Assessing the Effects of a Tobacco Tax Reform on the Industry Price-Setting Strategy.

José Ângelo Divino ,Philipp Ehrl,Osvaldo Candido,Marcos Aurélio Pereira Valadão

doi:10.3390/ijerph181910376

Abstract

In July 2020, the Executive Power submitted Bill no. 3887-2020 as the first step towards a wide reform of the Brazilian tax system. It will replace the current PIS/COFINS (charged on turnover of companies) by the CBS (a tax on goods and services), which includes a special regime for cigarettes. The novelty is that the specific cigarette tax will be charged on the highest retail price per cigarette brand across the country. This research simulates three scenarios that differ according to the price-setting strategy of the tobacco industry in reaction to the proposed tax reform. In all simulations, the tax reform would result in considerably higher cigarette prices, lower cigarette consumption, higher tax collection, and an implicit minimum price that is far above the current official price floor. Furthermore, the price dispersion and cross-border shopping across states would be reduced because prices and tax burden per brand would tend to be the same across the country due to the dominant price-setting strategy in the cigarette industry.

Highlights

Over the past few decades, Brazil has significantly reduced the prevalence of smoking, from 34.8 percent in 1989 to approximately 10.5 percent in Brazilian state capitals in
Bill no. 3887-2020 is supposed to replace the current PIS/COFINS with the CBS (Social Contribution on Operations with Goods and Services)
The present paper investigates how this tax reform might affect the cigarette industry’s price setting strategy and analyzes the potential impacts of Bill no. 3887-2020 on cigarette prices, smoking prevalence, tax collection, and cigarette consumption considering effects at the federal and state levels

Summary

Introduction

Over the past few decades, Brazil has significantly reduced the prevalence of smoking, from 34.8 percent in 1989 to approximately 10.5 percent in Brazilian state capitals in. Designed as a social contribution, the CBS is a general, non-cumulative tax on consumption Under this bill, there would be no change in the IPI (a federal consumption tax on manufactured products) and ICMS (a subnational consumption tax), which are other taxes levied on cigarettes. The CBS includes a special regime for cigarettes: a 22 percent ad valorem tax rate on the highest price per brand plus a specific tax of BRL 1.10 per pack. This reform would yield a substantially higher tax burden for the new CBS compared to the current PIS/COFINS that

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Conclusion