The Spanish tobacco tax loopholes and their consequences

Ángel López-Nicolása,b

Belén Cobachoa

Esteve Fernándezc

a Grupo de Investigación en Economía, Políticas Públicas y Salud, Universidad Politécnica de Cartagena

b Centre de Recerca en Economia i Salut, Universitat Pompeu Fabra c Institut Català d’Oncologia

ICO-WHO Symposium

5th June 2012

EU tobacco tax directives require the application of a minimum tax on cigarettes regardless of brand or price category as of 2011

Some EU member states started applying such tax earlier ◦ Among them, Spain as of 11th February 2006

What evidence is there on the effects of the tax in Spain?

What conclusions might we draw for tobacco tax policy in general?

Background

Traditionally based on ad valorem taxes◦ Encourages price differentiation

Ban on advertising in 2006 unleashed cigarette price war well in advance◦ Most intense in late 2005 and 2006◦ The tobacco control community called for a

minimum tax ◦ Phillip Morris also urged the government to apply

minimum tax (in order to protect its premium brands)

First applied in February 2006, revised upwards several times since

Recent history of tobacco tax policy in Spain

Effects on cigarette prices 1

23

45

€ pe

r pa

ck

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Packs of 20 (at 2011 prices)Distribution of cigarette prices in Spain (2002-2011)

As expected, the minimum tax lifted the bottom end and compressed the cigarette prices distribution, but…

Smoking also depends on what happens to other tobacco products◦ Fine cut tobacco remained taxed on an ad

valorem basis alone until June 2009◦ And even after then it bears a lighter tax

burden in terms of “cigarette equivalents”◦ Cigars and cigarillos remain taxed on an ad

valorem basis to date

The loopholes…

…their consequences (1)

5010

015

0R

eal p

rice

inde

x; 2

005=

100

2005 2006 2007 2008 2009 2010 2011

Cigarettes Cigars and cigarillosFine cut tobacco Pipe tobacco

Real price index; 2005=100Price of tobacco products in Spain (2005-2011)

…their consequences (2)0

24

68

10€

2005 2006 2007 2008 2009 2010 2011

Cigarettes (pack of 20) Cigars or cigarillos (20 units)

Fine cut tobacco (20 rolls at 0.7 gr. per roll)

Price of a 20 cigarette pack or equivalent (at 2011 prices)Price of tobacco products in Spain (2005-2011)

…their consequences (3)

Market share in 2011 (%)

91.1

3.3

0.4

5.1

-4 -2 0 2 4

Change in market share over 2005-2011 (%)

Fine cut tobacco

Pipe tobacco

Cigars

Cigarettes

Spain 2005-2011Structure of the demand for tobacco products

Cigarillos &

Prevalence of daily smoking (National Health Surveys)2006 2009 Difference

Men(not statistically

significant)

Spain (excl. Canary Islands) 35.09 35.36 0.27

Women

Spain (excl. Canary Islands) 23.84 24.49 0.65

…their consequences (4)

Summary of evidence Minimum taxes have avoided ultra cheap

cigarettes However, there is no evidence suggesting a

reduction in smoking prevalence The explanation appears to be related to

downtrading towards fine cut tobacco

The latest tobacco tax reform in Spain (31st March 2012) enacts exactly what an industry spokesman demanded publicly weeks earlier◦ A reduction of the ad valorem tax◦ An increase of the specific tax◦ No change for fine cut tobacco

The public health community should address this state of affairs and ◦ Demand an equalisation of the tax burden

of cigarettes and fine cut tobacco ◦ Watch closely the evolution of cigars and cigarillos

Conclusions (domestic)

The EU tobacco tax directive does not require Member States to apply a minimum tax on quantity for fine cut tobacco

The directive consecrates the price-product segmentation of tobacco markets across the EU

National governments must legislate beyond the EU minimum requirements in order to avoid the creation and persistence of the type of loopholes detected in Spain

Conclusions (EU wide)