State regulation urged to curb supernormal tobacco profits
A new system of State regulation of the tobacco industry proposed by the Irish Heart Foundation and Irish Cancer Society would enable Government to curb excessive profits being made by multinational cigarette companies and make them pay more towards the enormous economic cost of smoking-related illness.
The proposal is made in a joint pre-Budget submission by the health charities, which also calls on the Government to introduce annual tax increases on tobacco products of 5% above inflation – a move that would lead to a 62 cent increase on a pack of cigarettes this year.
Research carried out by leading UK business economist Dr Robert Branston shows tobacco firms enjoy profit margins of up to 55% after duties on sales in Ireland – around three times more than those achieved by food and drinks manufacturers. The combined profits of the three tobacco firms that control almost the entire Irish market totalled €104 million in 2011 from revenues of €226 million.
These huge profit margins are being permitted by the Department of Finance despite a Department of Health estimate that smoking-related illness is costing the State some €2 billion a year, compared to total tobacco tax receipts in 2011 of €1.42 billion.
Speaking at the launch of the Irish Cancer Society/Irish Heart Foundation joint pre-Budget submission in Dublin, Dr Branston said that by reducing industry profits to normal levels of between 12-20%, the State could take up to €65 million extra in tax from tobacco companies, without having any impact on the price of cigarettes.
He said the fact that just three global tobacco companies controlled virtually the entire Irish tobacco market; the lack of competition due to barriers to market entry amplified by tobacco control measures such as advertising and display bans; and the absence of substitutes for a highly addictive substance had created a market failure leading to excessive profits. Through a system of regulation, the State could reduce industry profit margins at a reasonable rate.
"Tobacco multinationals can continue to charge premium prices and make excessive profits because their products are very cheap to make, are highly addictive and competition in such a highly regulated market is so limited,” said Dr Branston. “This extreme profitability creates the incentive and ability for tobacco companies to fight tobacco control measures to the detriment of public health.”
Chris Macey of the Irish Heart Foundation said it was bizarre that although Ireland has regulators for everything from energy and electronic communications to broadcasting and taxi driving, there was none for an industry whose products kill half of all their users.
“There is no legitimate argument for the status quo because even apart from the health catastrophe of 5,200 people killed by tobacco-related illness a year in Ireland, the tobacco industry is a drain on the nation’s economy. It creates virtually no employment and on Department of Health estimates the taxpayer is subsidising tobacco companies to the tune of almost €6 for every euro of profit they take out of the country.”
Kathleen O’Meara of the Irish Cancer Society said that the extra €65m the State could generate through a tobacco industry regulator would pay for measures required to crack down on tobacco smuggling and to help smokers quit more than five times over.
“By combining higher taxes, tough anti-smuggling measures and improved smoking cessation services, we can achieve the win-win of a major reduction in smoking rates and huge extra revenue for the Exchequer,” she said.
This has already been achieved in the UK, where the price of a pack of cigarettes is now higher than in Ireland. Over the last decade the smuggling rate has been reduced in the UK from 21% to 9% despite higher tax increases than here through concerted enforcement measures.
“The latest statistics here show a reduction in smuggling over the last year from 15% to 13%, which is a great achievement by the Revenue Commissioners and Gardai in an era of resource limitations,” added Ms O’Meara.
Their efforts deserved greater assistance through extra detection equipment, such as scanners at Irish ports; and tougher sanctions for smugglers and sellers of illicit tobacco, including longer sentences and bigger financial penalties. In addition to selling contraband, it was also time for legislation to make it a criminal offence to buy smuggled tobacco.
The main recommendations in the pre Budget submission are:
1: Introduce price cap regulation of the tobacco industry to reduce excess profits. Any reductions in the manufacturers’ prices following the introduction of regulation to be offset by equal rises in tobacco taxes.
2: Adjust the structure of tobacco taxation to ensure tax increases benefit the Exchequer, rather than the tobacco industry.
3: Introduce a price escalator for taxes on all tobacco products of at least 5% above the rate of inflation. Based on an annual inflation rate of 1.2%, this would result in a price increase of 6.2%, or approximately 60c in Budget 2014.
4: Commit to a comprehensive Smuggling Strategy that includes a commitment to reduce the rate of smuggled tobacco by 1% per annum. Expenditure on anti-smuggling operations such as enforcement and supply chain control should be increased by around €8 million per year – equivalent to what the UK spends on these activities per head of the population.
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