‘Labour should tax the tobacco industry – and spend the proceeds on public health’

Labour, it is fair to say, is pretty reluctant to attach its name to new taxes. The reasons are obvious enough. The party wants to ditch its reputation for tax and spend in the midst of a cost-of-living crisis and it also wants to position itself as a ‘low tax, high growth’ alternative to the stagnant living standards and increased tax burden that the current government has overseen.

That is a cause of frustration to those of us who would prefer politicians to be more honest about the need to raise revenue to restore public services, but in fairness we don’t have to try to win an election. 

For all that, there are some taxes Labour does feel comfortable talking about. What they tend to have in common is that they fall on apparently unsympathetic targets: non-doms trying to minimise their share of taxes, private equity millionaires exploiting loopholes and private schools perpetuating inequality. If only we could design a tax on moustache-twirling villains to complete the set.

Tobacco industry profits could be a ready source of revenue

The all-party group on smoking and health might have found the next best thing: a tax on tobacco industry profits. Issues in politics and policy are rarely black and white, but an industry responsible for the death of over 100 million people is going to have a hard time painting itself as the good guys. 

There’s a fair amount to go after. Analysis by Dr JR Branston of the University of Bath has estimated that the four biggest firms in the UK make around £900m a year in profit.

That reflects incredible margins: 70% of the UK net revenue of market leader Imperial Tobacco in 2021 ended up as profit. For those of you rusty on your economic theory, in a perfectly competitive market, profits should be near zero. Those figures are well above what other consumer goods or manufacturing firms can hope to achieve.

These massive profits reflect a lack of competition in the market for cigarettes. But the economist’s standard remedy – trying to encourage new entrants to come in and force prices down – is clearly inappropriate here because we want cigarettes to be expensive so people don’t smoke.

Taxing tobacco producers could raise up to £700m per year

If competing away tobacco companies’ profits isn’t a viable option, we should tax them – in much the same way as Labour has called for taxes on oil and gas producers’ excess profits.

The all-party group proposes that we should cap prices to limit tobacco producers’ profits to 10% and introduce a ‘health promotion levy‘ to capture the rest. They reckon this could raise as much as £700m a year. That’s not enough to rebuild a welfare state, but it’s a more than helpful chunk of change – for example, it would offset most of the cuts to public health grants between 2016 and 2023. 

It should be a big enough sum of money to be of interest to a shadow Treasury team trying to make its sums add up. But they may well have other objectives in mind for it than to spend it on public health.

There’s a clear case for spending that money on health promotion

The major sticking point for the policy may well turn out to be hypothecation – whether the revenue from the tax is earmarked for health promotion measures, as Action on Smoking and Health (ASH) would like, or whether the Treasury would retain flexibility to spend it as they wish.

Tax experts tend to be dismissive of hypothecation, and for good reason. There are benefits to separating tax decisions from spending decisions. Tying spending on smoking cessation or public health services to tobacco sales means that budgets could become disconnected from need. On the other hand, it is hardly as if the existing Treasury spending review process has been especially effective at putting up what is required. 

In any case, the temptation for the Treasury may well be to engage in ‘fake hypothecation’ – use the funds from the new tax to support health promotion activities, but then claw the money back from existing public health budgets.

With life expectancy stalling, NHS preventative services under threat of cuts and the Labour Party committed to delivering a smoke-free Britain and reducing deaths from heart disease and stroke by a quarter, the case for spending that money on health promotion should be clear enough. Unfortunately for campaigners, raising revenue from tobacco producers and using it to address the problems they cause will require them to win two separate arguments.