Cigarette Price Hike

Irish Times
18 October 2011

A report reversing the findings of the Revenue Commissioners that increases in the price of cigarettes would increase smuggling and fail to discourage the habit will be presented to the IMF-ECB-EU “troika” and Minister for Finance in the coming days.

The report, Tobacco Taxation, Smuggling & Smoking in Ireland , was prepared by British economist Howard Reed for the Irish Heart Foundation (IHF) and published today. It was commissioned following the tax freeze on tobacco in the last two budgets ordered by then finance minister Brian Lenihan who said that increases in tax would fuel smuggling.

A report by the Revenue Commissioners in February this year also claimed that further tax increases would lead to a drop in tax revenue and fail to reduce the number of smokers. However, Mr Reed’s research disputes these findings.

He looked at the relationship between smoking prevalence using data from the 1998 and 2007 Slán (Survey of Lifestyle, Attitudes and Nutrition in Ireland) surveys and changes in the real price of cigarettes during that time, controlling for demographic factors such as gender, age, social class, education and family structure. He found that elasticity of demand for cigarettes, measuring in effect how many people stop smoking as a result of a price increase, was -0.32 . This figure suggests that a one euro increase in the price of a packet of 20 cigarettes would result in around 30,000 fewer smokers.

There are between 800,000 and 900,000 smokers in Ireland so it’s a reduction of around 4 per cent in the number of smokers. “Between 1995 and 2009 the price of packet of 20 cigarettes in Ireland increased by about 64 per cent. Volume of cigarette sales reduced over that period but revenue held up pretty much. In 2009, cigarette prices increased by 11 per cent but real tax revenue increased by 9 per cent,” he said.

“There is a strong case for increased taxation on tobacco products in Ireland despite what the Revenue Commissioners and what some politicians have been saying.” He said their findings that increased prices made no difference to the number of people smoking “was out of line with every piece of international research on this issue.”

Using data on tobacco expenditure in the Household Budget Survey, he found that the size of the illicit tobacco market had remained unchanged between 1995 and 2005. “In other words, increases in the price of cigarettes had no effect whatsoever on the smuggling of cigarettes,” he said.

An increase of a euro in a packet of cigarettes would generate €68 million in direct revenue for the Government and €28 million in indirect benefits, he said. IHF chief executive Michael O’Shea urged the government not to “make the same mistakes as the last administration. "If we invest a portion of this extra income in a national tobacco control strategy, including funding for anti-smuggling measures and more realistic tobacco cessation measures, we can make savings in lives and money on an even greater scale," he said.

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