BIZCHINA> Review & Analysis
Make cigarettes less affordable
By Ma Chao (China Daily)
Updated: 2009-08-12 13:48

Cigarette prices are a key concern of the 350 million smokers in China. Spoiled by cheap cigarette prices, Chinese smokers consume more than one third of the cigarettes produced in the world every year. For long, health experts and tobacco control workers have advocated levying heavier tax on cigarettes and other tobacco products to curb smoking that results in annual direct losses of 140 to 160 billion yuan ($20.6-23.5 billion) to China.

Raising the tax on tobacco and consequently making cigarettes more expensive is an effective measure to curb smoking. Higher cigarette prices may push some smokers to quit smoking and squeeze the amount of cigarette consumption of the ones who go on smoking. High cigarette tax is especially efficacious in reducing smokers among the young and the poor, because they are the most sensitive to prices.

In May, the Ministry of Finance and the State Administration of Taxation announced a hike in cigarette tax, the first since 2001. Hu Dewei, chief health economist at China Health Economics Institute under the Ministry of Health, and Mao Zhengzhong, professor at Sichuan University, explained the tax hike in details: for Class A cigarettes, the tax rose from 45 to 56 percent; and for Class B, the tax rose from 30 to 36 percent; the tax on cigars increased from 25 percent to 36 percent. However, the threshold between Class A and B is raised from 5 yuan per packet to 7 yuan, making the tax on cigarettes priced between 5 and 7 yuan per package lower. Besides, the tax increase on cheap cigarettes, which account for a half of total consumption, is still too modest.

Media coverage reveals that the cigarette producers and retailers have so far absorbed the extra taxes and not passed them on to the consumers, and consequently the retail prices have been stable.

The purpose of the tax hike this time is to enrich the State coffers rather than controlling tobacco use. In the first half of this year, the State revenue declined by 2.4 percent year-on-year, while the stimulus packages pushed up the government expenditure. Against this background, higher tobacco tax could make up for a part of the budget deficit, and curbing smoking is only a secondary consideration.

Tobacco taxation plans that can generate same amount of revenue can be very different in curbing smoking. Some could markedly reduce tobacco consumption, while some might have no effect at all.

Tobacco tax that can make a difference in curbing smoking should make cigarettes less affordable for the smokers by keeping the retail prices of cigarettes growing faster than consumers' incomes. If the tax does not really raise the retail prices of cigarettes, it would have no effect. Or, if the increase in prices is slower than that in the disposable incomes of tobacco consumers, cigarettes would become relatively cheaper compared with the purchasing power of smokers.

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If the prices of high-end cigarettes surged but those of cheaper ones remained stable, the tobacco consumption of the poor, who tend to consume cheap cigarettes, would not decline. Many smokers might divert their consumption to cheaper cigarettes. Then, the total volume of tobacco consumption, the money spent on cigarettes and the nicotine intake would remain unchanged.

Now China imposes higher tax on higher-priced cigarettes. Then, the producers and consumers could turn to cheaper cigarettes. Both Hu and Mao suggest that the most effective taxation plan to curb smoking is to levy a fixed duty on every package of cigarettes. Then, the prices of low-end cigarettes would be expected to rise, too, limiting the propensity of the young and the poor to smoke.

Daunting barriers, however, are still blocking the way to an effective tax plan to curb smoking. The tobacco industry of China possesses assets worth 500 billion yuan, provides incomes to 60 million people and contributes 7 percent of the total State revenue. In Yunnan province, almost half of the provincial government's revenue comes from the tobacco industry. Hence, the vested interests against tobacco control are mammoth. Since it is unrealistic to steeply cut cigarette consumption, a feasible plan is to keep a lid on the growth of cigarette sales and gradually trim the consumption.

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