# Why taxing vaping won't help ensure a just tobacco transition



## Rob Fisher (21/1/22)

Excellent article by Sifiso Skenjana!



The approach currently taken regarding levying an excise on electronic cigarettes and vaping products will threaten the very things the budget ought to achieve, says Sifiso Skenjana.

"Just transitions" - which have been a hot topic, predominantly in the climate change space - are applicable in all industries that need to transform into more sustainable versions of themselves.

At an industry level, this often denotes an intra-industry structural transformation from one unsustainable form towards a more sustainable one, in a way that promotes inclusive participation, and secures the lives of workers, communities and indigenous resources, including indigenous knowledge systems. The transition to low-sugar drinks in the sugary
beverages sub-sector is an example of such a transition. It both secures a future for the industry and secures less regressive positive public health outcomes for consumers through the reduction of the volume sugar in their products. In the process, communities and consumers are not adversely and unfairly impacted by the implementation of such a transition. The same quagmire is now facing the tobacco industry in South Africa. Just as the festive season started on 15 December 2021, National Treasury issued three tax policy discussion documents for public comment, one of which was the "Taxation of Electronic Nicotine and Non-nicotine Delivery Systems (Vaping)" (ENDS/ENNDS) discussion document. This follows two budget speeches where the government indicated its intention to levy taxation on electronic cigarette and vaping products.
According to Treasury's position: "The market for ENDS/ENNDS is still in its infancy in many developing countries like South Africa, but is expected to grow. In other markets, the growth in the consumption of these products has been observed among the youth and has raised concerns about its impact on youth initiation of smoking and tobacco use. Furthermore, there are concerns regarding their potential to undermine global tobacco control efforts, and public health in general, considering that these products are not harmless."

National Treasury admits the Control of Tobacco Products and Electronic (Nicotine) Delivery Systems' Bill, which has been in draft form since 2018, still needs to be processed by Parliament for a regulatory framework that governs ENDS/ENNDS to be put in place. Treasury also recognises that the sector is nascent, given the recent advent of ENDS/ENNDS. In this context, it is particularly important that South Africa: 1) follows an evidence-based approach in unpacking the impact the sector is expected to have on public health outcomes and socio-economic growth outcomes; 2) recognises the importance of a just transition as an anchor in the design of the structural transformation roadmap for the tobacco sector; and 3) ensures the relevant monitoring and evaluation tools are put in place to ensure adherence to standards and codes at a sectoral level, protection of consumer rights as well as ensuring accountability bodies are visible and accessible. Towards evidence-based policymaking The challenge that a nascent sector poses for policymaking and taxation considerations is, firstly, the lack of availability of reliable time series and cross-sectional data in order to have
a detailed understanding of the sector, its growth levers, as well as areas of critical vulnerability. Secondly, there is a risk posed by premature policy decisions that have no clear sight of second- and third-round effects of any one policy decision on the viability and sustainability of the sector in the medium to long run. The importance of evidence-based policymaking cannot be underemphasised. Government has recognised this through the adoption, in 2020, of the National Policy Development Framework, as well as the Guidelines for the Conduct of a Socio-Economic Impact Assessment, adopted in 2016.

Both policies pivot on the importance of evidence-based policymaking for achieving desired policy outcomes. Recent Nobel laureate for economics, Professor David Card - who in the 1990s ran an experiment to measure the impact of minimum wages on employment outcomes - expected that the introduction of a higher minimum wage policy would result in negative employment outcomes. However, his experiments found that there was no causal link between the two. This should breathe a sense of caution that must be followed by policymakers when looking at vaping developments in other countries and using them to proxy "evidence" for their policy proposals. To illustrate, National Treasury has alluded to the attractiveness of vaping for young people and the potential impact it has for health outcomes, thus the need to introduce this Pigouvian tax (taxes on goods that create negative market and social externalities). Treasury acknowledges that there are data gaps for this nascent industry, thus inadvertently acknowledging that there is no empirical basis for its proposals. Experiments and empirical research are therefore of tantamount importance before a policy direction is formed. In the UK, a report by Action on Smoking and Health (ASH) found that younger people were less likely to have access to e-cigarettes in comparison to tobacco cigarettes, primarily because access was a critical constraint; they found that awareness of e-cigarettes remained high while continued use was low. They report that use of e-cigarettes remains largely confined to current or former smokers. The overwhelming majority, 95.4% in total, of 11-17-year-old never-smokers have either never used an e-cigarette (84.3%) or are not aware of them (10.7%)".

In South Africa, young people are more likely to access tobacco products through illicit channels. A Business Leadership South Africa-commissioned report found that as much as 30% of cigarettes were bought illicitly. The University of Cape Town Research Unit on the
Economics of Excisable Products (REEP) reported that the illicit tobacco market grew from 5% of sales in 2009 to approximately 35% of sales by 2018. The World Health Organisation reported that South Africa had over 600 billion cigarettes sold illicitly and was the first country globally to have an illicit brand outsell a legally sold cigarette. The bigger challenge therefore for National Treasury is on missed revenues on illicitly traded products as well the health risks that are associated with those products, than it is on excise collection for vaping products. Again, of paramount importance is the empirical data and experiments to support the policy stance and policy direction on vaping products and e-cigarettes. Towards a just tobacco transition The vaping industry in South Africa is estimated to have a tri-factor contribution to the economy – directly, indirectly through supply chain value generation and induced (wages paid) – each contributing R930 million, R291 million and R470 million in gross value added respectively in 2019. According to NKC African Economics 2021 report The Economic Impact of the Vaping Industry in South Africa the industry supported roughly 9 500 jobs. The COVID-19 impact would already suggest that the sector has since come under even more strain. Though focused mainly on smoked tobacco, the UCT led CRAM-Survey and report Market impact of the COVID-19 national cigarette sales ban in South Africa found that the COVID-19 inspired cigarette ban dropped sales by 30% and saw only an 18% uptick after the ban was lifted. Pigouvian taxes have unfortunately not worked as well as they would have been intended. Worse so they tend to disproportionately impact poorer households than higher income households. A low-income earner who consumes e-cigarettes and vaping products is likely to substitute to more traditional, more harmful tobacco products should the price of these products increase, while higher income earners may more likely absorb the price increase.

This results in a perverse form of health inequality as poorer families are confined to more harmful products due to their inability to afford alternatives, while their richer counterparts will have the ability to reduce their health exposure to harm. This has been proven true for Pigouvian taxes even in the context of alcohol. This means that as authorities consider Pigouvian taxes, they must ask if such a policy position will worsen inequality, poverty exposure and negative outcomes for those already left in the fringes.

Government ought to carefully consider the notion of a Just Transition in tobacco control. This could ensure that policy proposals do not leave anyone behind. A just transition ensures that poor people do not remain health poor because they cannot absorb higher costs associated with high excise levies for vaping products and e-cigarettes. A just transition ensures that we act in a way that is sustainable for all key stakeholders. Standards, standards and more standards From a purely public health perspective, what is glaringly missing in the regulatory conversation about vaping in South Africa is a product safety and industry standards to ensure a benchmarked management of the industry and the products it sells to its consumers.

Most sectors in the country have healthy industry bodies that manage the rules of playing and also have a regulatory mediator to ensure unfair outcomes are resolved in an expeditious manner. Given that we expect this sub-sector to grow and we are already thinking about policy frameworks and taxation regimes, it is critical to ensure we have all the important building blocks for its effective management. Way forward? In a previous op-ed, Why Nobel laureates should inspire Godongwana's mid-term budget, I detailed how the upcoming national budget must "therefore answer critical questions on: 1) enabling employment and reducing inequality; 2) enabling critical functions of the state to work; and 3) addressing the critical revenue risk posed by a dwindling tax base".

The approach currently taken regarding levying excise on electronic cigarettes and vaping products will threaten the very things the budget ought to achieve. It will worsen tobacco induced health outcomes for those who come from more financially disadvantaged households, it will strangle a sector that is still reeling from Covid-19 tobacco bans and struggling to find its feet in a globally competitive marketplace, it will put stress on future corporate income tax revenues that the sector offers and will likely see no improved civic health outcomes as nobly intended.

As the adage goes "the road to hell is often paved with good intentions" but pragmatism will be required to ensure that this sector doesn't embark on a policy induced perilous path.

Sifiso Skenjana is the chief economist at IQbusiness. Views expressed are his own.

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