There are two types of excise taxes – specific and ad valorem. A specific excise tax is levied based on quantity (e.g. a fixed amount per cigarette or weight of tobacco), while an ad valorem excise is levied based on value (e.g. a percentage of the factory price or retail price). Both types of excises have their strengths and weaknesses (see excise taxes). The ideal level and possible combination of both depends on the situation of the country.
The experiences with the variety of taxes and changes in taxes and tax structures applied to tobacco products around the world, supported by economic theory, provide an extensive evidence-base for identifying best practices in tobacco taxation.
These best practices include the adoption of a relatively simple tax system that applies equivalent taxes to all tobacco products, with
- at least 70% excise tax share in final consumer price
- tax increases that exceed increases in consumer prices and incomes, to reduce the affordability of tobacco products
- minimization of incentives for tobacco users to switch to cheaper brands or products in response to tax increases
- improvement of tobacco tax administration to reduce opportunities for tax avoidance and tax evasion.
Such a tax system will have the greatest public health impact, while at the same time produce a more stable, reliable stream of tax revenues. It will be most effective when combined with strong tax administration, including the use of a state-of-the art monitoring, tracking and tracing system that includes high-tech tax stamps and licensing of all involved in the production and distribution of tobacco products, coupled with adequate enforcement and swift, severe penalties on violators.
The WHO is committed to helping governments design intelligent tobacco tax policy that best satisfies these dual goals of tobacco use reduction and revenue generation. An additional benefit of greater revenues through tobacco taxes is the possibility of generating an additional pool of funding for health, a practice recommended by the WHO and being adopted with increasing frequency by countries around the globe.