Ukrainian President Victor Yushchenko, citing concern for the tobacco industry, on Nov. 11 vetoed legislation that would have hiked the excise tax on tobacco products once more.
It is worth remembering that – even though tobacco excise taxes were increased in September 2008, and again in February and May of this year – cigarette prices in Ukraine remain among the lowest in Europe. This leads directly to a public health catastrophe for the nation and creates conditions for rampant smuggling of made-in-Ukraine cigarettes to other nations.
The excise tax on a mid-price pack of filter cigarettes was Hr 0.5 in August 2008, about 1 Hr in December 2008 and about Hr 2 since May 2009 – a four-fold increase in less than a year. Moreover, the nominal prices for cheap cigarettes increased three times.
However, the situation for expensive brands is far different. In August 2008, the price of a pack of Marlboros was Hr 5, which was then equal to roughly $1. Currently, the price is Hr 8, still about $1. By contrast, in Poland, the price is almost $4 and, in Western Europe, the price of Marlboros is much higher. Even in Russia, a pack of Marlboros costs $1.40. So it is no wonder why the smuggling of cigarettes out of Ukraine is so high — about 40 billion cigarettes illegally left Ukraine last year.
The government this time proposed an increase the ad valorem (percentage) part of the excise, which affects more expensive brands. The price of a pack of Marlboros, if the law had been signed by the president, would have increased to Hr 11, still much lower than the rest of Europe.
However, tobacco companies in Ukraine claimed that this tax increase would have been disastrous for their business. They make the same claim each and every time the excise tax is increased. Now we can check those claims. In January-October 2009, with much higher taxes, the tobacco giants produced 95.4 billion cigarettes in comparison to 110 billion during the same period a year ago. Meanwhile, sales (including of imported cigarettes) decreased from 102 billion to 94 billion during the same period. So the decline was just 8 percent. Many businesses in Ukraine would dream about having such a small decline in 2009.
In his veto message, the president argued that a tax hike would have led to a decline in tax revenue. This is not true; the opposite happens. Despite the industry’s production decline, government revenues from tobacco excise taxes skyrocketed in 2009. The public coffers are expected to receive Hr 9 billion in 2009, compared to Hr 3.5 billion in 2008.
What about the rationale that Yushchenko’s veto would save jobs in tobacco plants? In reality, employment is very small in tobacco factories. Employment declines even when production grows. In 2000, 6,156 workers in tobacco factories in Ukraine produced 59 billion cigarettes while, in 2008, 130 billion cigarettes were produced by just 4,139 workers.
Transnational tobacco companies came to Ukraine in 1993. They promised employment, investment and revenue. Now they control 99 percent of the tobacco production in Ukraine. In 1992, Ukraine produced 9,000 tons of tobacco leaves. However, despite huge increases in cigarette production, tobacco growing has almost disappeared in the country. In 1996-2008, the foreign trade balance of tobacco leaves and products was negative for Ukraine and totaled more than $2 billion. It actually means that Ukrainian smokers invested $2 billion in the economies of other nations.
What tobacco companies actually produce is death. Annually, more than 100,000 Ukrainians die of tobacco-related diseases. Recent tax increases – coupled with some legislative activity and media campaigns — have greatly contributed to a decline in smoking. In June 2005, 37 percent of adult Ukrainians smoked daily. In May of this year, this proportion decreased to 27 percent and, by October, to 25 percent. The next tobacco excise increase could speed up this positive trend, which would be very beneficial for public health in Ukraine.
The tobacco industry will survive in Ukraine, no matter what. But that is not always the case with those Ukrainian youngsters who experiment with smoking. If tax hikes stop them from becoming addicted to tobacco, then they will have much longer, healthier lives.
Many politicians in Ukraine already understand that high tobacco taxes are good both for public health and public revenues. I hope that the current and future president of Ukraine will understand this as well.
Konstantin Krasovsky is the head of the Tobacco Control Unit at the Ukrainian Institute of Strategic Research in the Health Ministry.
