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How Tobacco Industry Keeps Smokers Hooked in The Wake of Increasing Taxes

By Simon Mwangi

In 2018 only thirty-eight countries, covering 14% of the global population, had adequately high tobacco taxes. Evidence shows that significantly increasing tobacco excise taxes and prices is the single most effective and cost-effective measure for reducing tobacco use. Tobacco taxes can benefit smokers who quit, reduce the overall consumption of tobacco, and put smoking cessation on the radar of those who continue to smoke. Increased taxes also have a positive impact on non-smokers by reducing their exposure to second-hand smoke.

The tobacco industry, in its true element, has managed to devise ways and means aimed at defeating the envisaged taxation outcomes. A publication by Zaineb Sheikh (a medical doctor for the London School of Hygiene and Tropical Medicine) shows that a review that systematically assessed global literature on the tobacco industry’s response to excise tax policies, by the researchers at the Tobacco Control Research Group at the University of Bath, found that the industry responds to tax increases in multiple ways.

The World Health Organization (WHO) Framework Convention on Tobacco Control (FCTC) recognizes the importance of the policy of excise taxes on tobacco products in Article 6 and calls on governments to implement price measures to reduce tobacco use. However, the success of taxes is largely dependent on the extent to which the industry passes on tax increases and uses strategies to mitigate their impact.

The oligopolistic nature of tobacco markets with narrow competition gives them substantial pricing power, particularly since demand for their products is fairly rigid, resulting in lop-sided profit.
In a study to explore what is known about the tobacco industry’s price-based responses to tobacco excise tax policies, it was revealed that it utilizes six wide-ranging pricing strategies to weaken tax increases in both high and low income countries. Through differential shifting of taxes, the industry tirelessly raises tobacco prices by over-shifting tax increases on tobacco products at the higher end of the market but under shift on products in lowest segments to keep their prices cheap. This results in a growing price gap between superior and budget cigarettes as well as the range of prices available within each price segment.

Six identified studies in the US and UK showed that tobacco manufacturers introduced new brands and products as cheaper substitutes, presumably to make sure cigarette smokers do not quit considering that taxes cause prices to rise. This is another of the tactics employed to defeat taxation and which is mainly aimed at ensuring that there’s a steady supply of cigarettes in the market even when the prices for existing brands increase.

The other strategy employed by the industry revolves around reclassification of products or changing their physical attributes or even reducing its production levels, so they may fall within lower tax categories.  This is mainly aimed at exploiting the different approaches to taxing different products.

In price related promotions, the tobacco industry targets a particular group of consumers and uses price prejudice to lower the price of certain products by using gifts or through dissimilar pricing by geographic location or store type. This strategy is beneficial for the industry as it gets the most out of profits by lessening the effect of tax increases on demand and is extremely more impactful for the poor or price-sensitive consumers who are more likely to take advantage of price promotions.
Two studies from the UK identify the use of price smoothing and package downsizing strategies by the tobacco industry. In response to a tax increase every year, the industry was found to initially chose to reduce its profits and not fully pass on the tax to consumers, hence averting any quit-inducing large surge in prices but then gradually increase prices throughout the year in order to slowly pass on the tax escalation and thus increase profits.

Published: People Daily 07/09/2022 & The Star 06/09/2022