Tuesday 5 March 2019

The tobacco levy - a dead parrot

The zombie idea of a tobacco industry levy re-emerged at the weekend when ASH's puppet All Party group included it in their new list of demands. ASH are trying to portray the levy as 'making the polluter pay' as if it were a Pigovian response, overlooking the fact that there are no net financial costs of smoking and tobacco taxes are already sky high.

The conceit behind the levy is that the money will come from the industry's profits rather than from smokers (rather like the idea that the sugar tax is a levy on businesses). A childishly simplistic infographic from Cancer Research showed how this was supposed to work.

But that's not how it would work. After the idea was first mooted by George Osborne in 2014, there was some dispute about whether the cost would be passed onto the consumer (ie. 'public health' groups said it wouldn't while everybody else said it would). When HMRC ran the numbers they concluded:

Legally, the Tobacco Levy would be a direct tax, as traders would be liable for the tax. Economically, it would be entirely equivalent to an increase in the specific tax that currently exists on tobacco products.

... Evidence from the consultation, supported by evidence from changes to tobacco duties in recent years, was clear that manufacturers and importers would pay for the levy by fully passing on the Levy to consumers by raising retail prices.

Furthermore, HMRC estimated that a £150 million levy would only actually raise £25 million because of behavioural effects:

Higher prices lead to reductions in consumption of duty-paid tobacco and further switching to lower priced products. This reduces revenue from existing tobacco duties. Tax makes up a large proportion of tobacco prices, leading to large behavioural effects that almost completely offset the revenue raised by the Levy.

DEFRA's chief economist reviewed HMRC's work and concluded:

Based on this review and discussions, and the applications of economic theory and evidence, we believe that HMRC’s assessment is reasonable and appropriate. In particular, we believe that the crucial assumption that a significant proportion of the levy will be passed-on to consumers in the form of higher tobacco product prices as reasonable.

In late 2014, the Treasury ran a public consultation and Deborah Arnott of ASH said:

“It’s almost like Christmas come early to have the government launch a consultation on how to make the tobacco industry pay for the damage it does.”

Alas for Debs, it wasn't to be. Despite the majority of respondents being taxpayer-funded organisations who strongly supported the levy, when the results were published the following year the Treasury concluded that it was a dumb idea.

As announced in Summer Budget 2015, the government has decided not to introduce a levy on tobacco manufacturers and importers.

... Analysis of the responses shows that the impact of a levy on the tobacco market would be similar to a duty rise, as tobacco manufacturers and importers would pass the costs of a levy on to consumers. This is supported by HMRC analysis which shows that a levy of £150 million would only raise £25 million after behavioural effects.

This could be the first time a public consultation on tobacco has resulted in the policy not going ahead. I can't think of another. Either way, we are four years on and ASH are still banging their head against the same wall. Give it up, ASH. The tobacco levy has ceased to be. It has run down the curtain and joined the choir invisible. It is an ex-parrot.

ASH's 'new' list of policy demands is the same tired neo-prohibitionist wish list that they have been banging on about since 2015 with the addition of raising the smoking age to 21. The latter is a policy borrowed from the USA where the drinking age is 21. It doesn't make a lot sense there, but you can see how it could be defended. It makes no sense in Britain where you don't have to be 21 to do anything.

ASH's desperation to keep themselves relevant (and keep the grants rolling in) is palpable. They have had a good run but there's really no excuse for funding this dreadful organisation any longer. It has done quite enough damage. Put it out to pasture and spend the money on healthcare.

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