International Centre for Tax and Development
This paper examines the potential for changes in the tobacco tax to contribute to raising government revenues, reducing tobacco use, and improving public health in Nigeria. Specifically, it estimates the impact of a change in the excise tax structure and level on cigarette consumption, government revenue, smoking prevalence, net-of-tax (NOT) revenue, and the excise tax burden. To this end, we ran the Tobacco Excise Tax Simulation Model (TETSiM), adapted by the researchers to calibrate for the Nigerian context. We modelled four different policy interventions or changes to the tobacco tax structure and level, under 12 scenarios of economic/income growth (slow, medium, and high growth) and industry price response to an increase in excise taxes (either a full pass-through, or an under-shift or over-shift of the tax onto the retail price). We find that (1) cigarette consumption and smoking prevalence decrease in all 12 scenarios of possible economic/income growth and industry price changes under the policy interventions that impose higher tax levels and specific tax systems; (2) under all policy interventions and in all scenarios considered, government excise tax revenues from cigarette sales increase significantly but are most significant under the specific tax system, relative to the ad valorem tax system; (3) under all policy interventions, the best response to maximise NOT revenue for the tobacco industry is to increase the industry price; (4) under all policy interventions and in all scenarios considered, the excise tax burden to the consumer will at least double; however, since current excise tax burden is very low (at 4 per cent), the policy impact witnessed in the model remains minimal; and (5) we performed a three-year projection of the proposed policy change, which shows a consistent trend of increasing government revenues, decreasing consumption, and decreasing smoking prevalence rates if policy interventions are sustained each year over the three-year period. Based on the findings, we recommend that changes in tax policy need to be significant to have the desired effect on smoking prevalence. In particular, an effective tobacco control tax policy will require that: the tax system is changed from ad valorem to specific tax system; and the excise tax burden on tobacco products is continuously increased at least until it reaches 75 per cent.