How Pakistan’s Cigarette Taxes Affect The War On Terror

Source from:  American Enterprise Institute 03/09/2018

Pakistan has followed the usually sensible tactic of increasing cigarette excise duties in order to both raise revenue and lower smoking levels. There is an undoubted public health benefit from reduced smoking, and taxing products lowers demand.

Excise taxes were raised by far more than inflation every year for the past five years and revenue has also increased at a similar but slower rate, topping $1.1 billion in 2016.  But last year it fell to only $800 million. Equally worrying is that the smoking rate has declined only very slightly, by one billion sticks (from 82 to 81 billion) in the past five years.

So what has happened? The illicit market — both domestically produced cigarettes that evade taxes and, increasingly, illegally imported cigarettes (from Dubai in particular) — has grown rapidly. It is difficult to estimate the amount, but the illicit market has grown by at least 60% since 2012 and perhaps almost doubled. Illicit trade is bad for legitimate producers, Pakistan’s treasury, and also health. The illicit products are usually far higher in tar and when burnt are more injurious to health.

The Pakistan government has responded admirably, with enforcement efforts against local illegal producers showing success. However, production has also moved to the more lawless areas of Kashmir, making eradication of illegal production impossible. Unfortunately smuggling is rife and illicit products are slipping into the country at increasing rates, often through Afghanistan. The vast inhospitable border area means it is hard to prevent all forms of illicit trafficking.

With terrorist organizations benefiting from the illicit trade in tobacco in the region, the US has a foreign policy interest in helping Pakistan assess the right policies moving forward. It probably makes sense to lower excise duties on tobacco products to help control the illicit trade, and then increase them slowly overtime. Right now the only beneficiaries of current policies are organized crime and terror groups.  Enditem