Study Shows Higher Taxes, Lower Enforcement Lead to Illicit Tobacco Trade

A new report released by consulting firm Alvarez & Marsal indicates that high levels of taxation on tobacco products and low levels of enforcement are both associated with increased levels of illegal tobacco trade worldwide.

The report, “Causes and Control of Illegal Tobacco: Third Edition,” displays a notable correlation between the price of tobacco and the level of illegal tobacco consumption. The researchers found that a 10% increase in cigarette prices results in an almost 7% increase in illicit tobacco trade. Because taxes on tobacco products raise the prices of the products for consumers, the report argues, higher levels of tobacco taxation are associated with higher levels of illicit trade.

As rates of illicit tobacco trade increase following tax hikes on legal tobacco, the results could inadvertently be detrimental to government budgets and to public health. “Subsequent growth in illegal share will only harm tax revenues and limit the desired public health benefits,” argues the report. In addition to allowing an opportunity for tax evasion and thus lowering government revenue, illicit tobacco is more likely to be dangerous to those who consume it, as compared to legally obtained tobacco.

The report also recommends more stringent enforcement against illicit tobacco trade, though it says “enforcement alone is not a solution.” Strong customs and border enforcement can help stifle the proliferation of illegal tobacco but cannot fully make up for the damaging price effects of taxation.

The finding is consistent with the correlations found in the 2019 International Trade Barrier Index. Countries with higher tariffs, a poor customs environment, and weak judicial enforcement of property rights are usually the same countries with the highest rates of perceived corruption and illicit trade.

Illicit tobacco trade has also been exacerbated as a result of the COVID-19 pandemic, according to the report. Lower consumer purchasing power during the pandemic’s economic fallout and increasing trends toward online commerce have contributed to higher proliferation of illegal tobacco in the last year. For example, as noted in the report, 1 in 6 legal tobacco smokers in the United Kingdom switched to using illegal tobacco during the lockdowns of 2020.

The researchers recommend that governments take the negative effects of taxation into account when forming policy around tobacco products. While governments may be tempted to increase taxes on cigarettes to raise revenue post-pandemic, these tax hikes could inadvertently increase crime rates, harm public health, and ultimately result in less revenue overall. A common-sense low-tax policy should be paired with more stringent enforcement efforts at borders and within countries in order to prevent the dangerous proliferation of illegal tobacco.

The full report can be found here:

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