Rollback

| August 1, 2017

Lawmakers want to end the tax advantage enjoyed by roll-your-own products.

By George Gay

Earlier this year, the Australian Associated Press reported that, as part of the Australian budget presented in May, the taxation on RYO tobacco—and some other tobacco products—was to be raised over four years to the same level as that on cigarettes. The purpose of this measure, it was said, was to create a “level playing field,” whatever that might mean in this context. So I guess we were expected to believe it was merely incidental that the tax hike was estimated to rake in additional revenue of a$360 million ($277 million) annually.

The idea that the tax on RYO tobacco should be increased to equal that on cigarettes has been around for a while, but it seems to be gaining traction. I cannot help feeling that it is being driven by that rather unpleasant human trait in which most of us at some stage become concerned that someone, somewhere, but not us, is getting away with something. But it is often put forward as a way of improving the health of smokers by pricing RYO tobacco smokers out of the market and not providing a refuge for cigarette smokers when they get priced out of their market. I think, however, that you would have to be terribly trusting to believe that this was the case.

There is, to my mind, a lot of nonsense spoken about the health risks of various tobacco products, especially in the case of the relative risks posed by RYO tobacco and cigarettes. In an extract from a story in the Irish Daily Mail published at the end of May, Martina Blake of the Irish Health Service Executive (HSE) was quoted as saying that people incorrectly believed the consumption of RYO tobacco was safer than was the consumption of manufactured cigarettes but that “nothing could be further from the truth.” “Nothing could be further from the truth” is an ambiguous phrase, but I take it to mean that Blake believes that the consumption of RYO tobacco is riskier than is the consumption of cigarettes, or, at least, just as risky.

I wonder if she has any evidence to support such a claim. My gut feeling is that she does not. The truth of the matter must be that whereas it is known that the consumption of combustible tobacco products in general carries certain risks, we really have no idea what are the relative risks of smoking, including inhaling, various types of tobacco products—if indeed the risk does differ to a level that could be measured.

What is known, however, is that RYO tobacco tends to be smoked by the most financially impoverished people. The Daily Mail story reported on a study titled Roll Your Own Cigarettes in Ireland: Key Patterns and Trends, which was published by the HSE on May 31. The study found that of the 19.5 percent of respondents who smoked in 2014, 24.6 percent reported smoking RYO tobacco, a figure that was said to have risen from 3.5 percent in 2003. At 31.8 percent, male smokers were more likely to smoke RYO tobacco than were women, at 16.3 percent, while the highest prevalence of RYO smoking was among smokers aged below 25, at 44.9 percent. But the significant numbers, in my view, were those that compared the prevalence of RYO smoking among the unemployed, 39.5 percent, with that among those in “other employment categories,” 21.8 percent.

The Daily Mail piece quoted David Evans, a senior research officer at the Department of Public Health, as saying that higher tobacco taxes and prices had been proved to be the single most effective measure to reduce overall tobacco use. “However, the effectiveness of this measure will not be fully achieved if roll-your-own tobacco remains significantly cheaper than manufactured cigarettes,” he said.

Of course, what Evans said could be put another way: Higher tobacco taxes and prices have been proved to be the single most effective measure for reducing the use of duty-paid tobacco. If you arrange things so that RYO tobacco is priced at the same level as are cigarettes, it will simply mean that more people shift directly from duty-paid cigarettes to black-market products, without taking the intermediate step of going to RYO tobacco. What Evans proposes is an excellent way of making financially poor people even poorer while handing more revenue to governments to spend on things that will please those more likely to vote.

Holding their own

While tax differentials remain in place, sales of RYO tobacco are going to react as in the past to the state of the economy in general and, in particular, to the financial situation of those who smoke. And, in recent times, with the financially poor having been impoverished further by the actions of incompetent bankers, sales of RYO tobacco have been holding up well in the markets where it is a significant product, especially when set against sales of cigarettes in those same markets. In 2016, the top 15 markets according to Euromonitor figures obtained by Essentra were Germany (36.19 billion stick equivalents), Belgium (12.87 billion), France (12.82 billion), the Netherlands (10.58 billion), the U.K. (9.87 billion), Hungary (9.53 billion), Spain (9.25 billion), Italy (7.98 billion), Greece (3.6 billion), Poland (3.5 billion), Argentina (3.04 billion), Australia (3.04 billion), the U.S. (2.97 billion), the Czech Republic (2.8 billion) and Israel (1.06 billion).

But the RYO market is a mixed picture, according to Essentra, which supplies filters for cigarettes and RYO tobacco cigarettes. Essentra said Euromonitor figures indicated that, in 2011, worldwide RYO tobacco consumption stood at 139.32 billion stick equivalents and was expected in 2019 to reach 140.24 billion, roughly the same. But the 2011 figure was an increase of 4.9 percent on that of 2010, while the 2019 figure is expected to be down 0.7 percent on that of 2018.

Increased taxation on cigarettes could help maintain sales of RYO tobacco, though this might be offset partially by the launch of more “value” brands of cigarettes. And sales of both cigarettes and RYO tobacco will likely be negatively affected by bans on smoking in public and, to a lesser extent, even private places, such as apartment blocks.

But RYO tobacco sales could be given a nudge by the introduction of more sophisticated materials. There has been a lot of innovation in the papers sector, and filters offer another opportunity. Some RYO tobacco markets, such as India and Thailand, are still largely filter-less. And while in other markets RYO filters are mainly made of acetate, more complex filters are being introduced. Essentra, for instance, said it had supplied cavity, carbon and paper filters, the last of these being more degradable than acetate ones.

Aiming high

Some of this is encouraging, but the danger posed to the RYO tobacco sector by the closing of the tax gap between that levied on cigarettes and that levied on RYO tobacco cannot be overstated. There are people who smoke RYO tobacco for reasons of lifestyle, but they are far outnumbered by those who do so because it is cheaper.

Having said that, there is at least one glimmer of hope should RYO tobacco find itself taxed out of its normal business. On June 13, Imperial Brands posted on its website a note announcing the appointment of Simon Langelier as an independent nonexecutive director of the company.

In announcing the appointment, Imperial said that Langelier had significant international experience within the tobacco industry. “He held a number of senior commercial positions during a 30-year career with Philip Morris International, including in Latin America, Asia, Eastern Europe, [the] Middle East and Africa,” it said. “In addition, he was president of their next-generation products and adjacent businesses. Simon is chairman of PharmaCielo Ltd., a Canadian-based supplier of medicinal-grade cannabis oil extracts and related products.” In welcoming Langelier, Imperial’s chairman, Mark Williamson, said his extensive international experience in tobacco and “wider consumer adjacencies” would be a great asset to the board.

The appointment created interest, at least partly because it seemed to chime with the change of name that Imperial went through in February last year—from Imperial Tobacco to Imperial Brands. In a piece for the Motley Fool, Dan Caplinger said Imperial’s move could signal the beginning of a “budding relationship between the tobacco and marijuana industries,” though he went on to give a number of reasons why this might not happen, for the time being at least. One reason was that there was a conflict in the U.S. because marijuana is illegal at the federal level but legal in certain states, which presents a huge impediment to the big players such as Altria and Reynolds American getting into the business.

Nevertheless, Caplinger said that marijuana had become increasingly popular, as many states across the U.S. had legalized the drug for medical and/or recreational purposes, and more were considering doing so. Some investors had sought to cash in on the trend, but until now they had had only a limited number of investment choices available to them. Many had wondered whether Big Tobacco might eventually choose to get in on the legal marijuana business, “offering their shareholders an easier way to profit from the drug.”

Leaving aside the medical marijuana question, it seems to make sense for Imperial at least to prepare to enter the recreational marijuana market wherever it is legal, partly because Europe might start to follow the North American trend toward a more liberal approach to the drug. In Europe, as I understand it, marijuana users, unlike those in the U.S., tend to mix marijuana with RYO tobacco. In fact, in a July 2015 piece on the Marijuana Games website titled “How Europe Is Getting It Wrong on Cannabis” (goo.gl/8kaScQ), Russ Hudson cited a report on the 2014 Global Drug Survey in which the authors, having sampled 38,000 marijuana users, concluded that while 7 percent of American marijuana users added tobacco to their marijuana, more than 80 percent of marijuana users from other countries did so as a matter of practice.

The point here is that Imperial has a strong position on the international RYO tobacco and papers market, and it’s not difficult to imagine how tobacco and marijuana could be marketed—and even packaged—together.

And things could move quickly. Poland’s lower house of parliament in June voted to make medicinal marijuana legal under certain circumstances, according to a Rappler story. A total of 440 lawmakers voted in favor—with just two against and one abstention—of legislation to allow prescription-only, cannabis-based medicine to be made at pharmacies using imported ingredients. The law still needs to be approved by the senate and the Polish president before it comes into force, but Poland has taken a tentative step toward following the Czech Republic, Finland, the Netherlands, Portugal, Spain, 23 U.S. states and Uruguay.

The Polish legislation excludes the recreational use of cannabis, but according to the Rappler story, an opinion survey conducted in January found that 78 percent of Poles believe access to marijuana should be legal. Even if it was the case that this 78 percent of the population was in favor only of legalizing the use of medicinal marijuana, it is not a huge hop to recreational use, as the U.S. has demonstrated.

There are obstacles, however. According to a story in the London (Canada) Daily Mail, Ian Hamilton of Canada’s University of York has urged teenagers wanting to avoid long-term health risks to stop combining cannabis with tobacco. He noted that if it were accepted that millions of people would carry on using cannabis, then they should be encouraged to use cannabis in ways that avoided tobacco and minimized harm to their health. The story went on to quote researchers as saying that “cannabis has no solid links to cancer and only minimal ones pointing to an increased risk of heart disease.” I’m not too sure what is being said here. Is Hamilton saying that cannabis should be used, if at all, in chocolate brownies or by vaping cannabis oil? If so, what the researchers seem to be saying sounds plausible. But if Hamilton and the researchers are saying that all consumers need to do is cut out the tobacco, then I would be rather skeptical.

Inhaling the products of combustion from any burning plant material just doesn’t seem to be a great idea from the point of view of lung health, though of course it would be necessary to look at how marijuana is smoked, how often and, no doubt, a lot of other issues. In addition, the story did concede that cannabis use could increase the risk of psychosis by damaging the brain.

The story also mentioned that cannabis could be considered a gateway drug, with a recent study suggesting that users were 26 times more likely than nonusers to turn to “harder substances” by the time they turn 21. I don’t have any evidence about such matters, but I wonder whether this gateway effect has more to do with the fact that where marijuana use is illegal, users must mix with criminals who sell it and other illicit drugs. That does leave the possibility that if the use of marijuana were made legal, it would not have this gateway effect.

The question of mixing marijuana and tobacco is an interesting one. One debate going on in the U.S. has to do with the legalization of marijuana cafes, such as those in the Netherlands. This raises the question—as it has previously in the Netherlands—of whether, given that some marijuana smokers mix marijuana with tobacco, marijuana holds the key to allowing tobacco smoking back inside. I mean, how much marijuana do you have to mix with your tobacco for it to be a joint?

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