Summary of Key Points
Many experts from China and abroad recommend that China optimize the structure of its cigarette consumption tax to reduce the market for low-priced cigarettes, thereby enhancing the effectiveness of tobacco control measures. They point out that the significant price disparity in Chinese cigarettes (up to 10 times) allows smokers to switch to cheaper options when prices rise, undermining the impact of tax increases. International experiences, such as France's successful reduction in smoking rates through price hikes and the UK's strategy of maintaining small price differences, demonstrate that reasonable tax reforms can be effective. Data also show that the economic costs associated with smoking (2.43 trillion yuan in 2020) far exceed the fiscal revenue generated by the tobacco industry (1.52 trillion yuan), indicating that tobacco control and finance are not mutually exclusive. China currently has the conditions for such reforms, and it is suggested that tobacco taxes be centralized at the national level, with the additional revenue used for public health initiatives such as healthcare and smoking cessation services.
1. Low-priced cigarettes are a major obstacle to tobacco control: Large price differences weaken the effect of price increases
The price difference for cigarettes in China can range from just a few yuan per pack to several dozen or even hundreds of yuan, whereas in the UK, it is only about twice as much. This means that simple price hikes would likely lead smokers to switch to cheaper alternatives, rendering tax increases ineffective. Experts note that the price elasticity of cigarettes in China is -0.4, meaning that a doubling of prices should theoretically reduce consumption by 40%. However, the presence of low-priced cigarettes neutralizes this effect, as lower-income groups are more sensitive to price changes and can easily find cheaper alternatives.
2. International experiences: Combining price hikes with price regulation
The French example is particularly noteworthy: By continuously raising tobacco prices, the number of cigarettes consumed per day by adults was reduced from 6 to 3 over a 15-year period. The UK, on the other hand, focused on maintaining small price differences to prevent smokers from taking advantage of price fluctuations. Experts estimate that if all countries increased tobacco taxes by more than 10%, an additional 44 million smokers could be discouraged from smoking, and 5 million more would quit.
3. How should China reform its tobacco tax system?
Professor Zheng Rong from the University of International Business and Economics suggests that China should not adopt foreign models wholesale but tailor reforms to its own context:
- Increase the proportion of consumption-based taxes: Currently, the portion of cigarette consumption tax based on the quantity of cigarettes sold (e.g., a fixed amount per pack) is too low, while the portion based on price is high. Increasing consumption-based taxes would directly increase the cost of low-priced cigarettes, making price hikes more noticeable.
- Set minimum tax burdens and price thresholds: This would prevent companies from producing low-priced cigarettes to avoid taxes (e.g., by reducing profits or using smaller packaging).
- Simplify the tax system: Reduce the opportunities for companies to evade taxes through different tax brackets and product structures.
4. Don’t believe the myth that tobacco supports the economy: Smoking costs are much higher than fiscal benefits
Many assume that the tobacco industry is a valuable source of revenue for the state. However, data show that the total economic cost associated with smoking in China (including healthcare expenses and lost productivity) amounted to 2.43 trillion yuan in 2020, while the fiscal revenue from the tobacco industry was only 1.52 trillion yuan—meaning that the costs of smoking far outweigh the benefits. Tobacco control can not only improve public health but also save money; it is not a zero-sum game.
5. How to implement tax reforms?
Experts recommend the following approaches:
- Centralize tobacco taxes: If taxes are collected at the national level, local governments may be less inclined to promote cigarette sales for fiscal reasons, ensuring consistent and more effective policies.
- Use additional revenue for health initiatives: The funds generated from tax reforms should be invested in healthcare, public health, smoking cessation services (e.g., free counseling clinics), and chronic disease prevention (e.g., lung cancer screening).
- Seize the current opportunity for reform: With an aging population, a rise in chronic diseases, and increasing pressure on healthcare systems, now is the perfect time to reform tobacco taxes. This would help improve both public health and the economy.
In summary
Optimizing China’s tobacco tax system is not about raising more revenue but about limiting the availability of low-priced cigarettes and using the resulting funds to improve people’s health and reduce smoking. Such reforms benefit both individuals and the economy.