Finance Minister Nhlanhla Nene delivers the Medium-Term Budget Policy Statement next month as the country goes through the second technical recession in just 18 months. South Africans will be waiting with baited breath to hear how he plans to revive the country’s finances and economic outlook given that GDP contracted by 0.7% in the second quarter of this year.
Nene has already indicated that the country’s tax income could be lower than the forecasts for this year and that this is exacerbated by the ongoing problems at the tax revenue service.But ironically South Africa’s current economic climate presents an ideal opportunity for Nene to substantially increase the excise tax around tobacco.
Treasury has in the past maintained that its efforts to increase excise taxes on tobacco are not linked to a strategy to increase revenue but rather to support public health objectives. However, a significant increase in tobacco tax this year could be a win-win for public health and public finances: it will increase revenue and reduce the number of smokers.
Across the world, research shows that increasing excise taxes on tobacco products has reduced consumption and the burden of disease. It’s a strategy recommended by the World Bank and the World Health Organisation, with good cause.
In South Africa for example, R59 billion is spent each year addressing the harm from tobacco-related illnesses like lung cancer, emphysema, asthma and bronchitis. At the same time, the country only collects between R11 billion and R13 billion from excise taxes on tobacco. This is in stark contrast to the R2.3 billion after-tax profit of South Africa’s largest tobacco company, British American Tobacco in 2017.
This skewed equation means that it is the South African taxpayer that carries the healthcare bill of tobacco-related harm while the tobacco industry collects the profits. The only way to change this scenario is to substantially increase excise taxes on tobacco.
National Treasury has, since 2012, only increased the excise tax on tobacco products by between 6 per cent and 10 per cent, in line with the Consumer Price Index.
But these increases have done little to reduce the affordability of cigarettes, nor encouraged a drop in consumption, which has flatlined since 2012. For consumption to drop, there needs to be a significant increase in excise tax on tobacco, making the product less affordable. Recent research conducted by Sefako Makgatho Health Sciences University shows that the average smoker consumes about nine cigarettes a day. That means they purchase about 15 boxes of cigarettes a month at a cost of about R450.
The excise tax increase in March this year amounted to a mere R1.22 a box, resulting in an extra cost for 15 boxes of just R18 a month -- hardly an amount large enough to motivate a smokier to cut down or give up.
If the Finance Minister increased excise taxes to 70 per cent of the price of cigarettes, this would raise the cost of a R30 box of cigarettes to R51. For a person who smokes 15 boxes a month, their habit would cost R315 a month more. This would make many smokers reconsider.
In addition, the health costs have continued to rise, with Treasury having to increase its budget allocation to the public health system to treat tobacco-related cancers, lung diseases, and other non-communicable diseases.
The tobacco industry claims that an increase in tobacco taxes will not reduce consumption because of the illicit trade. They argue that smokers will buy illicit cigarettes which are cheaper than other cigarettes because excise tax has not been paid on them.
But these claims need to be interrogated because evidence shows that the tobacco industry has been exaggerating the size of the illicit trade to exert false pressure on Treasury to keep excise taxes low. Professor Corne van Walbeek’s research at UCT in 2014 shows that the tobacco industry has been adjusting its estimates of the illicit trade downwards to create the illusion that it has been growing rapidly. Although he agrees that illicit trade exists, he says that if previous estimates by the tobacco industry were incorrect, the credibility of current estimates should be questioned.
The tobacco industry’s role in the illicit trade has also been raised by the revenue service. In 2013, Ivan Pillay, then Acting Commissioner of SARS, asked the NPA to charge 15 tobacco local manufacturers and importers for tax evasion and involvement in the illicit trade. These cases have still not been pursued.
The illicit trade in South Africa can only be tackled through enforcement by the criminal justice system. But the Hawks and the National Prosecuting Authority have been in disarray and the South African Revenue Service has been deliberately undermined. As a result, enforcement has not taken place, particularly in the last six years.
The long-term solution for South Africa is to implement the World Health Organisation’s Illicit Trade Protocol. This calls for the use of an independent and effective system that regulates cigarette production, import, export and sale. South Africa signed the Protocol in 2013 but has still not ratified or taken steps to implement it.
Increasing the excise taxes on cigarettes and other tobacco products to 70% of the price will increase the cost to smokers , and encourage them to stop or reduce. Such an increase will also add to state coffers at a time when there has been a drastic decline in revenue collection.
The reality is that prevention costs less than treatment. Prevention means reducing the number of smokers - and one of the most effective ways to do this is to increase the price of tobacco. This is how we can take back the tax that is spent on tobacco-related health harm.