Smoke screen
Officials from the tobacco industry say that an EU-mandated rise in excise tax on tobacco products, which comes into effect this week, is discriminatory and will destroy their business. However, previous rises have done little or nothing to curb Poles' burning desire for tobacco, and current market conditions indicate that the industry is in little danger of seeing profits burn out.
Time is running out for Polish smokers. EU directives mean that Poland must raise its excise taxes on tobacco to EU levels by the beginning of 2009. By that time, Poland is obligated to almost double its excise on cigarettes, which currently stands at EUR 38 (zł.139) per 1,000, to EUR 64 (zł.242). Pursuant to these regulations, on January 16 the current rate will be raised 16 percent, bringing the tax on cigarettes to zł.75.12 per 1,000 cigarettes (previously it was zł.68.35), in addition to another 31.3 percent (previously 28.48 percent) which is charged on the maximum price printed on the cigarette packet.
The planned increase will have a direct effect on consumers. "There's no doubt that cigarettes should become more expensive," the president of Philip Morris Polska, Andrzej Dąbrowski, said. He estimates that, depending on the structure of the market, the price could go up by as much as 40-60 percent in the next four years - something tobacco producers fear could ruin their business.
"Tobacco companies will find it increasingly difficult to attain appropriate revenue levels in the Polish market," says the president of Imperial Tobacco Polska, Detlef Moede, adding that he fears the consumption of illicit products could increase. The industry has responded by asking for a renegotiation of the EU agreements. "It is necessary to consider extending the transitional period for adapting Polish excise duty to EU requirements beyond the year 2008 in order to alleviate the scale of the forthcoming increases," says Moede.
What a drag
A recent crisis close to Poland shows why tobacco companies are getting the jitters. According to market-research firm Euromonitor, when the Hungarian government raised taxes on cigarettes, a boom in black-market sales resulted, while retail prices increased by 63 percent in just 18 months. In 2004, legal domestic sales of cigarettes fell to around 15 billion cigarettes, in comparison to over 22 billion in 1998. Consumption of smuggled products grew to about a quarter of the legal market, tobacco companies withdrew their investments from the country, and both Philip Morris and Reemtsma (a subsidiary of Imperial Tobacco) closed down their factories in Hungary.
Whether the same scenario will occur in Poland is open to question. While the Hungarian government raised cigarette taxes by some 94 percent, Polish authorities have been taking a more gradual approach. The last rise, one year ago, amounted to around a seven-percent increase per 1,000 cigarettes. Since then the market has actually grown in terms of the number of cigarettes sold. After the first three quarters of 2005, 54.7 billion cigarettes were sold as compared to 53.9 billion in the corresponding period of 2004. Indeed, the recent crisis in the Hungarian tobacco market has worked to the benefit of Polish companies. "Hungary is the largest importer of our cigarettes," admits Philip Morris Polska's Dąbrowski.
On a roll
Dąbrowski argues that a rise in excise leads to a rise in cigarette sales: "This is the effect of the increase of the excise and its structure, which inspire consumers to go for products which are taxed less." He says that the tax is applied unequally among tobacco products, pushing customers towards cheaper cigarette alternatives. Tobacco companies then tailor their offer to meet this demand.
For example, after January 16 a kilogram of pouch tobacco, which is used for roll-your-own (RYO) cigarettes, will be taxed at just zł.52, plus 21.67 percent of the maximum price of a single packet. According to Philip Morris Polska estimates, this would amount to around zł.104 for 1,000 RYO cigarettes, whereas the tax on 1,000 ready-made cigarettes will rise to zł.160.86. Pipe tobacco will be even cheaper, as its equivalent of 1,000 cigarettes would be taxed at just under zł.62. Philip Morris claims that due to similar discrepancies under the previous tax system, RYO tobacco, which represented an insignificant portion of the market just a few years ago, currently holds as much as six percent of the market today.
Lighting up
Moede notices another trend. "Some companies use the loophole of lower taxation for pipe tobacco, which is in fact used as a RYO in practice," he explained. According to research company AC Nielsen, sales of pipe tobacco measured in terms of cigarettes grew from around 200 million to 1.4 billion between October 2004 and October 2005.
These statistics show that the most visible change can be seen in the cheaper cigarettes sector, as cigarette producers' responded to the growing popularity of RYO cigarettes by launching new cigarette brands in the low-cost segment. The cheap-cigarettes segment increased from 30 percent of the market in May 2004 to about 50 percent in October 2005. While the most expensive segment remained almost untouched by the changes in excise, it is the medium-priced sector that suffered the most. "This segment's share on the market has fallen from 36 percent before May 2004 to around 25 percent at the end of [2005]," Dąbrowski explained.
However, government officials claim that there are legitimate reasons for imposing different levels of taxation on different tobacco products. "In order to maintain a balance on the market and guarantee honest competition between tobacco products, it is justified to set the excise level for tobacco for RYO cigarettes at a lower level than for ready-made cigarettes," said Anna Adamkiewicz, a spokesperson for the Ministry of Finance. Adamkiewicz points out that in order to make 'rollies', one also has to buy rolling paper and additional equipment.
Kicking the habit
Philip Morris' president claims, that in accordance with the spirit of the Framework Convention for tobacco control, which the government should adopt soon, the government shouldn't rely only on price and tax as a means of realizing its smoking-prevention policy, but rather introduce a more comprehensive program, of which taxes would be just one component. "The government's excise policy doesn't affect consumption levels, it only harms the state's incomes," Dąbrowski claims. "The government's tax policy shouldn't discriminate against any products or producers."
Adamkiewicz agrees that the price of cigarettes doesn't affect consumption levels, but believes that equal taxation of tobacco products would only drive consumers to the black market. "If the excise was at the same level, those consumers who opted for the cheaper tobacco for rollies would probably turn to buying smuggled cigarettes rather than the cheapest brands of legal cigarettes," Adamkiewicz says. "Different excise levels on tobacco and cigarettes provide for products of different prices to function on the market, and it discourages consumers from buying products on the black market."
Filthy habit
In any case, many question whether the government ought to cater to the demands of an industry that manufactures products detrimental to its citizens' health. Research director of the Health Promotion Foundation (Fundacja Promocji Zdrowia), Krzysztof Przewoźniak, emphasizes that according to World Health Organization estimates, smoking is the most important single cause of premature mortality in Poland, especially among middle-aged men, where some 40 percent of deaths result from smoking. Within the entire population, there are four major groups of diseases linked with smoking: cancers, cardiovascular diseases, lung diseases, and prenatal and pediatric diseases. "In middle-aged men smoking is responsible for 90 percent of the lung-cancer cases in Poland. Lung cancer among all men amounts to one third of all cancer cases in the country," Przewoźniak claims.
Fuel for the fire
Despite the tax, tobacco companies have plenty of reason to continue operating in Poland. In November 2005 the government granted zł.1.6 million in incentives to a Philip Morris investment in Kraków. There the company will construct a European services center, which will provide accounting services for the company's European branches. When asked if the government is comfortable supporting the smoking industry, given the health implications of its products, the president of the Polish Information and Foreign Investment Agency (PAIiIZ), Andrzej Zdebski, said: "This is only a service center and it provides jobs for educated young people. We care about every services center, this is becoming our Polish specialty." Zdebski is also careful to note that Philip Morris doesn't only manufacture cigarettes, but also food products through Kraft Foods.
