Tobacco tax is good for the coffers, but risks abound

Take your eyes off the GST rate hike, if you can. I personally don’t mind so much how much tax is levied, as long as we get our money’s worth in the end (spend it well), and it doesn’t lead to any risky situations.

The G already makes more than $1 billion a year from tobacco tax. A 10 per cent hike would put a tidy $100 million more into the budget (although it wouldn’t stave off the need for the 2 per cent GST hike everyone is fixated on), and will more than pay for the healthcare costs that smokers are likely to rack up from their habit.

Don’t be mistaken – the tax hike is not really meant as a way to encourage smokers to quit. Singaporeans are surprisingly stubborn when it comes to paying taxes on things they really want, and the massive taxes we already pay for cars and alcohol have scarcely put a damper on demand.

Two things are going to happen, and one more likely than the other. The first is that smokers will feel a little hard done by – this can’t be avoided if the G needs the money. Smokers are used to being the butt of taxes anyway, since the G believes that they will not only keep smoking, but not impact the political balance significantly (it’s not like there are any pro-smoking opposition parties anyway).

Second, and more importantly, we are going to see a rise in contraband cigarettes (check out TMG’s report on the issue last year). As prices go up, it’s going to become more and more attractive to bring in illicit cigarettes, and with them the additional risks they are linked with.

Just on the surface, the G already loses about $203 million in revenue per year to contraband cigarettes, according to a 2014 report. If higher tax leads to more smuggling, then this loss figure could increase significantly.

Underneath the surface, it also floods the market with more tobacco prpducts that may not be compliant to tar, nicotine and chemical limits, is a source of funds for criminal syndicates and terrorism, and encourages other sorts of trafficking (like drugs or weapons) to piggyback along. Singapore becomes a big magnet for the inventory of illegal cigarettes around the region because with retail prices sky-high, smugglers stand to make bigger margins on their goods.

One more factor is going to push up cigarette smuggling in the near future – proposed plain packaging laws. The health ministry’s public consultation paper on plain packaging basically considered the risks of increased illicit trade non-existent, citing the Australian story, but some facts seem to bear out a different story.

KPMG study of illicit tobacco market in Australia

Chart from KPMG study of illicit tobacco market in Australia

Australian plain packaging laws came into force in 2012, and a study by KPMG showed that since that year, illicit tobacco has accounted for 2 to 3 per cent more of the tobacco market than before. The situation has prompted the Australian government to push a bill for harsher penalties for illicit cigarettes and tobacco.

Ultimately, Singapore needs to tread carefully and increase her vigilance against smuggled cigarettes, or else the financial benefits from the increased cigarette tax will not outweigh the associated risks.

 


Photo by Thong Vo on Unsplash

 

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