In some countries, tobacco taxes are structured such that they will always be higher than inflation. Australia, for example, increases tobacco taxes every year by the rate of inflation plus 12.5 per cent.
To ensure that tobacco products become increasingly unaffordable over time, tobacco taxes also need to be frequent and sustained over time. Even a high tobacco tax hike of around 20 per cent will not have much impact if only done once, or if only done every three or four years.
For Singapore’s 15 per cent tax increase to effectively reduce smoking rates in the long term, it will need to be repeated every year. It would still help if increased every two years, but it will take far longer to reap the same population health benefits.
MITIGATE TOBACCO COMPANIES’ PRICING STRATEGY
It is also important to pay attention to how taxes might affect different types of tobacco products.
When tobacco taxes increase, instead of quitting, some of the more price-sensitive smokers may “downtrade” to a cheaper brand.
Tobacco companies actually encourage downtrading. Instead of pricing the tax increase equally across all products, they tend to play with the pricing such that premium brands become more expensive while the price of value brands stays about the same.
To prevent downtrading, policy should reduce the price differential across different products. In Australia, tobacco taxes include a fixed amount per cigarette and an additional percentage of the retail price.