The effect of excise tax increases on cigarette prices in South Africa

The effectiveness of excise tax increases as a tool for reducing tobacco consumption depends largely on how the tax increases impact the retail price. We estimate this relationship in South Africa for 2001-2015.

Statistics South Africa provided disaggregated cigarette price data, used in the calculation of the Consumers' Price Index. Data on the excise tax per cigarette were obtained from Budget Reviews prepared by the National Treasury of South Africa.

Regression equations were estimated for each month. The month-on-month change in cigarette prices in February through April was regressed against March's excise tax change to estimate the pass-through coefficient. For the other 9 months, the month-on-month change in cigarette price was regressed against monthly dummy variables to determine the size of the non-tax-related price increase in each of these months. The analysis was performed in both nominal and real (inflation-adjusted) terms.

Expressed in real terms, the excise tax was undershifted. A R1.00 (one rand) increase in the excise tax is associated with an increase in the retail price of cigarettes of R0.90 in the pre-2010 period, and R0.49 in the post-2010 period. In the pre-2010 period, the tobacco industry increased the retail price of cigarettes in July/August, independent of the excise tax increase. The discretionary July/August price increases largely disappeared after 2010, primarily because the market became more competitive.

The degree of excise tax pass-through, and the magnitude of discretionary increases in cigarette prices, is significantly determined by the competitive environment in the cigarette market.