Tobacco Industry Arguments Against Taxation

The tobacco industry has a history of arguing against tax rises, saying that excessive taxation leads to increased smuggling, amongst other unintended consequences.

This page summarises some of those arguments, focussing on the run up to an increase in tobacco tax in the UK in 2012.

See also pages on Price and Tax, which details tobacco industry tactics, including those used in low and middle-income countries.

“Tobacco Tax Should Be Cut”

From 2004, the Tobacco Manufacturers’ Association (TMA) consistently argued that higher taxes increase smuggling:

• In March 2012, the TMA claimed that the UK Chancellor’s announcement of an above-inflation increase in tobacco taxation “will do nothing to reduce the level of tobacco smuggling and crossborder shopping which cost Her Majesty’s (HM) Treasury up to £3.6 billion in lost tax revenue in 2009/10.”¹ Tobacco companies, members of the TMA, voiced the same concerns individually. Imperial Tobacco said that the budget would “tempt more smokers to buy illicit tobacco products”², while the managing director of Japan Tobacco International UK said that “crime bosses will be tapping on their calculators to work out their new profit margins”³
• In March 2011, the TMA responded to the budget by arguing that the UK “Government has today increased tobacco duties by 2% above inflation which clearly demonstrates a complete lack of joined-up-thinking as taxation is the acknowledged driver of the illicit tobacco trade.”⁴
• In February 2011, the trade magazine, Tobacco Reporter featured arguments against using tax as a deterrent to smoking.⁵ In the editor’s memo, Taco Tunistra argued that the use of tax to generate money and “nudge people towards more wholesome lifestyles” was unworkable “if tobacco is addictive – taxation will not-cannot-reduce consumption”. Nicotine-dependent smokers will simply obtain their ‘fix’ from tax-avoiding sources, he argued.⁶
• In March 2010, in response to the UK budget, the TMA predicted that because the Government had “imposed the largest tax increase on tobacco products in ten years” it would “only provide further stimulus to those who seek to profit from the illicit trade in tobacco.”⁷
• In April 2009, the TMA responded to the budget by saying that it believed “the high level of tobacco tax” which was the “root cause of the high level of tobacco smuggling, needs to be addressed and a fundamental review of fiscal policy must be undertaken.”⁸
• In 2007, the TMA replied to the budget that “we maintain that a fundamental review of the UK’s tobacco tax policy, which is the root cause of the problem, must be undertaken.”⁹
• In 2005, the TMA argued that “High tobacco tax, one of the cornerstones of the UK government’s tobacco policy for almost a decade, has resulted in high levels of smuggling and crossborder shopping, with little effect on levels of smoking.”¹⁰
• In 2004, in its pre-budget meeting, the TMA argued for tax cuts of £1 on 20 cigarettes and £4 on 50g handrolling tobacco. It argued that “Tobacco tax should be cut to discourage smokers from buying abroad and so that smuggling becomes less profitable for the gangs who mastermind it.”¹¹

Tobacco Industry Concerns “Not Borne Out by the Evidence”

In their budget submission in 2012, anti-smoking charity Action on Smoking and Health (ASH) and the UK Centre for Tobacco Control Studies rebutted these arguments. In a submission endorsed by over 90 health organisations, they wrote that:

“The argument that tax increases and enhanced regulation inevitably lead to increases in smuggling are not borne out by UK evidence. In the UK smuggling has been significantly reduced over the last decade by strong enforcement measures. Reintroduction of the tax escalator, increasing taxation above the rate of inflation while sustaining a tough anti-smuggling strategy has been successful. It has not led to increasing levels of illicit tobacco, as predicted by the tobacco industry”.¹²

A systematic review published in 2012 has also outlined the flaws behind arguments frequently used to oppose increases in tobacco taxation:¹³

Higher tobacco taxes lead to a fall in tax revenue

The tobacco industry, and allied organisations frequently claim that an increase in tobacco taxes will lead to a fall in consumption of tobacco products (or at least a fall in consumption of legal tobacco products) and therefore lead to a fall in tobacco tax revenue.¹⁴ However a review from the International Agency for Research on Cancer (IARC) demonstrated that this was not the case, with an increase in tax revenues in the short to medium term, while below-inflation tax increases led to a fall in tax revenue in real terms.¹³¹⁵

Higher taxes lead to increased smuggling and use of counterfeit tobacco

Despite tobacco companies claiming that tax increases would lead to more smuggling, they continued to increase cigarette prices on most brands by 4-6% above the tax increase and rate of inflation.¹⁶ Furthermore, although higher tobacco taxes create an increased incentive to purchase illicit tobacco, tobacco industry-funded research often significantly overstates the prevalence of illicit tobacco products. It is recommended that governments increase efforts to tackle illicit trade rather than postponing tax increases for fear of a rise in illicit tobacco.¹⁷ Claims over the ‘tax revenue lost’ to the black market also ignore the increase in revenue generated by tax increases, as discussed above.

Lower taxes would reduce smuggling and increase revenue

The TMA also claimed that a decrease in tax would lead to an increase in revenue, as legal tobacco products would become more competitive against illicit tobacco products.^{14 18} However, Sweden increased its tobacco taxes in 1996 and 1997, generating a 9% increase in tobacco tax revenues. The increase was repealed in 1998, and tax revenues returned to their previous level, despite a 50% increase in cigarette sales per person.¹⁹

In 1994 Canadian federal and provincial cigarette taxes were reduced significantly in response to an “aggressive industry-sponsored campaign.”¹⁹ Provinces that lowered their tax rates saw a rise in tobacco consumption, as well as a 33% fall in federal tax revenues and a 40% fall in tobacco tax revenue in provinces that lowered their tobacco taxation, while revenue in other provinces was stable.¹⁹ New Hampshire also experienced a fall in tax revenue after reducing tobacco taxes.²⁰²¹

Higher taxes will cost jobs

The 2012 review article also found no evidence that higher tobacco taxes would cause significant job losses, as very few businesses are tobacco-dependent. The authors added that the money which had previously been spent by smokers on tobacco would be spent on other products.¹³

TobaccoTactics Resources

• Price and Tax