The fine line between tobacco control and a flowering black market

The imposition of so-called “sin taxes” on cigarettes and liquor products, in addition to generating significant fiscal revenues, do serve an economic purpose. Unlike normal goods and “necessity” products, cigarettes are not an essential good which people need to survive. As far back as the 1700s, Adam Smith averred “Sugar, rum, and tobacco, are commodities which are nowhere necessaries of life … are therefore extremely proper subjects of taxation.”

In addition, while a strict reading of a commitment to economic freedom would suggest that it is an individual’s right to choose what and how much of a good he or she would like to consume, such economic freedoms are typically not absolute. Tobacco smoking places costs on both the state and wider public. These include the increased burden placed on public health systems and the unintended costs to the wider public of smoking, and thus restrictions on smoking arguably support the economic freedoms of non-smokers.

Given the well-known harms associated with cigarettes to both individual and public health, it then begs the question: why doesn’t the government ban the product altogether? Napoleon III[2] eloquently articulated one of government’s primary arguments when he was entreated to ban tobacco in the 1800s: “This vice brings in one hundred million francs in taxes every year. I will certainly forbid it at once – as soon as you can name a virtue that brings in as much revenue.” In South Africa, taxes from tobacco related products have provided a steady and growing source of revenue, growing at an average annual rate of 14% from R956 million in 1992/93 to R11.6 billion in 2012/13.[3]

However, there are limits to the fund-raising potential of sin taxes. Raising taxes to make a product prohibitively expensive (or outright prohibition) typically results in the development of grey and black markets for that product. The South African tobacco industry has not been immune to this as continuous increases in taxes on tobacco and related products have fueled the ‘illicit trade’ in cigarettes. These illicit activities include:[4]

· Smuggling – The illegal movement of tobacco products from one jurisdiction to another without paying the due tax

· Counterfeiting – The illegal manufacture of well know branded cigarettes without consent and no tax being paid

· Bootlegging – Cigarettes are legally purchased in one country and transported to another with a higher tax rate. These are in volumes which are beyond those reasonable for personal use.

· Illegal Manufacturing – Tobacco products are manufactured but not declared or recorded to the authorities

The Tobacco Institute of SA estimated that South Africans smoked eight billion illicit cigarettes in 2013.[5] Estimates by the South African Revenue Service (SARS) suggest that the government has lost more than R3 billion annually in excise duties and VAT from illegal cigarettes, a significant proportion of the R11.6 billion actually collected. This despite border control and other government agencies collaborating to combat the scourge.[6] Independent research has affirmed that cigarette smuggling constituted between 40% and 50% of the market, and the growth in this illicit market can largely be attributed to tax increases incentivising illicit activities.[7]

Syndicates involved in illicit cigarette trade are often involved in other criminal activities. The established informal and illegal markets are conduits for the distribution of counterfeit goods, drugs, weapons and even human beings.[8],[9] Illegal cigarettes may also have significantly worse health repercussions as they may be manufactured from inferior and far more dangerous materials. The burgeoning tax hikes may therefore be spawning and entrenching organised crime; a phenomenon not unique to South Africa.

The ability to balance the cost of consumption and an individual’s freedom to smoke are controversial, with over-taxation (as well as prohibition) often resulting in worse outcomes than envisaged. The Minister of Finance may instinctively recoil at the notion of not raising taxes on tobacco and related products, but in doing so, he should also be cognisant of some of the unintended impacts resulting from the ever increasing taxes on tobacco.

 


[1] Comprises cigarettes and cigarette tobacco and Pipe tobacco and cigars

[2] French Emperor (1808-1873)

[3] National Treasury. Budget Review Statistical Tables 1998 – 2014.

[4] Ash Fact Sheet, 2014. Illicit trade in Tobacco. Action on Smoking and Health (Ash). Ash Fact Sheet. http://ash.org.uk/files/documents/ASH_122.pdf

[5] Fin24. 2014. Govt seeks to stub out illegal cigarettes. http://www.fin24.com/Economy/Govt-seeks-to-stub-out-illegal-cigarettes-20140424

[7] Lemboe, C. and Black, P. 2012. Cigarettes taxes and smuggling in South Africa: Causes and Consequences. Stellenbosch Economic Working Papers: 9/12.

[8] Phiyega, R. 2014. Illicit tobacco trade is a crime catalyst. Timeslive. http://www.timeslive.co.za/local/2014/11/25/illicit-tobacco-trade-is-a-crime-catalyst

 

[9] UK Parliament. 2014. Tobacco smuggling – Home Affairs Committee. http://www.publications.parliament.uk/pa/cm201415/cmselect/cmhaff/200/20004.htm