Striking the right balance is crucial
British American Tobacco alone contributed approximately £30 billion to governments in excise and other taxes in 2015 - that’s more than 70% of our total gross turnover.
Tobacco taxes provide a source of funds for many governments and can account for an important part of their revenue. Unsurprisingly, when difficult economic times reduce a country’s national budget, taxes on tobacco products are often viewed as a strong potential source of income.
High taxation rates can be used to support specific policy objectives. Some governments seek to cover the costs that they consider to be associated with tobacco use, such as healthcare costs. Health advocates might also put pressure on governments to increase tobacco taxes in an effort to reduce consumption.
But, do sudden and steep increases in tobacco excise taxes really cause smokers to quit in their droves or to cut down drastically?
The plain answer is no.
‘Shock’ increases in tobacco taxes often fail in both of these goals as consumers increasingly look towards the black market instead.
While some smokers may choose to quit, or smoke less, evidence shows that large and sudden tax rises do not always result in reduced overall tobacco consumption. In some developed countries we have seen tax rates raised to such a high level that tax revenue begins to fall, as smokers seek out cheaper, black market alternatives.
Hikes in excise tax may also lead to greater price differences between nearby countries, encouraging tobacco smuggling across borders.
It is clear that unusually high taxes on tobacco can create opportunities for criminals and ultimately undermine governments’ revenue and health objectives.
We’re not against increases in tobacco taxes.
Manageable increments, typically in line with inflation, make the most sense: governments are less likely to inadvertently fuel illicit trade and tax revenues are more predictable.