More losses than profits

In 2005, tobacco caused direct medical costs of 166.6 billion yuan and indirect costs - in the forms of productivity loss, years of potential life lost, and loss from fires and pollution - of 120.5 billion yuan, resulting in a total loss of 287 billion yuan, 19.6 percent more than the 240 billion yuan in taxes and profits the industry generated.

Given that diseases and fatalities caused by tobacco use have a time lag of 20 to 25 years, it is not this government that will have to pay the medical bills for the mass addiction to the weed, said Zhi Xiuyi, head of the Lung Cancer Diagnosis and Treatment Center of the Capital Medical University in Beijing.

Lung cancer cases have soared by 465 percent since 1980, and account for nearly a quarter of cancer deaths, said Zhi, also head of the department of tobacco control and lung cancer prevention at the Cancer Foundation of China. In the past, when individuals, work units and companies covered health insurance and medical care, the nominal cost to the government was negligible, Zhi said.

However, the government is rolling out its own health insurance program across the country, so it will become more liable for the costs of smoking-related illnesses, he said. "At the end of the day, all Chinese, including non-smokers, will be burdened with the medical costs of smokers."

Raising taxes and prices have been proved to be the most effective means to reduce smoking, said Teh-wei Hu, professor of health economics in the School of Public Health, University of California, Berkeley.

However, cigarettes have become more than twice as affordable in China since 1990, and smoking is much cheaper than in other countries, said Hu, also a senior policy adviser to China's Ministry of Health.

Raising tax on smoking

The overall effective tax rate of 40 percent on a packet of smokes in China is much lower than the international average, which ranges from 65 to 70 percent.

The tobacco industry has long argued that tax increases risk cutting government revenues, but Hu said a tax rise would actually raise revenues while reducing tobacco demand.

Hu's study showed that raising the tax on a pack of cigarettes by 1 yuan would increase the Chinese government's revenues by 64.9 billion yuan, reduce the number of smokers by 3.4 million, reduce medical costs by 2.68 billion yuan and generate a productivity gain of 9.92 billion yuan.

However, the decision to raise consumption tax on cigarettes by 6 to 11 percent in May 2009 brought increased revenues - but no reduction in tobacco use. "The tax increases had no impact on cigarette prices set by the STMA, as the tobacco producers and dealers had a big enough profit margin to absorb the burden themselves rather than pass it on to consumers," Hu said.

If China's tobacco tax rose to 51 percent, from the current 40 percent, of the retail price, the price of cigarettes would be affected and the number of smokers would decrease, according to Hu's study.

As more than half of Chinese smokers pay less than 5 yuan per pack, a big tax hike would likely persuade many poorer smokers to quit if almost 11 percent of their household expenditure went on cigarettes, Hu said.