Tobacco taxes are the most effective but the least-used tobacco control tool. A sufficiently large tax increase will raise tobacco product prices, making them less affordable, and driving down tobacco initiation and consumption.

When thinking about stopping an epidemic, tax is usually not the first thing that comes to mind. Yet perhaps the most impactful way to reduce tobacco use is to tax tobacco products. Some countries are already successfully using tax to reduce smoking rates, reaping significant and immediate health and revenue benefits. While there is no maximum tax level, some set ambitious goals, such as New Zealand’s goal to increase the cost of a cigarette pack to 30 New Zealand dollars (ca. 20 USD) through excise taxation. Unfortunately, most of the world, predominantly its poorer parts, still lags in implementing high tobacco taxes .

The mechanisms behind tobacco taxation are simple. A sufficiently large tax increase will raise tobacco product prices. By observing smokers’ behavior, researchers have determined that on average a 10% increase in cigarette prices makes the consumption of cigarettes fall by between 2% and 8%. Higher tobacco prices are especially effective in reducing tobacco use in more vulnerable populations, such as youth and lower-income people, because those groups are particularly sensitive to price increases. Frequent, significant tax increases are especially needed in countries where consumers’ purchasing powers are growing. When incomes rise faster than cigarette prices, smoking becomes more affordable, encouraging consumption. Excise tax increases are a proven and effective way to make cigarettes and other tobacco products less affordable.

Globally, we have yet to realize significant opportunities for improving health from tobacco taxation. For example, using only tobacco taxes, countries could realistically achieve the World Health Organization target of a 30% relative reduction in smoking prevalence by 2025. Unfortunately, many governments are still reluctant to increase taxes, because they often rely on tobacco industry reports that typically suggest that any additional tax increase will cause declines in tax revenue or a massive increase in cigarette smuggling. Independent studies have shown that these claims are usually greatly exaggerated; new tax increases bring in additional revenue for the governments, whereas illicit trade in tobacco products can be controlled while keeping prices high. When in force, the Protocol to Eliminate Illicit Trade in Tobacco Products will provide powerful tools to combat cigarette smuggling globally.

Differential Tax Treatment Can Lead to Product Substitution

Cigarette and roll-your-own-tobacco sales in Cyprus

When the 2008-2012 cigarette excise tax increases made cigarettes more expensive in Cyprus, some tobacco users quit, while others switched to relatively cheaper roll-your-own tobacco. Only after a substantial tax increase on roll-your-own tobacco had reduced the price difference between the two products in 2013, did the sales of both cigarettes and roll-your-own tobacco declined.

Cigarette Affordability in Colombia

Because consumers’ purchasing behaviors are influenced by product price and their own disposable income, economists use the ratio of these two factors to determine product affordability. Such a ratio can be interpreted as the percentage of income that is needed to buy the product (relative income price). The greater the proportion of income required to purchase cigarettes, the less affordable these products are.

Although price of cigarettes increased in Colombia from 2007 to 2017, prices barely kept pace with inflation. Because incomes in Colombia grew faster than cigarette prices, cigarettes became more affordable.

Cigarette Prices

Price of 20-cigarette pack of the most-sold brand in U.S. dollars; adjusted for purchasing power of national currencies.

In dotted countries, cigarette affordability has declined from 2008-2018.

Tax Increases Do Not Lead To Increased Cigarette Smuggling

Cigarette prices vs. illicit market in the UK

Due to periodic cigarette tax increases, the inflation-adjusted price of cigarettes in the UK increased by 63% from 2001 to 2016, making UK cigarette prices among the highest in the world. At the same time, the illicit market dropped by over 70%, along with dropping tax-paid consumption.

Tobacco prices are central to industry marketing strategies, and it is the tobacco industry that sets the prices of its tobacco products. Cigarettes are a largely uniform product, easily manufactured at low cost on a global scale. Through pricing strategies, the tobacco industry regulates its sales volumes and decides which products and brands will be perceived as “premium” and which will be “economy” brands.

Cheap brands help the industry broaden its customer base because these products are more affordable, particularly to youth. Besides, when a tax increase rises the price of all cigarettes, some consumers will switch to those cheaper brands, instead of quitting.

The gaps in prices between different cigarette brands can be closed though tobacco tax policies. Uniform specific tax structure is particularly effective in reducing variability in cigarette prices.

The Excise Duty Bill introduced in Kenya in 2015 not only increased the tax rates, but also changed the tax structure from an ad valorem tax with a specific floor to a uniform specific tax. This led to increase in cigarette prices and declines in price variability. In 2014, before the bill was introduced, the lowest-cost brand of cigarette was by 40% cheaper than the most-sold brand of cigarettes. In 2016, after the tax structure was changed, the price gap declined to only 27%.

Note: Kenya couldn’t sustain the uniform excise. It moved back to a two-tiered system in 2017 for filtered and non-filtered cigarettes. They did it on equity ground.