An often-heard argument from the tobacco industry is that an increase in the tobacco excise tax will stimulate illicit trade in cigarettes. The experience of South Africa, presented in this case study, does not support this argument.
South Africa was one of the first middle-income countries to use excise tax increases as a tobacco control tool.1 Between 1994 and 2004 the real (inflation-adjusted) excise tax increased at an average rate of 13% per year. The tax increases, together with large increases in the net-of-tax price, pushed up the real retail price by an average of 8% per year. Per capita consumption of cigarettes decreased at more than 5% per year, and smoking prevalence among adults fell from 31% to 24%. Between 1994 and 2004 real government revenue from tobacco taxes increased at an average rate of 9% per year.1 At the same time, there was no evidence that illicit trade was a real problem. See Figure 1.
Since 2010, however, there has been a partial reversal of those gains, in part because from 2010 to 2019, the real excise tax increased by less than 2% per year, but primarily due to an increase in illicit trade from an estimated 10% in 2010 to more than 30% in 2017.2,3 The rapid rise in illicit trade, especially since 2015, cannot be ascribed to the increases in the excise tax, but is closely associated with two factors: tobacco industry efforts to thwart
taxation and enforcement measures; and large-scale corruption in many government institutions, including South Africa’s revenue authority.2,3