Pricing and tax

Striking the right balance is crucial

In 2017, our total Group tax contribution, including both taxes borne and collected, amounted to over £37.4 billion.

A taxing problem

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 may fail in both of these goals as consumers increasingly look towards the black market instead.

The evidence

While some smokers may choose to quit, or smoke less, large and sudden tax rises may 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. 

A report which was jointly commissioned by the tobacco industry in Australia estimated that in the 12 months to June 2015, illicit trade cost the government around $1.42 billion in lost excise revenue.

Between 2007 and 2010 the tobacco black market grew from 8.3% to 14.3% of the tobacco sold in the country. The largest annual increase during that period occurred in 2010, the same year as an increase in excise of 25 per cent. We don’t think that’s a coincidence.

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 potentially undermine governments’ revenue and health objectives.

A managed solution

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.