China Increases Cigarette Levies to Curb Smoking

China has raised levies on cigarettes, according to the official Xinhua news agency, in a move touted by some state media as an effort to curb smoking. It’s not clear how much of an impact the tax increases will have, however, in a country with more smokers – roughly 350 million – than the U.S. has citizens.

Beijing’s tax agency divides cigarettes made by state-owned tobacco manufacturers into different classes, based on their price. The consumption tax on one class of higher-priced smokes is rising to 56% from 45% of the price cigarette factories charge distributors. The tax on a class of less-expensive cigarettes will increase to 36% from 30%, Xinhua said. A tax of 5%, which is assessed on the price of the cigarettes as they are sold by wholesalers to retailers, is also being imposed, Xinhua said.

It is unclear how much the added levies will affect the price smokers must pay. So far, retail prices haven’t changed, tobacco-industry officials and retailers have said.

Public-health advocates have long urged China to aggressively raise cigarette taxes in order to push up prices. But the Chinese government, which earns significant revenue from tobacco sales, has resisted any sudden, sharp increase.

Higher prices for cigarettes are one of the most effective ways of reducing smoking rates, especially among more price-sensitive consumers, such as teenagers. Because smokers are addicted to cigarettes, they tend to be less responsive to price increases than consumers of other goods.

The World Bank estimates that in developing countries, such as China, where people have less disposable income, a 10% increase in the price of cigarettes would translate on average into an 8% drop in cigarette consumption. That’s good news for governments, since, in the short to medium term at least, they can earn more tax revenue, even as cigarette consumption declines — reaping both fiscal and public-health benefits.

“Whether it will affect the retail price, we still need to wait and watch,” said Jia Kang, director of the Institute for Fiscal Science Research, a think-tank affiliated with the Finance Ministry. He said he expects tax increases to be passed along to consumers, eventually. “If the tobacco companies don’t transfer the tax to consumers, it will be meaningless” for public health, Mr. Jia said.

One thing, however, is sure, Mr. Jia said, The tax increase will help offset a drop in government revenue, which in the first five months of the year fell 6.7% from the same period in 2008.
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