An evaluation of the cigarette tax increase impact on illicit trade in 5 Colombian cities

Abstract

Background Few studies in middle income countries assess the effect of a sharp tax increase on observed consumption of illicit cigarettes. The 2016 tax reform in Colombia resulted in a 100% increase of the excise tariff for 2017. This study evaluates the changes in penetration of smuggled products associated with the tax increase nine months after it became effective. The policy of interest is the excise tax increase effective in January 2017 (from 23 to 48 cents per 20 cigarette pack), the first jump in a two-year adjustment period. Methods Non-participant group is defined as smokers in 2016, since the tax measure affects all smokers. Evaluation will use the results of a smoker survey in five Colombian cities in 2016 and a second one planned for September 2017, specifically designed to measure penetration of illicit trade. A matching technique is used considering three dimensions: spatial, age and gender. This provides an adequate comparison. By comparing individuals in the same zone in each city of the same gender and the same age it can be established to what extent the price increases (attributable to new tax levels) are associated with consumption patterns. Results The 2016 survey estimated a 3,5% penetration of illicit cigarettes, with significant differences across cities. Price behaviour indicates that tax has not been fully transfered to consumers yet, with a 22% annual hike (first semester average) but it is getting closer to the expected result. [Changes in price structure after tax reform] Conclusions First wave results suggest that tax levels are not the only driver of illicit trade, since cigarette taxes are the same for all the country. Cities closer to the border and with weaker institutional conditions are more prone to have consumers of smuggled cigarettes. This points at the need to dedicate efforts to target tax administration efficiency to protect revenues in those areas.

Keywords

• WCTOH