New research suggests that government cap cigarette prices and raise an extra £500m per year in doing so

Posted in: Industry tactics, Public policy

An independent regulatory agency to cap the wholesale prices of tobacco would curb the excessive profits made by tobacco manufacturers and should raise an extra £500 million per year of tobacco tax revenue for the Treasury, say researchers from the University of Bath. The creation of an ‘Ofsmoke’ agency to regulate the industry, similar to those in force for utility companies, would increase tax revenue and help protect public health, according to the article recently published in the journal Tobacco Control.

The study starts by highlighting how cigarette manufacturers currently make roughly double the profits of most other companies. Imperial Tobacco for example is reported as having profit margins in the UK of 67 per cent, meaning 67p out of every £1 it receives from tobacco sales is profit, making it one of the most profitable companies in the UK.

Dr Robert Branston, from the Centre for Governance and Regulation at the University of Bath’s School of Management; and Professor Anna Gilmore, from the University’s Department for Health and the UK Centre for Tobacco Control Studies, say that capping the pre-tax cigarette manufacturers’ prices would safeguard society from the market failure behind manufacturers’ pricing power and associated high profits. Regulation would set a maximum price that cigarette companies could charge for their product, based on an assessment of genuine operational costs. Retail mark-up would not be affected and nor would the price that consumers pay, but the excess profit currently accrued by cigarette manufacturers would be transferred to the Treasury through increased tobacco taxes.  The system would be set up at no cost to the consumer or taxpayer, funded instead through a levy or licence fee paid by tobacco companies.

The study finds that the potential increase in UK annual tobacco tax revenues were approximately £500 million using 2009 and 2010 data, even allowing the costs of putting the system in place.  The money raise would fund, twice over, UK wide anti-tobacco smuggling measures and smoking cessation services in England including the associated pharmacotherapies to help people stop smoking.

Dr Robert Branston, Deputy Director of the University’s Centre for Governance & Regulation, said: “A handful of companies dominate the market and cream off massive profits. With such a deadly product, competition isn’t attractive, so we’ve identified regulation as an attractive alternative that stands to benefit both government and public health.

“Clamping down on the extreme profitability of cigarettes would reduce the incentive for tobacco companies to fight public health measures and mean they have fewer funds at their disposal. It would also raise the small matter of £500m for the nation.

“A move to regulation would make it easier to expand tobacco control policies as companies would be partially insulated against their impact on revenue and, therefore, less able to argue against them.”

He went on to say that regulation could also be a way of preventing tobacco companies from using price as a marketing strategy and might even help restrain the behaviour of companies when it comes to supporting cigarette smuggling and marketing to young people.

Professor Anna Gilmore, Director of the University’s Tobacco Control Research Group said, “The tobacco industry is likely to argue that this type of direct economic regulation is an extreme reaction, but it’s hard to argue that nothing should be done given the extent of market power that these firms are enjoying and the number of deaths the sector causes.

“If it came to a choice between increasing income tax or capping the excess profits of companies whose products kill one in two users, I could hazard a guess which one the public would prefer”

Deborah Arnott chief executive of health charity Action on Smoking and Health said, “Tobacco multinationals are unique, they make excessive profits despite the fact their products kill half all their customers. They can continue to charge premium prices and make excess profits because their products are cheap to make, highly addictive and competition in such a highly regulated market is so limited. Capping their profits is not extreme it’s essential.”

The paper is based on the UK but researchers are confident that the system could be applied to any country where tobacco companies enjoy significant market power and are therefore able to make excessive profits.

To read the full text click here.

Posted in: Industry tactics, Public policy