By: Staff Writer
November 22, 2024
The Organisation for Economic Co-operation and Development said in its Tobacco Taxation in Latin America and the Caribbean report that tax reform is needed in the LAC on tobacco and urged for reforms that align with best practices globally.
The OECD said: “Tobacco excise taxes have the potential to raise significant revenues. Revenues from indirect taxes on tobacco range from 0.01 percent (in Barbados) to 2.58 percent (in Chile) of total tax revenue. Tobacco excise taxes raise 0.50 percent of total tax revenue in LAC on average, which is about one-third of average annual smoking attributable medical costs. Countries with higher tobacco use prevalence raise more tax revenues.
“The average tobacco excise tax collected per pack of legal cigarettes sold increased from USD 1.2 to 2.0 (expressed in purchasing power parity) between 2008 and 2016 due to significant increases in the tobacco tax rates. However, the tax ratio has increased only slightly since then, reflecting the absence of ambitious tobacco tax reforms in recent years.”
The OECD added: “Concerns about revenue losses from tobacco excise hikes are overstated. First, the demand for tobacco products is inelastic as smokers tend to adjust their behaviour only slowly over time.
A tobacco tax increase will tend to raise tax revenues in the short run, even if tobacco use decreases. In the longer run, tobacco tax increases can result in a drop in revenues, but the reduction in health, economic and social costs would be far larger than the loss in tax revenues, thereby resulting in a positive impact for the government budget.
“Second, concerns that tobacco tax increases would strengthen illicit trade should not prevent tobacco tax reform either. Instead, these concerns call for accompanying measures to contain illicit trade.”
In 2021, over 350 000 individuals died from tobacco use and second-hand smoke in Latin America and the Caribbean (LAC). Over 40 percent of respiratory cancers in LAC were attributable to tobacco use, and the smoking-attributable medical costs can reach up to 1.5 percent of GDP per year. The total social and economic costs of tobacco use significantly outweigh the tobacco tax revenue that is raised.
The report also said: “Tobacco products remain affordable on average in LAC and have become more affordable over time. The main objective of tobacco taxes is to increase the price of tobacco products such that smokers reduce or quit smoking. For this tax-induced incentive to be effective, tobacco excise taxes need to be sufficiently high, which will also limit the possibilities for tobacco businesses to absorb the tax instead of passing it through to retail prices.”