Working Paper

Working Paper

2015-05-28

University of Cape Town

This paper proposes a model that can be used to predict the likely impacts of tobacco tax increases and harmonisation in the East African Community. The model has five sections, one for each EAC country. These sections consider different cigarette market segments based on tax or price differentials. The model can therefore calculate the likely effects of excise tax increases and harmonisation on the retail selling price of cigarettes, cigarette consumption, government revenue and industry revenue for each individual country and for the EAC as a whole.

Two Scenarios are presented in this paper. Scenario 1 explores an increase in the current excise tax rates and a harmonisation across the EAC of a uniform specific tax of UDS 0.60. A sensitivity analysis is conducted to assess the robustness of the assumptions in this scenario. Scenario 2 discusses the use of a mixed tax structure with a specific excise tax of USD 0.60 or an ad valorem excise tax of 40% of the retail selling price, whichever is higher. The advantages and disadvantages of a uniform specific excise tax and other tax structures such as tiered specific taxes, ad valorem taxes and mixed tax structures are explored. Factors such as administrative ease, predictability of revenue flows, inflation and income growth are discussed. A uniform specific tax is shown to be the most preferable excise tax structure, even over a mixed tax structure.

The results show that, with an assumed price elasticity of demand of -0.6, as excise tax is increased in the region, consumption decreases and government revenue increases. Scenario 1 shows a decrease in consumption by around 2.3 billlion cigarettes, or 18%, compared to current consumption levels across the EAC of around 12.9 billion cigarettes. Scenario 2 shows a slightly higher decline in consumption of 2.7 billion cigarettes or 21%. In terms of government excise revenue, Scenario 1 shows an increase of around USD 140 million or 80% from the current government revenue of around USD 176 million across the EAC. The second scenario reveals an even greater increase of USD 173 million or 98%. These results show that excise tax increases and harmonisation will contribute to public health and financial objectives of governments in the region.

We would like to acknowledge the Bill and Melinda Gates Foundation, through the American Cancer Society, for funding this research. Economics of Tobacco Control Project, Southern Africa Labour and Development Research Unit, School of Economics, University of Cape Town, South Africa