Price and Income Elasticity of Cigarette Demand in Bulgaria and the Impact of Changing Excises on Government Tax Revenues

This Report was written by Smoke-Free Life Coalition in Bulgaria. The report assesses the price and income elasticities of demand for cigarettes and simulates alternate tobacco tax scenarios. Using available data, the researchers estimate that the total price elasticity is -1.49, which suggests that a 10% increase in cigarette prices would reduce consumption by 14.9%. Price is not found to be significant for smoking prevalence, however, only smoking intensity. The income elasticity of demand, on the other hand, is 1.32. These elasticity estimates are higher than existing estimates and others in the region, so they should interpreted with some caution. The authors also consider the impact of raising cigarette prices between 5% and 25%, using excise taxes. Even given the high price elasticities calculated, there is still room to raise taxes and maintain the current level of tax revenues or even increase them. Specifically, raising the excise tax by 7.25% would raise prices by 5% thus bringing an additional BGN 31 million in tax revenues while reducing consumption by more than 5%. A 10% increase in the specific excise would reduce consumption by 8% while retaining the current tax revenue level. When considering the medium- and long-term harm of tobacco use on economics, higher tax increases would still be a cost-effective option. The report concludes with a discussion of the potential limitations of these findings as well as recommendations for policy makers to improve tobacco tax policies.