OECD Tobacco Tax Report Faces Global Reforms’ Typical Obstacles

The OECD has published a report that calls on Latin American and Caribbean countries to adopt more ambitious tobacco tax reforms. The report, published Oct. 28, states that governments should impose higher excise taxes on tobacco, stop giving subsidies to the industry, and cooperate at a regional level.

The report touches on an old quandary between tax and public health experts: the extent to which a worthy policy objective, such as encouraging people to quit smoking, should be achieved through taxation. Taxation is an attractive tool to achieve public policy goals because it is based on legislative authority, provides a tangible financial return to government, and affects individuals and business where it matters the most.

The problem with such a strategy is that it raises a legitimacy concern. The tax may be advertised and “sold” to constituents to disincentivize certain behavior while also being used to fund the public budget—including expenses not directly associated with the conduct the government says it wants to discourage.

There is no doubt that higher taxes can reduce the tobacco consumption, with low- and middle-income countries showing more decline than high-income countries. The issue is that they are also great at raising tax revenue, and these two objectives aren’t necessarily aligned.

One might assume that tobacco tax revenue is exclusively used to fund public health services that its consumers (and proximal non-smokers) need and government-sponsored programs to help people quit and avoid smoking.

In Brazil, however, the revenue raised with the excise tax on industrialized products—and the new sin tax on harmful products—aren’t earmarked to fund these expenses. Colombia, the most observant follower of World Health Organization’s best practices in tobacco taxation among LAC countries, only requires that collected revenue is used to support public health—covering the cost of diabetes medication or treating heart disease, for example. But the link between the tax and at least one of its proclaimed purposes isn’t that clear.

The more a government relies on taxing tobacco to meet its fiscal goals, the less it can be justified to reduce tobacco consumption. The report from the Organization for Economic Cooperation and Development talks about health and revenue objectives—but it doesn’t discuss possible constraints on how LAC countries should use the tax revenue they collect from tobacco consumers. It says that countries aren’t “fully tapping into their tobacco tax revenue potential” but is silent on the incentives that might result from relying on that revenue to balance LAC budgets.

Another issue that receives little attention in the report is the administrative cost of its recommendations, which include enforcing mandatory licensing for all parts of the tobacco value chain and ensuring that tobacco companies don’t benefit from direct or indirect tax incentives.

The report seems to assume that social and economic costs from tobacco use outweigh the burden of its recommendations, and that might well be true. A factor that should play a role in this assessment is the overall maturity of local tax authorities when it comes to digitalization, so that they would be positioned to enhance their oversight of tobacco trade at a lower cost.

Today, the digitalization of tax administrations in LAC is inconsistent at best. Some countries have structured a functional framework of electronic tax services (Brazil, Chile, and Mexico), while others lag due to lack of financial resources or administrative capabilities (Costa Rica, the Dominican Republic, and Guatemala).

The OECD report advocates regional cooperation to address differences among LAC tobacco tax policies. Because tobacco tax rates are set in isolation and not all countries tax traditional tobacco products in addition to new tobacco and nicotine products, companies can (and do) exploit these asymmetries in their favor, the report says. It argues that “weak” control policies in one country shouldn’t create a hurdle for effective tobacco tax policies in other countries.

To fans of the OECD Pillar Two’s global minimum tax, this should sound familiar. One country’s tax policy choices, labeled as “weak” or “harmful” by the OECD, shouldn’t render the tax policy choices of other countries—as in taxing multinationals’ profits—ineffective.

This carries even more weight if the objective is to build a healthier, smoke-free society. But as a call to cooperation, it should account for the means and ends of all stakeholders involved. Otherwise, it paves the way for initiatives such as the GloBE rules of Pillar Two, which is really an abandonment of cooperation as the preferred tool to effectuate global tax reform: If a country refuses to adopt the rules, other countries can step in and collect the cash.

You could argue that the purported goal of the tobacco tax report is even more appealing than taxing the Googles and Apples of this world. This raises the question of whether its suggested reforms would evolve into supranational control of tobacco taxes in LAC and elsewhere, with a system of checks and balances to ensure dissident countries don’t compromise agreed-on tobacco tax policy standards.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Lucas de Lima Carvalho is the founder of the Latin American Tax Policy Forum. He is based in São Paulo.

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