State should seize far bigger portion of cigarette profits, say lobby groups

An official submission has said Ireland should increase its tax take on a packet of cigarettes to about 90 per cent, writes COLM KEENA,Public Affairs Correspondent

A RADICAL proposal to seize much of the profit made by the tobacco industry in the Irish market has been made to the Department of Finance by the Irish Cancer Society (ICS) and the Irish Heart Foundation (IHF).

In a detailed pre-budget submission made last June, the two organisations have argued the tobacco industry makes super-profits here and that a competitive market in the sector does not exist.

For these reasons it proposes that the sector become regulated, with its prices controlled in the same way as energy prices, taxi fares and phone rates. With such a change, the actual price of a standard packet of cigarettes could remain the same, but the proportion of the price that would go to the exchequer would increase.

At the very least, according to the submission, Ireland should increase its tax take on a packet of cigarettes to about 90 per cent – the rate in the UK, where the industry has been accused of making super-profits – from the 79 per cent that applies here.

The increased public income, which the organisations say could amount to €150 million per annum, would help society pay for the costs associated with the health problems caused by smoking, and help fund measures aimed at stopping people from taking up the habit, according to the advocacy groups. Also, it would reduce the amount of money available to the industry to fund its efforts to combat public health policy objectives. The submission says the argument from the industry that adding to the price of a pack of cigarettes only gives a boost to tobacco smuggling is challenged by the fact that additions by the industry to the price of a packet of cigarettes over the past 10 years exceed the additions that have come about due to tax increases.

In the decade to 2010, the sector’s revenue from a pack of cigarettes has risen to 183.7 cent from 100.2 cent, or by 83.33 per cent, while the exchequer’s take has risen to 671.3 cent from 377.2 cent, an increase of 78.02 per cent, according to the submission. According to Chris Macey, head of advocacy at the IHF, the industry has successfully hidden the price increases it has introduced in the past decade behind government increases in the tax take on cigarettes. The proposal made in the joint submission, which also includes the suggestion that the Government should commit to increasing the price of a packet of cigarettes by 5 per cent per annum over the rate of inflation, (bringing in an additional €50 million per annum), cites a paper published in the UK in 2010 in Tobacco Control, a peer-reviewed journal aimed at health professionals. In the paper, The Case for OfSmoke, authors Anna Gilmore, Robert Branston and David Sweanor argue three of the four recognised conditions for market failure exist in the tobacco sector. These are information failure, externalities (costs imposed on others through the use of tobacco) and market power. The paper concentrates on the latter.

Outside China, the tobacco market is dominated by Philip Morris International, British American Tobacco (BAT), Japan Tobacco International and Imperial Tobacco (IT). Outside China and Indonesia, according to the paper, three out of these four companies control more than 80 per cent of all major markets.

The market is difficult for new entrants to break into, in part because of the advertising and promotional restrictions most governments have introduced. Furthermore, the large tax burden governments have imposed on cigarettes as part of a strategy to reduce consumption (a strategy championed by the authors) has had the unintended consequence of serving to hide price increases introduced by manufacturers, the paper said.

“Small increments in the manufacturer’s margin have negligible impact on demand but equate to big increases in manufacturer revenue . . . As normal competitive forces are absent, the resulting oligopoly can raise prices seemingly at will, generating sustained high profits, significantly higher than those earned by other consumer staples.”

In support of this, the paper says BAT and IT had earnings margins before interest, taxes, depreciation and amortisation of between 45 per cent and 28.2 per cent between 2004 and 2011. Over the same period, the margins for Cadbury ranged between 12 per cent and 15.9 per cent, while those of L’Oreal were 14.3to 16.6 per cent. The margins of other well-known groups were also much lower than those of the two tobacco giants.

On the basis of this analysis, the authors recommended the regulation of tobacco prices by a newly established regulatory agency, OfSmoke, which could be funded by a levy or licence fee paid by the tobacco companies. The submission from the ICS and IHF argues for increased taxation, better targeting of cigarette smuggling and more spending on prevention measures.

Upwards of a quarter of Irish people still smoke. In California the rate is just 11.9 per cent, while in Canada and Australia it is less than 17 per cent. Better policy can reduce the numbers smoking, reduce the associated costs (and pain) for society, and produce increased revenue for the State, the submission argues.

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No representative of the tobacco industry in Ireland would give an on-the-record interview for this article.

The industry here is represented by the Irish Tobacco Manufacturers Advisory Committee (ITMAC), membership of which comprises: PJ Carroll Company Limited, owned by British American Tobacco; JTI Ireland Limited, formerly Gallaher (Dublin) Limited, part of Japan Tobacco; and John Player Sons Limited, part of Imperial Tobacco. These companies account for 98 per cent of all tobacco products sold here. Cigarettes are not made in the Republic.

The organisation has over the years lobbied the Government not to increase the amount of tax it imposes on tobacco, saying that Ireland's retail prices are already the highest in the EU and that this is fuelling the illegal trade in smuggling.

A pre-budget submission from last year is on the organisation's website. It is understood it is not making a submission to the Department of Finance this year.

The trade in smuggled cigarettes comprises cigarettes that are produced by the big four global tobacco groups, sold to distributors or traders, and then smuggled into Ireland; and counterfeit cigarettes that are produced by illegal operators but that bear major brand names.

According to Ash UK, between three-quarters and half of the cigarettes sold illegally in the UK are produced by legal manufacturers, though the amount of counterfeit product is increasing.

Legislation introduced in the Finance Act 2006 made it a legal duty for tobacco manufacturers not to facilitate smuggling and to avoid supplying cigarettes to those likely to smuggle them into the UK.