The Colombian Experience Jasmin Chakeri Program Leader Equitable Growth Finance and Institutions Mexico amp Colombia Roberto Iunes Senior Economist Health Nutrition and Population GP ID: 613691
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Tobacco Tax Policy Reform under WB Development Policy Operations:The Colombian Experience
Jasmin ChakeriProgram Leader – Equitable Growth, Finance and InstitutionsMexico & ColombiaRoberto IunesSenior Economist – Health, Nutrition and Population GPLatin America & the Caribbean
Washington DC, April 19, 2017Slide2
Outline of Presentation
Development Policy Financing instrumentColombian contextTobacco tax in ColombiaObjectives of the comprehensive tax reformsSupport from the WBG
OutcomesLessons learnedSlide3
Development Policy Financing (DPF) Instrument
Financing for general budget supportProgram focuses on achieving measurable development results through government policies and institutional actionsAdequate macroeconomic framework as assessed by the World Bank
Upstream analytical work underpinning the program; parallel technical assistance
Customize content and design to country circumstancesSlide4
Colombian context
Economic slowdown following oil price shockImpact on fiscal accounts Peace Agreement and implementation of post-conflict agendaFiscal consolidation while protecting social and peace-related spendingMove towards a “new economy” that relies less on extractives industriesSlide5
Tobacco tax in Colombia (pre-reform)
Represents one of the most important departmental taxesRevenue earmarked for health sector financing (and sports)Dual structure (introduced in 2010)Specific component: COP659/pack in 2016 (updated annually by CPI inflation)Ad valorem component: 10% of sales value
General VAT rate (16%) applied as wellSlide6
Tobacco tax in Colombia (pre-reform) cont.
Price per pack of cigarettes lowUS$1.81 (PPP) for most-sold brand, compared to US$2.5 (PPP) in other Latin American countries and US$7.03 (PPP) in OECD countriesShare of taxes in sales price low49.4% vs. 53% average for the Americas Overall collections from tobacco tax low0.07% of GDP in 2013, compared to 0.59% in Chile and 0.21% in MexicoSlide7
Objectives of the comprehensive tax reform
Creation of Tax Commission in 2015 to prepare comprehensive proposalSeveral objectivesIncrease tax revenueEnhance equitySimplify the tax system
Improve competitivenessAddress externalities (public health & environment)Increase liquor & wine tax
Increase tobacco tax
Introduce sugary drinks tax
Environmental taxes
Difficult political environment
Rejection of first Peace Agreement
Reaching peace remained No. 1 political prioritySlide8
Support from the World Bank Group
DPF to support fiscal sustainability and competitiveness reformsFiscal reforms to help adjust to the new environment of low oil prices and create space for peace-related spendingStructural reforms to diversify the economy and improve competitiveness in the context of the “New Economy”Close cooperation between WB macro-fiscal, trade & competitiveness and health teamsDialogue on overall tax reform with
MoF: fiscal point of view (generate revenue)Dialogue on tobacco control with
MoH
: public health point of view (reduce consumption)
Dialogue on customs with
MoH
and
MoF
: reduce smugglingSlide9
Support from the World Bank Group
Questions that needed to be addressedWhat is the “optimal” tax rate? ElasticityWill tax increase lead to an increase in smuggling?Should there be one large increase or a more gradual approach? What is the short-term vs. long-term effect on the poor?WB provided technical expertise: in-house and international experts
WB also brought convening power: joint meetings with MoF and MoH
to bridge differences Slide10
Outcomes
Increase in the specific component of the tobacco tax To COP1,400 in 2017To COP2,100 in 2018, adjusted by CPI inflation + 4pp thereafterAd valorem component maintained at 10% (but over total sales price)General VAT rate raised from 16% to 19%
Additional revenues earmarked to finance health insuranceTax reforms accompanied by stronger anti-contraband measures (Anti-Contraband Law)
Estimated fiscal impact: COP1 trillion in additional revenue through 2022
Positive health impactSlide11
Lessons learned
Even in the context of fiscal consolidation, it is possible to implement reforms that benefit public health while at the same time increasing fiscal revenueTobacco tax reforms need to be accompanied by stronger tax administration and enforcement, especially anti-contraband measuresEvidence is critical: to inform public opinion, challenge interest groups and assure decision makers of the soundness of their decisions