Flawed analysis by the Department of Finance and the Revenue Commissioners of the impact of tobacco tax on smuggling has cost the taxpayer up to €200 million over the last two years, a major new report for the Irish Heart Foundation has revealed.

The study shows that a €1 tax increase on a packet of 20 cigarettes in the next Budget would bring in €68 million in extra receipts and a further €28 million in indirect public finance benefits – directly contradicting claims that further tax hikes would actually reduce net tax take because of the smuggling problem. This led to a tax freeze on tobacco imposed by the previous Government in the last two Budgets.

Such an increase would also result in some 30,000 people quitting smoking in Ireland. Given that roughly one in two smokers ultimately die from the habit, this single action would help up to 15,000 people countrywide to live longer.

In response to the findings of the report titled Tobacco Taxation, Smuggling and Smoking in Ireland which was compiled by leading UK consultancy Landman Economics, the Irish Heart Foundation called on Finance Minister Michael Noonan to institute a new policy of regular tax increases above inflation starting with a €1 hike in the forthcoming Budget.

“This report proves that a tobacco tax increase is a Budget no brainer – it will save lives on a huge scale and bring in significant extra income that will help reduce pressure on the public finances,” said chief executive, Michael O’Shea.

“The findings also demonstrate that 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.”

The Irish Heart Foundation commissioned the report following the Budget tax freeze ordered by then Finance Minister Brian Lenihan who said that increases would fuel smuggling.  A report by the Research and Analytics Branch of the Revenue Commissioners also claims that further tax increases would lead to a drop in tax revenue and rather than reducing the number of smokers would simply encourage more to use untaxed products.

However, Landman Economics director Howard Reed said that apart from the fact that this analysis was out of kilter with all similar international studies, the evidence provided by Irish data also showed that it was seriously flawed.

 “This is illustrated by the fact that despite major tax increases from 1995-2005, the most recent period for which figures are available, the size of the non duty paid market remained unchanged. And when tobacco tax rose by 11% in 2009 – the highest excise hike for years – revenue increased by 9%.”

By examining the impact of past price increases on smoking rates, the report concludes that further increases in tobacco taxation would also produce substantial benefits to the public finances – ranging from just under €50m per year for a 50 cent rise, €96 for a €1 hike and €165m if tax was increased by €2. Extra tax take would account for 70% of the total, with the remainder accruing from indirect benefits such as reduced health service spending, reduced net spending on benefits, and increased revenue from direct and indirect taxes due to longer working lives and reduced workplace absenteeism.

“These figures, although necessarily approximate, make a powerful case for further increases in tobacco taxation,” said Mr Reed. He added that the data showed that a €1 increase would also reduce the overall smoking rate, estimated at 24% of adults by the Office of Tobacco Control, by 3.8 percentage points. In other words, the number of smokers in Ireland, which is currently estimated at almost 1 million people, would be reduced by 30,000.

Figures highlighted in the report show that after successfully lobbying for a tax freeze in 2009, the tobacco industry then put up its prices on a packet of 20 cigarettes by 13.5 cent. “This exposes the utter duplicity of the tobacco industry”, said Mr O’Shea. “In effect they transferred millions from the Irish Exchequer at the time of our greatest need and added the money on to their already booming profits.”

In addition to a price increase in the Budget, the report recommends:

• A Government commitment to a price escalator whereby tobacco taxes rise by a certain amount each year in future budgets (for example, 5 percent per year above inflation).

• Expenditure on anti-smuggling operations such as enforcement and supply chain control should be increased by around €8 million per year. This would match per capita spending in the UK where smuggling has been reduced from 21% to 12% despite regular tax increases above inflation. A similar reduction here would bring in around €130 million of extra revenue to the Exchequer per year.

Mr O’Shea added that tax increases, tackling smuggling and serious smoking cessation measures were recognised internationally as the three major elements of a tobacco control strategy that when implemented simultaneously would have a major impact in reducing smoking rates and saving lives.

“This report does not only provide the evidence to increase taxes, the extra receipts this will bring in can also fund an integrated national strategy that will really make a difference.

“A total of 5,700 people die every year in Ireland from tobacco related disease and illness. That’s the equivalent of 2 9/11s a year on Irish soil or a jumbo jet crash every month. By seriously addressing this catastrophe the Government can make the biggest contribution to reducing avoidable death in this country for more than a generation.”

ENDS

Additional note:

Mr Howard Reed is the Director of Landman Economics. Prior to this role he worked for four years as the Chief Economist for the Institute of Public Policy Research, UK until 2008. His career includes roles such as Programme Director, Work and Incomes Research at the Institute for Fiscal Studies and prior that he fulfilled the roles of Senior Research Economist, Programme Co-ordinator and Research Economist at same. Mr Reed has published many papers most recently:
‘The distributional effects of the 2010 Spending Review (2011), Journal of Poverty and Social Justice, Vol 19 No1, pp 63-66 (with T. Horton).

‘The impact of training on productivity and wages: evidence from British panel data’ (2006), Oxford Bulletin of Economics and Statistics, Vol 68 No. 4, pp 397-421 (with L. Dearden and J. Van Reenen).

“National Insurance: Does it have a future?” (2005),  Public Policy Research, Vol 12, No 2,