Measuring changes in the illicit cigarette market using government revenue data: the example of South Africa

The tobacco industry claims that illicit trade in cigarettes has increased sharply since the 1990s and that government has lost substantial tax revenue.

(1) To determine whether cigarette excise tax revenue has been below budget in recent years, compared with previous decades. (2) To determine trends in the size of the illicit market since 1995.

For (1), mean percentage errors and root mean square percentage errors were calculated for budget revenue deviation for three products (cigarettes, beer and spirits), for various subperiods. For (2), predicted changes in total consumption, using actual cigarette price and GDP changes and previously published price and income elasticity estimates, were calculated and compared with changes in tax-paid consumption.

Cigarette excise revenues were 0.7% below budget for 2000-2012 on average, compared with 3.0% below budget for beer and 4.7% below budget for spirits. There is no evidence that illicit trade in cigarettes in South Africa increased between 2002 and 2009. There is a substantial increase in illicit trade in 2010, probably peaking in 2011. In 2012 tax-paid consumption of cigarettes increased 2.6%, implying that the illicit market share decreased an estimated 0.6 percentage points.

Other than in 2010, there is no evidence that illicit trade is significantly undermining government revenue. Claims that illicit trade has consistently increased over the past 15 years, and has continued its sharp increase since 2010, are not supported.