‘Sin Taxes’

‘Sin Taxes’

In the 2016/2017 Budget Speech, the Honourable Minister of Finance, Mr Calle Schlettwein announced the increase in ‘sin taxes’. Above inflationary increases were announced as being applicable to wine, malt beer, spirits, cigarettes and tobacco and cigars, following on South Africa’s announcement of the same increases a week earlier.

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‘Sin tax’ increments come as no surprise considering the fact that medical research is increasingly proving the detrimental health effects of alcohol and tobacco products on public health.

What is its stated purpose?

‘Sin taxes’ are not a technical term, but rather a loose term to reference the levying of excise duties on the production and sale of alcohol and tobacco products – ‘sinful’ products (Source: ‘The Economics of Sin Taxes’ - James Sadowsky (1994)). ‘Sin taxes’ are imposed with the dual purpose of increasing government revenues and discouraging the consumption of affected products.

How are sin taxes designed?

‘Sin taxes’ are designed to achieve their stated purpose by imposing above par taxes upon the producers of alcohol and cigarettes on their products that are distributed to Namibia for their intended sale. It should be noted that the secondary stated purpose of improving public health doesn’t come directly from the application of excise duties on products but rather through the application of the logic that an increase in the price of the affected products leads to a reduction or discouragement of their consumption.

And does its design allow it to achieve its stated purpose?

Pros and cons

‘Sin tax’ proponents assert that the significant revenues generated by ‘sin taxes’ significantly increases public coffers, whilst also acting as an indicator that the negative consequences, both direct and indirect, borne by the general public are accounted for in part by the consumers of alcohol and tobacco products.Opponents to ‘sin taxes’ cite the tax’s regressive nature as it affects the ‘poor man’ the most (Source: ‘Regressive Sin Taxes’ - Benjamin Lockwood and Dmitry Taubinsky (2015)). This is due to tax rate increases leading to a larger proportion of their limited budgets being allocated to catering for the increased price of their alcohol and cigarettes.Weighing the valid considerations by both sides of the argument while also taking into account the current framework for ‘sin taxes’, it would appear that the current framework caters largely towards the revenue aspect of these taxes.

What is actually happening with sin taxes?

‘Sin tax’ revenues have been a trusted source of income to the fiscus, an indicator that the consumption of affected products have been fairly consistent over the years, which can be attributed to the year-on-year increments.  Revenues are directly proportionate to consumption – a reduction in consumption amounts to a reduction in revenues.

Notwithstanding the consistent inflow of public revenues from ‘sin taxes’, numerous unintended consequences (such as illicit trading and smuggling) have arisen as policy-makers strive to strike a balance between health and economic objectives. Economic opportunity and price differentials are the main culprits driving illicit trade, paving the way for black markets to save consumers money and for smugglers to profiteer – a seeming ‘win-win’ in the face of rising prices (Source: ‘Cigarette Smuggling Big Business’ – B-Metro staff reporter (undated)).

 

 

 

3. What is actually happening with sin taxes?

 

‘Sin tax’ revenues have been a trusted source of income to the fiscus, an indicator that the consumption of affected products have been fairly consistent over the years, which can be attributed to the year-on-year increments.

 

Revenues are directly proportionate to consumption – a reduction in consumption amounts to a reduction in revenues.

 

Notwithstanding the consistent inflow of public revenues from ‘sin taxes’, numerous unintended consequences (such as illicit trading and smuggling) have arisen as policy-makers strive to strike a balance between health and economic objectives. Economic opportunity and price differentials are the main culprits driving illicit trade, paving the way for black markets to save consumers money and for smugglers to profiteer – a seeming ‘win-win’ in the face of rising prices (Source: ‘Cigarette Smuggling Big Business’ – B-Metro staff reporter (undated)).

 

 

 

3. What is actually happening with sin taxes?

 

‘Sin tax’ revenues have been a trusted source of income to the fiscus, an indicator that the consumption of affected products have been fairly consistent over the years, which can be attributed to the year-on-year increments.

 

Revenues are directly proportionate to consumption – a reduction in consumption amounts to a reduction in revenues.

 

Notwithstanding the consistent inflow of public revenues from ‘sin taxes’, numerous unintended consequences (such as illicit trading and smuggling) have arisen as policy-makers strive to strike a balance between health and economic objectives. Economic opportunity and price differentials are the main culprits driving illicit trade, paving the way for black markets to save consumers money and for smugglers to profiteer – a seeming ‘win-win’ in the face of rising prices (Source: ‘Cigarette Smuggling Big Business’ – B-Metro staff reporter (undated)).

What are the implications of the current framework?

Zimbabwe, the producer of “golden leaf” tobacco, stemming from its reputation for high grade tobacco, is currently dealing with black market shipping of its cigarettes to its neighbouring countries, primarily South Africa. An article by a local Zimbabwe news agency (‘Cigarette Smuggling Big Business’ – B-Metro staff reporter (undated)) states that due to the sanctions imposed on the country, exports of these cigarettes may only be made freely to Asia. Opportunistic smuggling syndicates have used this opening to re-brand Zimbabwean cigarettes as South African, in order to gain access to the European markets which are otherwise unavailable to Zimbabwean exporters. The smuggling situation is exacerbated by the fact that Zimbabwe’s non-membership to the South African Customs Union (SACU) means that the country is not afforded significant trade concessions within Southern Africa.

A November 2015 IOL article (‘Billions Lost to Illegal Tobacco Trade’) by Carla Bernardo estimates tax revenue losses resulting from this has been estimated to be in the region of R4-billion annually. The loss of such significant tax revenues greatly underpins the revenue-generation purpose of ‘sin taxes’. Coupling this with the lack of specific and robust public health initiatives, ‘sin taxes’ fall short of achieving their objectives on both fronts.

 

4. What are the implications of the current framework?

 

4.1. Smuggling

 

Zimbabwe, the producer of “golden leaf” tobacco, stemming from its reputation for high grade tobacco, is currently dealing with black market shipping of its cigarettes to its neighbouring countries, primarily South Africa. An article by a local Zimbabwe news agency (‘Cigarette Smuggling Big Business’ – B-Metro staff reporter (undated)) states that due to the sanctions imposed on the country, exports of these cigarettes may only be made freely to Asia. Opportunistic smuggling syndicates have used this opening to re-brand Zimbabwean cigarettes as South African, in order to gain access to the European markets which are otherwise unavailable to Zimbabwean exporters. The smuggling situation is exacerbated by the fact that Zimbabwe’s non-membership to the South African Customs Union (SACU) means that the country is not afforded significant trade concessions within Southern Africa.

 

A November 2015 IOL article (‘Billions Lost to Illegal Tobacco Trade’) by Carla Bernardo estimates tax revenue losses resulting from this has been estimated to be in the region of R4-billion annually. The loss of such significant tax revenues greatly underpins the revenue-generation purpose of ‘sin taxes’. Coupling this with the lack of specific and robust public health initiatives, ‘sin taxes’ fall short of achieving their objectives on both fronts.

 

 

4. What are the implications of the current framework?

 

4.1. Smuggling

 

Zimbabwe, the producer of “golden leaf” tobacco, stemming from its reputation for high grade tobacco, is currently dealing with black market shipping of its cigarettes to its neighbouring countries, primarily South Africa. An article by a local Zimbabwe news agency (‘Cigarette Smuggling Big Business’ – B-Metro staff reporter (undated)) states that due to the sanctions imposed on the country, exports of these cigarettes may only be made freely to Asia. Opportunistic smuggling syndicates have used this opening to re-brand Zimbabwean cigarettes as South African, in order to gain access to the European markets which are otherwise unavailable to Zimbabwean exporters. The smuggling situation is exacerbated by the fact that Zimbabwe’s non-membership to the South African Customs Union (SACU) means that the country is not afforded significant trade concessions within Southern Africa.

 

A November 2015 IOL article (‘Billions Lost to Illegal Tobacco Trade’) by Carla Bernardo estimates tax revenue losses resulting from this has been estimated to be in the region of R4-billion annually. The loss of such significant tax revenues greatly underpins the revenue-generation purpose of ‘sin taxes’. Coupling this with the lack of specific and robust public health initiatives, ‘sin taxes’ fall short of achieving their objectives on both fronts.

 

Earmarking of Funds

In some ways, the current ‘sin tax’ framework can be viewed as being contrary to its stated purpose by reason that a reduction in the consumption of alcohol and tobacco products may well only be achieved by stout public health initiatives funded by the ‘sin tax’ revenues. A 2015 publication by the Research Council of Michigan (‘Earmarking State Tax Revenues: Tying Policymakers’ Hands or Protecting Policy Priorities’) suggests that in the absence of any earmarked funds, ‘sin tax’ revenues are ‘lost’ to other fiscal areas of the government budget instead of being put towards aiding the tax in achieving its secondary health objective.

 Customs and excise regulations should be adapted to rapidly changing conditions in order to instil efficiency and allow states to monitor the effect of their regulations. Sub-Saharan countries are currently embarking upon numerous projects to better customs and excise regulations.

The 2012 ‘SADC Review Study Into The Illicit Trade In Excisable Products With Particular Reference To Alcohol And Tobacco Products’ details numerous potential ideas for the revision of customs regulations such as: Zimbabwe is tendering proposals to link accounting records and customs declarations in order to advance the quality of data used and reduce costs; and Mozambique has been cited to make reference to ‘street prices’ in order to gauge the effectiveness of enforcement. Further, the SADC Review Study proposes that excise rates be linked to wages to assist in avoiding the situation whereby consumers of legal products turn towards illicit substitutes during times of economic hardship.

Conclusion

The harmonisation of ‘sin tax’ structures are needed sooner rather than later in order to both ensure efficient revenue collection and support stated health objectives. It would appear that the primary way to combat revenue leakages and address the equally important public health aspect of ‘sin taxes’ is through a multi-pronged approach involving customs and excise regulations and specific allocation of revenues towards education and public health initiatives. ‘Sin tax’ policies require consistent evaluation so as to effectively address the intricate link between human behaviour and taxation.

© 2017 KPMG Advisory Services (Namibia) (Pty) Ltd, a Namibian company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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