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The effect of excise tax increases on cigarette prices in South Africa
  1. Daniel J Linegar,
  2. Corne van Walbeek
  1. School of Economics, University of Cape Town, Rondebosch, South Africa
  1. Correspondence to Professor Corne van Walbeek, School of Economics Building, University of Cape Town, Rondebosch, 7701, South Africa; cwalbeek{at}gmail.com

Abstract

Introduction The effectiveness of excise tax increases as a tool for reducing tobacco consumption depends largely on how the tax increases impact the retail price. We estimate this relationship in South Africa for 2001–2015.

Data Statistics South Africa provided disaggregated cigarette price data, used in the calculation of the Consumers’ Price Index. Data on the excise tax per cigarette were obtained from Budget Reviews prepared by the National Treasury of South Africa.

Methods Regression equations were estimated for each month. The month-on-month change in cigarette prices in February through April was regressed against March’s excise tax change to estimate the pass-through coefficient. For the other 9 months, the month-on-month change in cigarette price was regressed against monthly dummy variables to determine the size of the non-tax-related price increase in each of these months. The analysis was performed in both nominal and real (inflation-adjusted) terms.

Findings Expressed in real terms, the excise tax was undershifted. A R1.00 (one rand) increase in the excise tax is associated with an increase in the retail price of cigarettes of R0.90 in the pre-2010 period, and R0.49 in the post-2010 period. In the pre-2010 period, the tobacco industry increased the retail price of cigarettes in July/August, independent of the excise tax increase. The discretionary July/August price increases largely disappeared after 2010, primarily because the market became more competitive.

Conclusion The degree of excise tax pass-through, and the magnitude of discretionary increases in cigarette prices, is significantly determined by the competitive environment in the cigarette market.

  • Excise tax pass-through
  • Industry pricing strategy
  • Overshifting and undershifting the excise tax
  • South Africa

This is an Open Access article distributed in accordance with the Creative Commons Attribution Non Commercial (CC BY-NC 4.0) license, which permits others to distribute, remix, adapt, build upon this work non-commercially, and license their derivative works on different terms, provided the original work is properly cited and the use is non-commercial. See: http://creativecommons.org/licenses/by-nc/4.0/

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Footnotes

  • Contributors DJL performed the statistical analysis and wrote the initial draft. CvW initiated the project and wrote the final draft.

  • Funding This work was supported by the Bill & Melinda Gates Foundation grant number 408254 (IRMA 20177).

  • Competing interests None declared.

  • Provenance and peer review Not commissioned; externally peer reviewed.