The Purpose of Tobacco Tax? ... It Was Fiscal, Not Health [Song Seungseop's Financial Light]

'Tobacco Consumption Tax' Introduced in 1989
Local Government Funding Started with Tobacco Tax
Gradually Increasing Tax Rates and Various Charges ↑
Tobacco Prices Raised in 2015, Frozen for 8 Years
'Increase After General Election?'... Government Says "No Plan"

There are rumors circulating that cigarette taxes might increase. The government continues to deny this. Smokers cannot help but feel anxious. Especially for ordinary people with tight budgets, an increase in cigarette prices is a significant burden. But when did we start taxing cigarettes? How much tax do smokers pay annually? Why is there talk of raising cigarette taxes? From now on, we will share the story of taxes related to cigarettes.

‘Where to get money needed for local autonomy’... The beginning of cigarette tax

South Korea introduced cigarette tax on January 1, 1989. It was a ‘cigarette consumption tax’ levied on cigarette manufacturers, import sellers, and those bringing cigarettes from abroad. However, when importing foreign cigarettes, up to 400 cigarettes, or 20 packs, were exempted from tax. At that time, the tax was 360 won per 20 cigarettes (1 pack). Popular cigarettes then, such as ‘Geobukseon’, sold for 500 won, and ‘Hallasan’ for 700 won. Considering that Seoul city bus fares in the 1980s were around 30 to 60 won, both cigarette prices and tax rates were quite high.

Why did the government introduce the cigarette consumption tax? Was it for the health of the people? Not at all. The cigarette consumption tax was solely a measure to increase national revenue. At that time, ‘local autonomy’ was a major issue. Following the June Democratic Uprising in 1987 and the inauguration of the Roh Tae-woo government, public enthusiasm for local autonomy was high. The problem was funding. Local governments lacked sufficient resources to exercise autonomy. The government planned to raise money by taxing the cigarettes people smoked.

On February 8, 1989, a government official from the Ministry of Government Legislation appeared on KBS radio to explain the cigarette tax, revealing the government’s thinking clearly.

“When local autonomy is implemented, more funds are needed for local governments. To increase revenue, we newly established the cigarette consumption tax this year. It does not affect cigarette prices. This is because the previous tobacco monopoly payments to the national treasury and the education and defense taxes imposed on cigarettes were all abolished. The cigarette consumption tax is paid by cigarette manufacturers and import cigarette sellers. So, it does not have much to do with the general public.”

Gradually rising cigarette tax, burden also increased

In fact, when the cigarette consumption tax was first introduced, it did not affect cigarette prices at all. But after its introduction, as the government created additional levies and raised tax rates, it gradually began to have a decisive impact on prices. In 1994, the government raised the cigarette consumption tax by 27.8% to 460 won, and seven years later in 2001, it increased again by 10.9% to 510 won. In 2005, it was sharply raised again to 641 won.

Other taxes also began to be added. A representative example is the local education tax. The education tax, which was abolished when the cigarette consumption tax was first introduced, was revived in 1996 under the name local education tax and was imposed at 184 won. At the end of 1996, a waste disposal charge of 4 won was added, and in 1997, a national health promotion charge of 2 won was newly introduced. From 1999, a value-added tax of 10% was also added. These taxes and charges were also significantly increased over time.

The controversy over cigarette tax flared up in 2015. At that time, the Park Geun-hye administration raised the cigarette consumption tax from 641 won to 1,007 won, citing public health promotion. The health promotion charge was also raised from 354 won to 841 won. As a result, the price of a pack of cigarettes surged 80%, from 2,500 won to 4,500 won. The government and ruling party claimed that the tax increase influenced smoking cessation. The basis was that tax revenue increased by 2.8 trillion won, but cigarette sales dropped by 34%.

Raising cigarette prices for public health?… Heated debate over ‘cunning tax hike’

Tobacco tax revenue forecast predicted by the Korea Institute of Public Finance in 2014. Data from the Korea Institute of Public Finance

However, the cigarette price set by the government ignited the tax debate. In 2014, the Korea Institute of Public Finance published a study titled ‘Effects and Finances of Cigarette Taxation.’ According to the study, tax revenue was highest when cigarette prices were 4,500 won. If the real goal was to reduce smoking rates, cigarette prices should have been raised further, but sales dropped so much that tax revenue decreased. Although the government claimed it was for public health, backlash arose, arguing that the real purpose was to collect more taxes.

What actually happened? Domestic cigarette sales plummeted from 4.4 billion packs in 2014 to 3.3 billion packs in 2015. During the same period, the smoking rate dropped from 24.2% to 22.6%. However, it is difficult to conclude simply that the smoking rate fell because of the price increase. Many studies show that while price hikes initially reduce smoking rates, after several months consumers become desensitized and the effect diminishes. In fact, the smoking rate rose again to 23.9% in 2016.

Tax revenue showed a very clear effect. In 2014, cigarette tax revenue was only 6.9905 trillion won. Compared to 2012 (6.913 trillion won) and 2013 (6.5875 trillion won), it was basically stagnant. But in 2015, when cigarette tax rates were raised, tax revenue soared to 10.5181 trillion won. That was a 50.4% increase at once. In 2016, it jumped again to 12.3 trillion won. Despite initial sales declines, tax rates increased, and over time, smokers who had tried to quit resumed purchasing cigarettes.

Ongoing ‘post-election hike theory’... Government says “No plans”

[Image source=Yonhap News]

What is the current situation? Last year, 3.61 billion packs of cigarettes were sold, a 0.6% decrease from the previous year. Although sales of combustible cigarettes dropped by 2.8%, sales of heated tobacco products increased by 12.6%. Cigarette tax revenue was 11.7 trillion won. It was virtually unchanged from 11.7 trillion won in 2021 and 11.8 trillion won in 2022. The smoking rate is at an all-time low. The overall smoking rate in 2022 was 17.7%, the lowest since records began.

However, speculation has begun that cigarette taxes may rise again. At the 36th World No Tobacco Day ceremony and forum last May, Seo Hong-kwan, director of the National Cancer Center, argued that cigarette prices should be raised to the OECD average of 8,000 won. Seo was the figure who led the cigarette price increase in 2015. On December 7 last year, the Korean Society for Smoking Cessation held an autumn academic conference on the topic ‘Current Status and Prospects of Tobacco Price Policy.’ Professor Cho Hong-jun of Ulsan University College of Medicine’s Department of Family Medicine, a presenter, said, “It seems the government will raise cigarette prices after the general election and before the presidential election.”

The basis for saying cigarette taxes must rise is the phenomenon of tax revenue shortfall. Last year, national tax revenue was 344.1 trillion won, 56.4 trillion won short of the original budget estimate. If cigarette prices rise to 8,000 won, cigarette tax revenue is expected to increase to 20.98 trillion won, and if to 10,000 won, to 26.2 trillion won. Despite rising inflation, cigarette prices have been frozen for eight years, so some argue that real prices are effectively falling. To encourage smoking cessation, cigarette prices need to be raised.

The government has repeatedly stated it will not raise cigarette prices. The Ministry of Economy and Finance said in November last year that there were no plans to raise cigarette prices. Last month, it released explanatory materials emphasizing, “We are not considering raising cigarette prices.” Nevertheless, voices predicting a cigarette tax increase after the general election have not ceased. On the 5th, the government again declared, “We are not considering any tax rate increases or cigarette price hikes. We have no plans to review this even after the general election.”

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