Report: Where There’s Smoke, Israel Isn’t Doing Enough to Discourage It

A new Knesset study documents how a distorted tax policy is failing to deter smokers and even encourages the young to turn to cheaper cigarettes

An Israeli soldier prepares a cigarette  West Bank, July 4, 2017

The Israeli government is risking lives and depriving itself of revenues with a distorted tobacco tax regime at odds with its own declared commitment to reduce smoking.

These are the conclusions of a report released this week by the Knesset Research and Information Center, which took aim at Israel’s relatively low tobacco tax and poorly designed system for taxing tobacco. In particular, it pointed to the much lower rate for loose tobacco for rolling and cigarettes.

The sales tax on a package of 20 cigarettes as of last year was 19.30 shekels ($5.50), or 65.5% of the price not counting the value-added tax. By comparison the tax on 40 grams of loose tobacco, equivalent to 57 cigarettes, was just 18.10 shekels.

Not surprising that while cigarette imports continue to grow, imports of loose tobacco have skyrocketed as self-rolled cigarettes become the preferred choice of many smokers, the report said. Imports of cigarettes rose 11.5% in the four years to 2016 to $212 million while imports of rolling tobacco soared 1,236% to $30.2 million.

Meanwhile, the Health Ministry estimates that 22.5% of all Israelis over age 18 were smoking last year, up from 19.7% the year before. In absolute terms, it meant that the number of smokers climbed by 120,000 to about 1.2 million people, the third straight year of increases.

“This situation is causing severe damage to use of tax policy as a proven tool to reduce smoking and the harm it causes, to prevent the young from taking up smoking and a cumulative loss to the government of 1.5 billion shekels in tax revenues in recent years,” the report concludes.

MK Yehudah Glick (Likud) who ordered the study had even harsher words for the government.

“The state invests tens of billions in security every year, but we fail to save 8,000 people a year who die from smoking. The state must come to its senses and prepare a comprehensive war on smoking, led by the prime minister and in cooperation with all relevant ministries — raising taxes, reducing access, providing rehabilitation services,” he said after the study was released.

The government had promised in 2013 to gradually raise the tax on rolling tobacco from 290 shekels a kilo to 800 shekels, which would still have left the effective rate to be far less than for cigarettes. But in fact, the increase stalled at the current level of 453 shekels. If the tax were raised to 1,375 shekels a kilo to match the rate for cigarettes, the price of loose tobacco would double.

If loose-tobacco usage remained unchanged that would bring another 630 million shekels in tax revenues. That is unlikely, because according to World Health Organization figures, every 10% increase in the price of a tobacco product reduces smoking by 4%, even in high-income countries like Israel.

But even taking that into account, the report said tax revenues would still grow by an estimated 243 million from the 2016 figure of 453 million.

But the rationale for taxing tobacco is less about revenues and more about health. Like other countries, government policy targets cigarettes for high taxes to discourage smoking and to help cover the health costs that smokers run up from their habit.

In Israel, however, it remains a losing proposition because tax revenues from all tobacco added up to 6.3 billion shekels last year while the Health Ministry estimates the costs to the economy from higher mortality rates for smokers, lost work days and medical costs at 12.7 billion shekels.

Apart from the issue of the differential between loose tobacco and cigarettes, the Knesset report criticizes the general way the government taxes tobacco.

The WHO recommends taxes on tobacco products be no less than 70% and advises policy makers to fix the tax in currency terms, not as a percentage of the price, otherwise taxes will make cheap smokes relatively cheaper.

Israel has a mix of taxes – a 270% rate on the wholesale prices and a fixed price of 7.90 shekels per pack, which adds up to 19.30 a pack before VAT.

Not surprisingly, the big players in Israel’s tobacco market don’t support higher taxes and their views are included in the report.

Dubek, Israel’s sole tobacco maker, which controls about 11% of the market, said a fixed tax would only hurt lower-income groups. Globrands, which has about a 28% share and imports British-American Tobacco and Japan Tobacco international products, opposes removing the tax differential between loose tobacco and cigarettes, calling loose tobacco a “semi-finished” good that contains stems and other unsmokables that get thrown out.

Phillip Morris, which dominates the market but is not a leading seller of loose tobacco, supports raising the tax. It opposes a higher levy on cigarettes, saying it would spur a black market, among other things.