In 2021, over 350 000 individuals died from tobacco use and second-hand smoke in Latin America and the Caribbean (LAC). Over 40% of respiratory cancers in LAC were attributable to tobacco use, and the smoking-attributable medical costs can reach up to 1.5% of GDP per year. The total social and economic costs of tobacco use significantly outweigh the tobacco tax revenue that is raised. The OECD Report “Tobacco Taxation in Latin America and the Caribbean” finds that countries in LAC have significant scope to improve the effectiveness of their tobacco tax policies and administration in order to reduce the prevalence and societal costs of tobacco use. The Report examines the trends and effects of tobacco consumption, analyses tobacco tax revenue, provides an extensive overview of tobacco tax policy design in the region, discusses the need for tobacco tax reform and offers tobacco tax policy recommendations. The Report also provides detailed information on tobacco taxation in 18 countries in LAC (Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Guatemala, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru and Uruguay).
Tobacco Taxation in Latin America and the Caribbean
Abstract
Executive Summary
Tobacco use prevalence remains high in Latin America and the Caribbean (LAC), resulting in significant health, economic and social costs. In 2021, over 350 000 individuals died from tobacco use and second-hand smoke, and over 40% of respiratory cancers in LAC were attributable to tobacco use. The smoking-attributable medical costs can reach up to 1.5% of GDP per year. These striking figures call for policy action. While countries in LAC have made significant progress with tobacco control policies, there is still significant scope for tobacco tax reform in the region.
This report introduces a framework to assess countries’ tobacco tax policy performance based on a selection of best practices. The framework complements existing tools, including the World Health Organisation’s (WHO) MPOWER matrix and Johns Hopkins University’s cigarette tax scorecard, both of which evaluate tobacco tax progress over time. The framework intends to pave the way for country-specific tobacco tax reform analysis and recommendations. It shows that, while most countries signed the WHO Framework Convention on Tobacco Control (FCTC) and implemented its key guiding principles as of 2003, progress has stalled since. There is an urgent need for a new wave of tobacco tax reforms in the LAC region to improve the effectiveness of both tobacco tax policy and administration.
Over the past decades, countries in LAC have gradually, albeit partially, aligned their tobacco tax policy with best practices. Countries have started to rely more on excise taxes than on other indirect taxes to raise the price of tobacco products. Volume-based (i.e. specific) tobacco excise taxes are more common than price-based (i.e. ad valorem) tobacco excise taxes. Uniform rates are more widespread than tiered rates. Many countries index their specific taxes to inflation, but none adjust them to real income growth. All traditional tobacco products (cigarettes, cigars, cigarillos and roll-your-own tobacco) are taxed, although not necessarily in the same way. Tobacco sale regulations are in place in most countries.
Nevertheless, many countries have significant scope to improve their tobacco tax policy design and administration. Most of tobacco tax shares remain below the WHO’s recommended threshold of 75% of the retail price. Ad valorem tobacco taxes are often levied on a narrow base without an excise tax floor that ensures that a minimum amount of tobacco excise tax is paid. When they are not banned, new tobacco and nicotine products are often not taxed or taxed at rates too low to prevent their take-up by young people. Tax rates vary significantly across tobacco products, which might incentivise consumers to switch from expensive to cheaper tobacco products rather than to reduce or quit smoking.
Tobacco products remain affordable on average in LAC and have become more affordable over time. The main objective of tobacco taxes is to increase the price of tobacco products such that smokers reduce or quit smoking. For this tax-induced incentive to be effective, tobacco excise taxes need to be sufficiently high, which will also limit the possibilities for tobacco businesses to absorb the tax instead of passing it through to retail prices.
Tobacco excise taxes have the potential to raise significant revenues. Revenues from indirect taxes on tobacco range from 0.01% (in Barbados) to 2.58% (in Chile) of total tax revenue. Tobacco excise taxes raise 0.50% of total tax revenue in LAC on average, which is about one-third of average annual smoking-attributable medical costs. Countries with higher tobacco use prevalence raise more tax revenues. The average tobacco excise tax collected per pack of legal cigarettes sold increased from USD 1.2 to 2.0 (expressed in purchasing power parity) between 2008 and 2016 due to significant increases in the tobacco tax rates. However, the tax ratio has increased only slightly since then, reflecting the absence of ambitious tobacco tax reforms in recent years.
Concerns about revenue losses from tobacco excise hikes are overstated. First, the demand for tobacco products is inelastic as smokers tend to adjust their behaviour only slowly over time. A tobacco tax increase will tend to raise tax revenues in the short run, even if tobacco use decreases. In the longer run, tobacco tax increases can result in a drop in revenues, but the reduction in health, economic and social costs would be far larger than the loss in tax revenues, thereby resulting in a positive impact for the government budget. Second, concerns that tobacco tax increases would strengthen illicit trade should not prevent tobacco tax reform either. Instead, these concerns call for accompanying measures to contain illicit trade.
The report identifies key tobacco tax reform priorities across countries in LAC, including:
Increase specific tobacco excise tax levels and index them to inflation and real income growth to reduce the affordability of tobacco products.
In countries with an ad valorem tobacco tax component, introduce a minimum tax or price floor, and levy the ad valorem tax on the suggested or actual retail price rather than on the ex-factory price. Use information from the value added tax administration to ensure that the tobacco tax base is aligned with the retail price.
Align the design of excise taxes across tobacco products to achieve a similar tax burden, especially between highly substitutable tobacco products, to prevent smokers from switching from expensive to cheaper tobacco products rather than to reduce or quit smoking.
Where the sales of new emerging tobacco and nicotine products are not banned, tax them at similar levels than cigarettes to reduce their take up, especially among young people.
Account for the strategic response of tobacco businesses when designing tobacco tax policy. Evaluate the impact of tobacco tax increases on pre-tax and retail prices over time and follow-up with additional tax measures as necessary.
Select the tobacco excise tax point that facilitates most the tobacco excise tax administration, align the tobacco excise tax structure with the taxing point and introduce measures to limit fraud:
Use modern fiscal markings.
Collect more detailed tobacco transaction information within the excise tax declarations.
Enforce mandatory licencing for all parts of the tobacco value chain.
Levy the value added tax on the tobacco excise tax-inclusive price.
Implement Article 5.3 of the WHO FCTC so that direct and indirect (tax and non-tax) subsidies are not provided to tobacco companies to prevent these subsides from undermining the effectiveness of tobacco tax policies.
Finally, this report calls for an enhanced national and regional dialogue to advance the tobacco tax reform agenda. Ministries of Finance and Ministries of Health need to strengthen their cooperation to ensure that tobacco tax policies are effective in significantly reducing tobacco use. Other parts of government might have to participate in such a dialogue, including tax and customs authorities, given their important role in enforcing tobacco excise taxes. At the regional level, countries have an untapped reform potential to exchange information on tobacco-related information to avoid weak tobacco control policies in one country, while creating a hurdle for effective tobacco tax policies in other countries.
