Cigarette taxing is a tricky affair
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.
Before SA moved to level two of the national lockdown in August, the sale of cigarettes and other tobacco products had been banned completely, 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, who became a YouTube sensation.
Dlamini-Zuma said that the ban was justified because it 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 only 16% of smokers in their sample had quit smoking successfully during the lockdown. This also speaks to the addictive power of cigarettes.
Indeed, it does seem wrong that companies can 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 bought 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 of people spending three to four times the usual price to get 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 pressure people into kicking the habit. But this must also be approached with caution. The danger of raised prices of legal product could backfire, making illicit product more attractive.
SA was losing 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 work load due to tax evasion. “Unless we significantly boost the resources at Sars ... specificially 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 were driven by prohibitively high prices 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 also exists of driving people into using the untested fake products with high tar content designed to imitate big brands, increasing the health threat. Until more South Africans become employed and Sars is functioning even better than it was before the state-capture years, prohibitively high tax rates would wreak havoc on the government’s revenue, and undermine its attempts to improve public health.
IT DOES SEEM WRONG THAT COMPANIES CAN SELL A PRODUCT THAT KILLS MILLIONS