Cigarette taxes aren’t the problem
We read “Smokin’” by Tim Cohen (Cover Story, November 22-28) with great interest.
As our study estimating the size of the illicit cigarette market is referred to in the article, we would like to clarify a few issues.
We agree with much of the content of the article, but disagree about the reasons for the recent increase in illegal cigarettes sales in SA.
The article incorrectly adopts the industry’s narrative by pointing to tobacco taxes as the culprit and cause of the rise in illicit market share. It misses the point that the real problem of “illicits” in SA only began when cigarette taxes were rising minimally, barely above inflation.
Taxes are not to blame here. It is the weakness of SA’S tax administration that caused the problem, and only addressing that weakness will help recover the tax losses. We see the same situation all over the world. Cambodia, for example, has one of the lowest cigarette taxes in the world, but has a booming illicit cigarette market because its tax administration is not functioning properly. Research shows a clear link between the degree of cigarette tax evasion and the level of corruption.
As Cohen correctly points out, the gap method we used to estimate the size of the illicit trade market relies on many assumptions. Wary of the limitations of the method, we employed another method that, like the method used by the industry, relies on cigarette prices to distinguish between legal and illegal cigarettes. We found that 30% of the market was illegal in 2017, while the gap method led to an estimate of 40% in the same year.
Trying to figure out the difference, we revisited the issues of measurement.
The study commissioned by the Tobacco Institute of Southern Africa (Tisa) uses cigarette selling price to distinguish between legal and illegal cigarettes — anything sold below R17.85 is classified as an illegal product. If a product is sold above this price but is not declared to the SA Revenue Service (Sars), it is an illegal product, but would be erroneously classified as legal using the Tisa study’s methodology.
Our gap analysis is different. It classifies any not-tax-paid product as illegal. As we found more illicit cigarettes with the gap analysis compared with the price-based methods, some illegal cigarettes are evidently being sold above the threshold price.
Tisa blames small operators represented by the Fair Trade Independent Tobacco Association for selling without paying tax, but it has the same incentives to evade the tax, as suggested by the previous Sars investigations. And if Tisa’s members are selling above the threshold price, tax-paid status is almost impossible to establish.
Academics and the industry can keep quibbling about methodological details. But it is at best a sideshow because cigarettes in this country are becoming increasing affordable, damaging more lives and inflicting more suffering. There is a simple solution to stop this: controlling the supply of cigarettes using modern technologies. A proven track-and-trace solution would cost less than R1 a pack and recover billions of rands in unpaid taxes. That kind of return on investment should be hard to pass up.
on behalf of the economics of tobacco control project, University of Cape Town