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Costa Rica’s Cigarette-Tax Regime a Gift to Black Markets

By: David Rodríguez Suárez - @DaveRodriguezS - Jul 30, 2014, 5:17 pm

EspañolFranklin Murillo, the manager of British American Tobacco in Costa Rica, told La Nación on March 31 that “In the face of higher taxes on a legal product … an illicit market will arise that does not compete under equal conditions and provides products at lower prices and lower quality.”

This is a phenomenon that merits our attention. Since the enactment of the Anti-Tobacco Law in Costa Rica on March 2012, we’ve been under the impression that cigarette use has gone down. However, in reality, we’ve seen a dramatic increase in illegal smuggling, and all because of a lack of understanding of how the market works.

In Costa Rica, it was thought that if taxes on cigarettes were increased, no one would buy them anymore because of higher prices. People failed to realize that doing this would only lead to tobacco users turning to the black market. Instead of taxing cigarettes at a lower rate, and therefore taxing a larger quantity of sales, the government failed to properly analyze the situation.

La Nación points out that in 2013, Costa Rican authorities seized nine times more smuggled cigarettes than in 2012. This is undoubtedly a result of the increased tax.

From September, the Ministry of Health will require cigarette packaging to contain repulsive images that depict the consequences of smoking. They ignore, of course, that these policies have proved to have minimal impact, as a result systematic desensitization. Even still, there are those who believe the only solution is to eliminate the product from the market entirely, forgetting that tobacco is one of the most important industries in the Costa Rican economy.

In response to the current policy direction in Costa Rica, Guillermo Oliva, director of Costa Rican Tobacco Corporate Affairs, cites Panama as a cautionary example: “With the excessive increase in cigarette taxes implemented in 2009, our neighbors not only failed to reach their public-health objectives, they also put tax collection in jeopardy by driving the industry to the brink of collapse.”

Therefore, there are certain things that must be considered when debating the issue of tobacco use.

    1. If we want to reduce consumption, focus should be placed on demand, and not on supply.
    2. Reducing demand is going to require more than simple behavior modification.
    3. The government does not benefit from a precipitous fall in consumption, given dependence on consumption for a revenue stream.
    4. It is preferable for the treasury if the use of tobacco stays legal, instead of illegal.
    5. The government fights against cigarette use, but also depends on it financially.

I point these out in order to illustrate the problem. It’s necessary to weigh the impact of smoking on public health with the tax revenue this activity generates. Far from issuing any sort of value judgement on cigarette smoking, my aim is to simply shed light on this issue. We cannot measure the real impact of the Anti-Tobacco Law, because much of the tobacco use has gone underground.

In reality, solutions to these kinds of health issues go beyond archaic prohibition methods. As a psychology student, I can say that there are many reasons why someone would start smoking, and they occur in an environment where not all variables can be controlled.

The desire to smoke can come from “emotional emptiness,” low self-esteem, irrational ideas, various reinforcements, social learning, among many other causes. Breaking this habit requires more than arbitrary government policy and demands from a centralized authority.

What the market does is satisfy demand. If the state assumes a repressive position against legal producers … the only ones who will benefit, in the end, are the illegal producers.

Translated by Pablo Schollaert.

David Rodríguez Suárez David Rodríguez Suárez

David Rodríguez Suárez is a psychology student at the Latin University of Costa Rica and president of youth outreach for the Libertarian Movement Party. Follow @DaveRodriguezS.