The Impact of Cigarette Taxes and Advertising on the Demand for Cigarettes in Ukraine

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SUMMARY

Background: Cigarette consumption in Ukraine is increasing while the cigarettes are becoming more affordable due to low taxes and raising income. The impact of cigarette prices and taxes on cigarette consumption is unclear due to the limited research evidence using the local data. This study estimates the sensitivity of Ukraine population to cigarette prices and the affordability of cigarettes using the macro level data in order to predict the effectiveness of cigarette tax policy.

Methods: Monthly time-series data available from 1997 to 2006 in Ukraine were used to estimate the generalized least square model with an AR(1) process to investigate the impact of cigarette price/tax, household income, the affordability of cigarettes and the volume of tobacco advertising on Ukraine domestic cigarette sales while controlling for other factors.

Results: Our analyses demonstrate a strong positive association between cigarette sales and household income as well as a strong positive association between cigarette sales and tobacco advertising activity. The population is found to have relatively low sensitivity to cigarette prices and cigarette taxes, but the impact of cigarettes' affordability is statistically significant, even though also of low magnitude.

Conclusion: We speculate that the lower sensitivity to cigarette prices among Ukraine population is caused by wide price variation allowing smokers to avoid a price increase by brand substitution as well as by low costs of cigarettes, high social acceptance of smoking and limited effort to control tobacco use in Ukraine. Narrowing the cigarette price choices and increasing cigarette prices above the level of inflation and income growth by adopting the appropriate tax policy would likely increase the effectiveness of this tool for controlling the smoking rate in Ukraine as well as yield additional budget revenue gains. In addition, imposing advertising restriction may further help reducing the smoking prevalence.

Key words: Ukraine tobacco control, cigarette demand, cigarette tax policy

INTRODUCTION

Smoking is a serious threat to public health and the leading cause of premature deaths. According to estimates by the World Health Organization, 5 million people throughout the world die each year due to smoking related diseases (1); out of those - 1 10 thousand are Ukrainians (2). In addition, deterioration of public health due to smoking negatively affects government finances and national economy as a whole. Two obvious consequences are growing health care expenditures (which in Ukraine is primarily financed from the state budget) and reduced productivity of labor force due to chronic diseases and premature deaths (3). Therefore, it is crucial for the government to take actions in order to prevent public health deterioration and the economic losses due to smoking.

Cigarette consumption has been quickly growing in Ukraine. Based on the official data on legal sales (Note: This was calculated based on the official statistics using the formula: domestic production - exports + imports) of cigarettes provided by the State Statistics Committee (Fig. 1), there is nearly two- fold increase in legal cigarettes sales from 1997 to 2005. The evident growing trend in legal sales, especially between year 2000 and year 2005, may reflect rising cigarette consumption in Ukraine. If the existing trend continues, one may predict an increasing number of tobacco related diseases and the tobacco related deaths in the population.

Government interventions, such as high tobacco tax, have been shown to be effective to control the smoking-related public health and economic problems. The potential benefits include reduction of tobacco consumption and smoking prevalence as well as increases in budget revenue that could potentially offset additional health care expenditure caused by smoking.

Ukraine currently has low tobacco tax rate, particularly when compared to other European countries. …