Donna Edmunds is Director of Research at Progressive Vision.
You there, reading this on your BlackBerry whilst having a quick cigarette – put that out! Don’t you know that today is No Smoking Day? I’m told that one million people will try to give up smoking today, helped to do so by their friendly government adviser. Of course the health benefits speak for themselves, and the money that can be saved is astronomical. If you smoke a 20 pack a day, you can save around £6.63 a day – or £2,419.95 a year.
But why are prices so high in the first place? Does the high tax burden really encourage people to quit, or does it just push trade underground? Is there are dark side to this worthy tax?
Last month, Progressive Vision brought together almost 100 stakeholders including those from the tobacco industry, retailers, HMRC and Trading Standards to discuss the trade in illicit tobacco at a one day summit. We discussed best practice in collecting intelligence on criminals dealing in illicit tobacco; we considered how to best share that information to present a united front in the fight against tobacco; and we explored the use of nudge theory to encourage people to buy legitimate products.
Ultimately, from whatever angle we came at the problem, the answer was the same. The consensus was that high taxes drive the illicit trade as people will always buy an identical product for less money if they can. How high is the tax? Well, on a typical pack of 20, the tax burden is anywhere between 77% and 90%. In the UK a typical pack of 20 cigarettes costs £6.63, so somewhere between £5.10 and £5.97 is going to the treasury for every pack.
The price differential on a packet of cigarettes across the EU is vast. In Belgium an equivalent pack of 20 is £4.20; in Spain, £3.25 and in Poland, £2.00. This means a hefty profit can be made by buying cigarettes in Europe and selling them here for significantly less than the recommended retail price – illicit cigarettes in the UK cost about half the price of a legitimate pack. Even so, a shipping container full of smuggled cigarettes can yield a £1million profit.
The sale of illicit tobacco is it is often seen as a ‘Robin Hood crime’, helping those on a low wage gain access to a product they would otherwise be unable to afford. And they really can’t afford it – for someone on jobseeker’s allowance of £64.30, a 20-a day habit would cost them 72% of their income (some £46.41 a week). Yet in some of the most deprived areas smoking rates are as high as 60%, against a national average of 21%. Clearly in these areas, the high tax rate is simply driving trade into the hands of the criminals rather than leading to the reduction in smoking that is the objective.
Not only does it hit the poorest hardest in their wallets, but the fall-out from the illicit trade compounds the problem. The soft criminal element in the local community is often in fact not soft at all, but likely to be doing far worse than selling the odd packet of cigarettes on the cheap. So the illicit trade drives up the general crime rate in an area, which gnaws away at social cohesion there. Local shops are driven out of business as their revenue from tobacco dwindles, so communities lose key assets. And children are more likely to gain access to cigarettes, smoking at a younger age and also becoming drawn into the criminal element.
All of these factors compound the regressive impact of the tax, as the health and wellbeing outcomes in every way have far greater negative consequences for poor communities, driving down community cohesion in areas where it is already fragile at best.
Furthermore, the scale of profits to be made has, unsurprisingly, attracted some serious criminal factions. A report by ASH Scotland, published last August, found that "The Taliban, al-Qaeda, Hezbollah and the Kurdistan Workers Party (PKK) are involved in smuggling cigarettes as is the Columbian FARC. Both the Provisional IRA and the splinter group the Real IRA have been linked with tobacco smuggling as a way of raising money to fund their activities. Chinese Triads are central to the traffic to the UK of counterfeit cigarettes produced in highly sophisticated factories in the Far East."
For all these reasons, we at Progressive Vision would like to see the Government scrap the duty escalator due to be introduced which would see tobacco duty rise to 2% above inflation in the forthcoming 2011 Budget. In the longer term, we would also like the current policy of setting punitive taxes to disincentivise smoking to be revisited. Creating a ready market for terrorists and petty criminals alike is not the way to help the poorest in our society.