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 6634rfoley@irishcancer.ie