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Making the Tobacco Industry Pay
Ms. Rachel FoleyPolicy & Public Affairs Manager, Irish Cancer Society
Making the tobacco industry pay
Rachel FoleyPolicy and Public Affairs Manager
Irish Cancer Society
Joint Proposal
• Branston, R. & Gilmore, A. (2010) ‘The case for OFSMOKE: how tobacco price regulation is needed to promote the health of markets, government revenue and the public’. Tobacco Control, doi:10.1136/tc.2009.034470.
• Branston, R. & Gilmore, A. (2013) ‘The case for Ofsmoke: the potential for price cap regulation of tobacco to raise £500 million per year in the UK’. Tobacco Control, doi:10.1136/tobaccocontrol-2011-050385
Based on the work of UK academics, Dr Robert Branston & Professor Anna Gilmore, Bath University
“These companies remain some of the most profitable in the world. This is thanks in part to their endlessinventive ways of undermining and circumventing regulation.” Anna Gilmore, University of Bath, UK, 2011
What’s the problem?
Market power
Pricing power
High price
high taxes
Significant profits
Price of a packet of 20 cigarettes net of tax in 27 EU countries, July 2011
Tobacco industry
Small number of companies
Ability to manipulate
price
Profits equal to
Coca-Cola, Microsoft
and McDonalds
A duplicitous industry
Our approach
Tobacco regulator
Tax structure
Tax escalator
Tax hand-rolled
tobacco
Illicit trade
Ireland
Profits = €100 million
a year
Profit margin = 26-55%
Government revenue
could increase by
€41-60 million a year
Market share and profitability
2011 Imperial JTI BAT Total tobacco industry profits
Market Share 33% 46% 10%
Revenue (after VAT and duty)
€79,777,706 €112,184,988 €34,538,000 €226,500,694
Profit actually made
€32,973,449 €62,280,000 €9,003,000 €104,256,449
Operating profits
41% 55% 26%
A tobacco regulator
New approach Cap profits Cover legitimate costs
Paid for by the tobacco industry
Could be extended
beyond price
2011Imperial JTI BAT Total tobacco industry profits
33% 46% 10%€79,777,706 €112,184,988 €34,538,000 €226,500,694
€32,973,449 €62,280,000 €9,003,000 €104,256,449
41% 55% 26%€15,955,541 €22,436,998 €6,907,600 €45,300,139
€17,017,908 €39,843,002 €2,095,400 €58,956,310
€9,573,325 €13,462,199 €4,144,560 €27,180,084
€23,400,124 €48,817,801 €4,858,440 €77,076,365
Impact of price regulation 2011Optimistic scenario (12% profit)
Conservative scenario (20% profit)
Reduction in Profits due to regulation €77,076,366 €58,956,310
Implied reduction in corporate tax @12.5% €9,634,546 €7,369,539
Cost of regulator €7,000,000 €10,000,000
Potential net increase in tax revenue to Exchequer €60,441,820 €41,586,771
Benefits
Market transparency
– shields Government
from industry lobbying
Remove price as
marketing tool
Less money to
undermine tobacco control policies,
lobby and develop new
products
Additional revenue for Government
Correct market failure
Could these benefits be
achieved through a different
mechanism?
Wholesale price Total tax
Retail price
Production Costs
Industry profit (incl.
retail margin)
Ad valorem
excise tax (9%)
Specific excise tax
(65%)
Sales Tax (23%)
79%21%
Tobacco tax structure
Specific Tax
Calculated on volume
Maximum allowable
level = 76.5%
Could increase
Government revenue without
increasing price
Industry could
absorb tax increase
Reduce down-trading
Reve
nue
Com
mis
sion
ers
Price elasticity of demand: -3.6
Land
mar
k Ec
onom
ics
Price elasticity of demand: -0.5
Fran
k Ch
alou
pka
Price elasticity of demand: -1 to -2.3
Why not a price increase?
Structure of tax
Should not facilitate the introduction of economy
products
Should not encourage
price competition
Should not allow tobacco
industry to absorb tax
increases on the cheapest
brands
Pall
Mal
l Reported that PJ Carroll was reducing the recommended retail price for Pall Mall by 50 cent from €7.75 to €7.25: ‘Less money more quality’.
Bens
on a
nd H
edge
s An example of product innovation is Benson & Hedges’ ‘B&H Big Box’ in which a 23-cigarette box is being sold for €9.75. M
arlb
oro
Gol
d To
uch Retailing for
€7.80 and is described as ‘an innovative new dimension in smoking: slightly thinner than Marlboro Gold Original...’.
But doesn’t Ireland have the highest price in
Europe at €9.20?
If the tax structure changed, the price of cigarettes would be relatively uniform
Tax Escalator
Real price hasn’t kept pace with nominal
price
High price but average affordability
CPI + 5%Become
policy in the UK
Loose tobacco
Sales increased by 71% in
2009
Tax only 60% of retail price
1 pouch = approx.
25 cigarettes for €4.25
Smuggling
Increase spending by
€8m per year
Improve enforcement
Make it illegal to buy
smuggled tobacco
De-link smuggling from price
Raise awareness of industry complicity
Adherence to Article 5.3
FCTC
Challenges
Public health and Dept. of Finance objectives not
aligned
Recession happy coincidence
Legal challenges always looming
Contact me:
Rachel FoleyPolicy and Public Affairs Manager
Irish Cancer Society
00 353 1 231 [email protected]