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Stop the smuggling or cut duty!

Ireland's smuggled cigarettes epidemic puts it up to the government to either enforce current regulations or else cut tobacco duty to allow legitimate traders to compete

Mar 12 2012 By Dan White

Junior Health Minister Roisin Shorthall needs to explain needs to explain the methodology used in arriving at the estimates of how smoking costs the country's health services

Junior Health Minister Roisin Shorthall needs to explain needs to explain the methodology used in arriving at the estimates of how smoking costs the country's health services

As smokers already know to their cost, Irish cigarette prices are the second-highest in Europe. According to figures compiled by the Irish Tobacco Manufacturers Advisory Committee (ITMAC), a packet of 20 cigarettes now costs €9.10 in Ireland.
 
This compares with €8.54 in the UK, €6.20 in France and €4.25 in Spain. Further east, cigarette prices are even lower with a packet of 20 international brand cigarettes costing just €1.19 in Ukraine and €1.17 in Serbia.
 
This enormous price disparity has inevitably led to a huge increase in tobacco smuggling. At least 24% and possibly up to 30% of the cigarettes smoked in this country are not Irish duty-paid. While some of these cigarettes may have been brought back entirely legally by Irish people travelling abroad, the vast majority are smuggled.
 
In addition to cheaper legally-produced cigarettes that have been purchased abroad, there has also been a huge upsurge in the smuggling, mainly from China, of counterfeit cigarettes. While smokers of legally-produced but smuggled cigarettes know what they are inhaling, those who consume counterfeit cigarettes have no such guarantee. 

Loss of revenue

ITMAC estimates that, based on its surveys, no Irish duty was paid on 23% of the cigarettes smoked in this country in 2010. This is leading to an enormous loss of revenue, both excise duty and VAT, to the Irish exchequer. Once again estimates of the revenue loss from smuggled tobacco vary with ITMAC putting the figure at €526m.
 
Other sources put the figure even higher with IBEC’s Retail Ireland putting the total loss to the exchequer at €750m when consequential losses suffered by retailers are added. 
 
After growing very rapidly during the second half of the last decade, with the proportion of cigarettes on which no Irish duty had been paid increasing from 11% in 2005 to 26% in 2010, cigarette smuggling seemed to plateau in 2010 with a slight fall to 23% being recorded. This seems to have been due to a combination of improved enforcement and the absence of tobacco duty increases in the December 2009 and December 2010 budgets.
 
This restraint vanished in last December’s budget when Finance Minister Michael Noonan announced a 25 cents increase in the excise duty on a packet of 20 cigarettes. This was compounded by the 2% increase in the standard VAT rate to 23%. This added a further 15 cents to the price of a packet of 20 cigarettes bringing the total increase to 40 cents.

Smuggling will increase

Not surprisingly the legitimate tobacco trade is fearful that this latest imposition will lead to a further increase in tobacco smuggling. 
 
When it comes to cigarettes and smoking, governments everywhere are conflicted. Health departments point to the costs, sickness, medical treatment and premature death, associated with smoking. Junior Health Minister Roisin Shorthall told the Dáil last July that it would cost the health service €23bn over the next decade if smoking rates, currently 29% among adults, remained unchanged.
 
On the face of it these figures would seem to indicate that smoking is costing €2.6bn a year in healthcare costs and lost productivity. But are these figures the product of rigorous analysis or have they been merely “scientifically” plucked out of the air by advocacy groups? With previous estimates having put the healthcare costs associated with smoking at as low as €500m a year, Minister Shorthall needs to explain the methodology used in arriving at these estimates.
 

Life expectancy 

Even if her estimates prove to be accurate, they are of course gross figures. At the risk of sounding ghoulish, the optimum time for citizens to expire from an exchequer point of view is in their early sixties, i.e. after a working lifetime paying taxes but before they can draw their pensions. With their habit knocking an average of between 10 and 15 years off their life expectancies, most smokers fall into this category.
 
Any estimate of the true costs associated with smoking has to deduct the pension and healthcare savings resulting from the fact that most smokers die significantly younger than non-smokers.
 
As against the conflicting estimates of the cost of smoking are the very real revenues generated by tobacco, about €1.5bn a year. This means that Finance Departments, including our own, are reluctant to make cigarettes too expensive lest they seriously depress consumption and with it the tax take from tobacco.

A legal product

But there is an even more fundamental issue. Whatever one may feel about them, cigarettes are a legal product and likely to remain so for the foreseeable future. 
 
Given this reality, it is incumbent on the government to ensure that the legal distributors of a legal product are not placed at a competitive disadvantage. But that is exactly what is now happening. While legitimate tobacco retailers face ever-tightening restrictions on their activities and a mounting excise duty and VAT burden, their illegal competitors are entirely unencumbered by such burdens.
 
Unfortunately they are not alone. Diesel launderers, who bleach the marker dye from tax-rebated agricultural diesel, are estimated to be costing the exchequer €150m, and possibly twice that amount, in lost revenue.
 
This is intolerable. If the government insists on imposing a high-tax regime on tobacco and diesel then it must do whatever it takes to ensure that these taxes are paid by all sellers. If it isn’t willing or able to do so then it should cut excessive duties and allow legitimate traders to compete on a level playing field instead. 

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