• Illegal tobacco products
• Taxation
• Public policy
• Price
• Economics

The tobacco industry claims that increases in tobacco tax will not discourage people from smoking because smokers will simply substitute taxed cigarettes with smuggled untaxed cigarettes.1 The experience in Hong Kong suggests that smuggled cigarettes are eating into some of the taxed cigarette market share, as the industry suggests. However, despite this increase in the illicit market, higher tobacco tax does effectively reduce total tobacco consumption.

The tobacco duties of Hong Kong on is governed by the Dutiable Commodities Ordinance with just few exceptional circumstance.2 ,3 The analysis below is based on data obtained between 2009 and 2010, and examines the impact of the first increase in tobacco tax in Hong Kong in 8 years.4

Table 1 provides cigarette duties,5 duty on each cigarette,2 ,6 number of cigarettes taxed, market share of smuggled cigarettes7 and number of cigarette sales in Hong Kong in 2009 and 2010, to determine the effect of an increase in tobacco tax in this time period (Subject to round up/down).

The increased number of smuggled cigarettes was 35 396 127 in 2010, after the government increased the tax rate by 50%. However, the government was successful in achieving its objective of reducing smoking, as the total number of cigarettes consumed in 2010 dropped by 868 185 548 from the previous year in spite of the expansion of the illicit market.

It is not surprising that some consumers may switch to smuggled cigarettes following a tobacco tax increase. However, these results show that the conclusion that increasing tax does not decrease smoking is incorrect. The reason for this is that as the price of taxed cigarettes increases, so does the price of smuggled cigarettes since they are substitutes for taxed cigarettes. For example, a reporter found that after the duty rose again in 2011, the price of a pack of 20 cigarettes increased from HK$40 to HK$50, while that of smuggled cigarettes also might increase from HK$24 to HK$39.8 An increase in the illicit cigarette price decreases smoker demand, as does an increase in the price of taxed cigarettes.

Unlike for the legal market, there are no standard pricing and purchasing data for the smuggled cigarette market. However, an analysis based on the figures available from tobacco sellers and reporters is sufficient to understand the power of tobacco tax to decrease overall consumption of cigarettes. While tobacco tax increases drive some smokers to purchase smuggled cigarettes, tax increases still achieve the goal of decreasing tobacco consumption overall because the price of both smuggled and taxed products increase together. Scholars who reject the power of ‘health taxes’ may have paid insufficient attention to the effect of tax increases on the price of smuggled cigarettes.9 ,10 While it may be true that, as the WHO reports stated, “increased smuggling does not automatically follow tax increases”,11 ,12 it is also important to recognise the effects of higher prices for smuggled cigarettes, which also contribute to a drop in cigarette consumption.