In a country where the minimum wage is R20 an hour and more than 10-million people have no formal source of income, hiking taxes on tobacco products risks making the illicit market bigger and more lucrative. The risk also exists of driving people into the untested fake products with high tar content designed to imitate big brands, increasing the health threat.
Until more South Africans are put into jobs and Sars is better than it was even before the state capture years, prohibitively high tax rates would wreak havoc on the government’s revenue, and undermine its goal of improving public health.
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