The Potential Benefits of Effective Cigarette Tax Policies: Evidence from Southeastern Europe
Since 2017, Tobacconomics has worked with think tanks in low- and middle-income countries to produce economic evidence on tobacco control. For this evidence to be timely and relevant, we focus on six research core competencies (shown below), which reflect current tax policy discussions. The findings can be used to inform more effective tobacco taxation, as most governments are currently failing to implement best practices (check out the Tobacconomics Cigarette Tax Scorecard to learn about current policies).
Below, we focus on research from our think tanks in Southeastern Europe which addresses the second core competency. This is part of a larger series, in which each blog is dedicated to one of the competencies in a region where we work (Asia, Latin America, and Southeastern Europe).
| # | Research Core Competency Questions |
| 1 | How do consumers of tobacco respond to tobacco taxes, and how would consumers respond to tax increases and other structural reforms to fiscal policies? |
| 2 | How would a given fiscal policy affect the price of tobacco products, and how would this change in price affect government revenues, consumption, and health outcomes? |
| 3 | How would the fiscal policy affect the poor? |
| 4 | What are the health and economic costs of a given unhealthy behavior and how can the fiscal policy address these costs? |
| 5 | How would the fiscal policy affect employment and economic growth? |
| 6 | To what extent is the fiscal policy related to illicit trade of tobacco products? |
Our think tank partners modelled the impact of tax increases and alternate tax structures across Southeastern Europe. The results support existing literature on the topic and show that tobacco taxes remain underutilized in governments’ toolboxes to improve fiscal and public health in the region.
In Albania, Development Solutions Associates (DSA) analyzed the effect of a 25% increase in price due to a 44% increase in the excise tax rate. This change would reduce consumption by 15% and raise an additional EUR 19.7 million. The researchers also found that the tax increase would impact smokers of different income groups differently (Table 1). Low-income smokers are more responsive to price, so they would reduce consumption the most and reap health and economic benefits.
|
Table 1 |
Consumption (compared to status quo) |
Tax revenue (EUR) |
Change in tax revenue (compared to status quo) |
|
Low-income |
-27.1% |
42.3 million |
+1.1% |
|
Middle-income |
-4.8% |
77.3 million |
+32.1% |
|
High-income |
-16.4% |
77.2 million |
+15.9% |
DSA also compared the historical annual cigarette tax increase of 4% (status quo) to the recommended 8% from 2022 to 2024 and 5% from 2025 to 2030. The researchers found that the more aggressive annual tax increases would raise additional revenues while saving lives due to a decrease in tobacco consumption.
|
Table 2 |
Annual consumption (compared to status quo) |
Annual revenue (compared to status quo) |
Premature deaths (2022-2030) (compared to status quo) |
|
Baseline |
-0.2% |
+3.5% |
+14,525 |
|
Scenario 1 |
-1.2% |
+4.0% |
-18,598 |
Researchers from University of Banja Luka (UBL) in Bosnia and Herzegovina considered three scenarios of increases to the specific excise tax: 10%, 25%, and 50%. All three scenarios would reduce consumption, as seen in Table 3. At the same time, though, only a 10% and 25% increase would raise additional revenues.
|
Table 3 |
Tax increase |
Consumption (compared to status quo) |
Change in tax revenue (compared to status quo) |
|
Scenario 1 |
+10% |
-4.85% |
+2.79% |
|
Scenario 2 |
+25% |
-15.00% |
+1.46% |
|
Scenario 3 |
+50% |
-33.24% |
-6.44% |
The researchers analyzed how a 25% excise tax increase would affect different socioeconomic groups and found that the policy would be progressive, as the tax burden would shift to higher-income smokers (Table 4). Moreover, all groups would reduce consumption and reap health benefits from the increase.
|
Table 4 |
Consumption (compared to status quo) |
Change in tax revenue (compared to status quo) |
|
Low-income |
-22.07% |
-6.43% |
|
Middle-income |
-14.00% |
+3.26% |
|
High-income |
-10.28% |
+7.73% |
Democracy Plus (D+) in Kosovo simulated a 25% increase in the price of cigarettes from a 48% increase in the specific excise tax. This would reduce consumption by 11.1% in the country, while increasing tax revenue collection by 26.2%. Both low- and middle-income smokers would smoke less in this scenario (Table 5).
|
Table 5 |
Consumption (compared to status quo) |
Tax revenue (EUR) |
Change in tax revenue (compared to status quo) |
|
Low-income |
-16.3% |
63.2 million |
+18.9% |
|
Middle-income |
-18.4% |
63.2 million |
+15.9% |
|
High-income |
+1.7% |
76.1 million |
+44.4% |
Our partner in Montenegro, Institute of Socioeconomic Analysis (ISEA), examined the impact of increasing the price of cigarettes by 16% by raising the specific excise tax to 0.95 euros per pack and decreasing the ad valorem to 24.5% of the retail price. This would reduce tobacco consumption by 7.5% and increase tax revenues by 11.3%. In Table 6, the impacts of the excise tax change are shown by income group. While low-income smokers are most responsive to price, all income groups reduce consumption.
|
Table 6 |
Consumption (compared to status quo) |
Tax revenue (compared to status quo) |
|
Low-income |
-8.75% |
+9.93% |
|
Middle-income |
-8.26% |
+10.52% |
|
High-income |
-5.80% |
+13.48% |
In North Macedonia, researchers from Analytica modelled a 25% increase in the excise tax, which would raise the price of cigarettes by 17%. In addition to reducing consumption by 8.1%, the government would collect an additional 12.6% of tax revenues in this scenario. Middle-income smokers would benefit the most from this policy, while high-income smokers would face the largest tax burden (Table 7).
|
Table 7 |
Consumption (compared to status quo) |
Tax revenue (EUR) |
Change in tax revenue (compared to status quo) |
|
Low-income |
-11.6% |
65.8 million |
+8.4% |
|
Middle-income |
-17.3% |
69.9 million |
+1.3% |
|
High-income |
+2.4% |
100.5 million |
+25.6% |
Institute of Economic Sciences in Serbia analyzed changes to consumption, household spending, and tax revenue from a 25% increase in cigarette prices (through a 44% increase in the specific excise tax). This would reduce consumption by 11.0% in the country and raise an additional 171 million euros in tax revenue. Each income group would benefit from a reduction in consumption, although low-income smokers would be most responsive (Table 8). In addition, low-income households would reduce the amount they spend on cigarettes, which would allow those funds to be spent more productively.
|
Table 8 |
Consumption (compared to status quo) |
Change in tax revenue (compared to status quo) |
Spending (compared to status quo) |
|
Low-income |
-21.6% |
+3.5% |
-2.0% |
|
Middle-income |
-11.8% |
+16.4% |
+10.2% |
|
High-income |
-4.0% |
+26.7% |
+20.0% |
The evidence presented above highlights the value of effective cigarettes tax policies, especially for low- and middle-income smokers. In their simulations, our think tank partners demonstrate the benefits that governments can reap from well-designed tax systems. Not only are tobacco taxes a significant source of revenue, but they reduce consumption, thus preventing tobacco-attributable death and disease.
Look back at the other blogs on the second core competency in Asia and Latin America and stay tuned as we continue our blog series with a discussion of the third core competency!