Impact of a Recent Tobacco Tax Reform in Argentina

The literature on policies for the control of the tobacco epidemic suggests that increasing selective taxes on the consumption of tobacco products is the most cost-effective policy. Cigarette tax structure in Argentina is very complex. All the tax bases for cigarette consumption taxes are related and, therefore, any modification of a tax affects the collection of the rest of the taxes. This is important given that funds raised by one of the taxes, the Special Tobacco Fund (FET), are allocated among the tobacco provinces according to the value of tobacco production. These provinces oppose in the congress to any reform that increase taxes on cigarette consumption that negatively affects these funds. In May 2016, the government decided to increase the rate of one of the taxes, the internal tax, from 60% to 75% until December 2017. We study the impact on cigarettes’ demand price elasticity, consumption and tax revenues of this tobacco tax reform. Using an Error Correction Model, we estimate short- and long-run demand price and income elasticities. We explore the sensitivity of the reform on these elasticities by estimating the model using total average retail price and average retail price of the cheapest and most expensive cigarette brands. We find that the tax reform of May 2016 induced an increase in the magnitude, in absolute value, of the short-run demand price elasticity. This increment in the demand price elasticity occurred not only for the average real retail price but also for both the cheapest brands of the market and the most expensive ones. We also show that the tax reform increased the funds collected by the FET.