The effect of excise tax increases on cigarette prices in South Africa

Abstract

IntroductionThe effectiveness of excise tax increases as a tool for reducing tobacco consumption depends largely on how the tax increases impact the retail price. We estimate this relationship in South Africa for 2001–2015.DataStatistics South Africa provided disaggregated cigarette price data, used in the calculation of the Consumers’ Price Index. Data on the excise tax per cigarette were obtained from Budget Reviews prepared by the National Treasury of South Africa.MethodsRegression equations were estimated for each month. The month-on-month change in cigarette prices in February through April was regressed against March’s excise tax change to estimate the pass-through coefficient. For the other 9 months, the month-on-month change in cigarette price was regressed against monthly dummy variables to determine the size of the non-tax-related price increase in each of these months. The analysis was performed in both nominal and real (inflation-adjusted) terms.FindingsExpressed in real terms, the excise tax was undershifted. A R1.00 (one rand) increase in the excise tax is associated with an increase in the retail price of cigarettes of R0.90 in the pre-2010 period, and R0.49 in the post-2010 period. In the pre-2010 period, the tobacco industry increased the retail price of cigarettes in July/August, independent of the excise tax increase. The discretionary July/August price increases largely disappeared after 2010, primarily because the market became more competitive.ConclusionThe degree of excise tax pass-through, and the magnitude of discretionary increases in cigarette prices, is significantly determined by the competitive environment in the cigarette market.

Illicit/cheap cigarettes in South Africa

“…The industry has traditionally been highly concentrated, with British American Tobacco (BAT) having a market share in excess of 90%, followed by other multinationals (primarily Philip Morris and Japan Tobacco) (van Walbeek 2005). Despite new tobacco control legislation and substantial increases in the excise tax after 1994, the multinationals were able to increase their net-of-tax turnover by raising retail prices substantially (Linegar and van Walbeek 2018). Thus, even though the number of cigarettes sold decreased by about a third between 1994 and 2009, the real (inflationadjusted) net-of-tax price per cigarette doubled, allowing the multinationals to maintain their profitability (Linegar and van Walbeek 2018).…”

“…Despite new tobacco control legislation and substantial increases in the excise tax after 1994, the multinationals were able to increase their net-of-tax turnover by raising retail prices substantially (Linegar and van Walbeek 2018). Thus, even though the number of cigarettes sold decreased by about a third between 1994 and 2009, the real (inflationadjusted) net-of-tax price per cigarette doubled, allowing the multinationals to maintain their profitability (Linegar and van Walbeek 2018). The large profits earned by the incumbent multinationals attracted the attention of competitors, which ultimately caused substantial disruption in the tobacco industry.…”

“…Between 1993 and 2003, aggregate cigarette consumption reduced by a third and adult smoking prevalence fell from roughly 33% to 24% (van Walbeek 2005). However, since 2004, the decrease in cigarette consumption and smoking prevalence has levelled off (Linegar and van Walbeek 2018).…”

Estimating the Distributional Impact of Increasing Taxes on Tobacco Products in Armenia

“…Seventh, we assumed that the excise tax would be passed fully onto the consumer. Although this is a standard assumption in tobacco tax modeling studies, (6,8) the empirical evidence is mixed, (8,(58)(59)(60)(61) hence we may overestimate here the effect of increased excise taxes.…”

Non-Communicable Diseases and Urbanization in African Cities: A Narrative Review

“…While the enforcement of the alcohol and tobacco policies may be lacking the needed regulatory teeth, there is some evidence suggesting higher levels of alcohol and tobacco abstinence in countries implementing these interventions compared to countries without any regulations [90]. Between 1993 and 2009, cigarettes sales declined by 30% in South Africa, and the rate of smoking among adults dropped by 25%, even as government revenues from tobacco taxes increased by 800% [91,92]. South Africa imposed taxes on sugary drinks in 2017, becoming the first African country to do so, in an attempt to reduce excessive consumption of sugary drinks [93], the effect of this is yet to be seen.…”