13.8 Tobacco industry arguments against tax increases
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The tobacco industry recognises the effectiveness of tax increases in decreasing smoking and therefore sales volumes. Internal documents released as part of settlement of litigation by United States attorneys-general against Philip Morris and British American Tobacco include the following statements:
Of all the concerns there is one—taxation—that alarms us the most. While marketing restrictions and public and passive smoking do depress volume, in our experience taxation depresses it much more severely. Our concern for taxation is therefore central to our thinking about smoking and health.218
Increases in taxation, which reduce consumption, may mean the destruction of the vitality of the tobacco industry.219
Given such concerns it is not surprising that the industry has in many instances vehemently opposed large increases in taxes. Opposition to tax increases has tended to include the following three arguments.
First the tobacco industry has argued that tax increases and particularly resulting price differences between countries will lead to incentives to smuggle.197
Second it has argued that price increases are regressive—that they impact most severely on the poor and underprivileged.220-222
Third it has argued that very high tax increases will lead to such significant declines in smoking that government revenue will be put under threat.223, 224
Each of these arguments is examined in the following three sections.
Despite industry concerns about sales volumes, stock-market analysts are fairly sanguine about the impact of modest and gradual tax increases on tobacco company profits and potential returns to shareholders. So long as tax increases are not too sudden or too large, tobacco companies can offset declines in sales with increases in their own price levels, thereby maintaining returns to shareholders. In the long-run, government efforts to maintain revenue—for example through modest tax increases, minimum pricing regulations and anti-smuggling initiatives—will also protect tobacco industry profitability.225
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