This week, the EU is expected to release an updated tobacco tax directive, the first in over a decade. Early reports suggest that the EU will propose a significant increase in the minimum cigarette tax rates across the entire union and expand the tax on other products, including electronic cigarettes, throughout the block.
If the EU decides to increase the scale and scope of tobacco taxes, they will miss a real opportunity to reduce smoking harm and the harm of punitive fiscal policies. Decades of empirical research have found that despite tax-induced price increases, most smokers continue to smoke, with many of them hailing from low-income households. As such, cigarette taxes will further push low-income households towards poverty.
The current EU Tobacco Tax Directive requires member states to impose a minimum excise tax on cigarettes and other tobacco products. The EU cigarette tax includes both volume-based taxes (a fixed amount of Euros levied per pack of cigarettes) and ad valorem taxes (an additional percentage based on the retail price).
In summary, the current minimum cigarette consumption tax in the European Union is €1.80 ($1.89) per pack of 20 cigarettes, with a total consumption tax requirement of at least 60% of the EU-weighted average retail price (with some exceptions). These tobacco consumption taxes are levied in addition to the widespread value-added tax (VAT). EU legislation only sets a minimum tax rate and some countries impose higher tax rates.
To understand just how high these taxes are when combined, here is a calculation using the average tax rates of the European Union on a pack of 20 cigarettes. The base market price (pre-tax) of one pack of cigarettes is 1 euro. With a consumer tax of 3.44 euros (at least 60% of the Recommended Retail Price), the pre-VAT price reaches 4.44 euros. Finally, adding a VAT of 0.95 euros, the retail price including all taxes comes to 5.39 euros.
The average tax rate and basic market price (excluding taxes) of €1.0 plus consumption tax (60% of the minimum retail price) of €3.44 (63.8% of RSP) equals a pre-tax price of €4.44, plus value-added tax of €0.95 (21.4%), resulting in a retail price (including all taxes) of €5.39. This information is sourced from the European Commission Taxation and Customs Union, Tax Foundation, and the author's calculations.
In 2022, the average tax imposed by European Union member states on cigarettes was over 80% above the retail price. This resulted in a price hike of more than 500%, with low-income Europeans bearing the brunt of the cost.
The EU is also demanding the imposition of minimum taxes on other tobacco products. These include finely cut smoking tobacco, cigars and cigarillos, as well as other tobacco products for smoking.
According to the European Commission's Taxation and Customs Union, the lowest product category rates include a weighted average retail price of 50% for finely cut tobacco, at €60 per kilogram, 5% for cigars and small cigars at €12 per kilogram or per 1,000 units, and 20% for other tobacco products at €22 per kilogram. It should be noted that currently there is no inclusion of vapor products in the Tobacco Taxation Directive, but this may change with the release of the next report and the application of existing tax rates for tobacco products in the EU.
We have written multiple times about why tobacco taxes lead to poor public policy. Most notably, cigarette taxes are regressive, increase smuggling, and generate unstable revenue sources through a narrow base instead of addressing smoking-related issues. Although the World Health Organization (WHO) attempts to classify these practical issues as unfounded SCARE (smuggling, court issues, anti-poverty regression, revenue decrease, and earmarked taxes) strategies, it cannot provide empirical analysis to ease these concerns.
Using cigarette taxes to improve personal and global welfare is certainly problematic. In the upcoming EU Tobacco Tax Directive, the EU has a huge opportunity to shift from strict policies to those aimed at improving the welfare of as many EU citizens as possible. Last year, a group of international scholars published a set of three international best practices on tobacco and nicotine public policy. These simple rules can guide the EU's policies on tobacco and nicotine products.
Motivating change in smoking behavior through more rewards and fewer penalties.
This means reducing dependency on taxes as a tool to encourage smokers to quit or switch to less harmful products.
In addition to punitive taxes, public policy can also provide help and incentives for smokers who want to quit. Smokers are more likely to quit if nicotine replacement therapy (gum, patches, lozenges) is priced lower, subsidized or given for free. Paying smokers to quit significantly increases their chances of quitting. A 2009 study published in the New England Journal of Medicine found that a $750 reward increased the quitting rate by almost 300% compared to the control group. A recent study using even larger incentives found similar results.
Cigarette taxes only lead to too many problems and do not improve the lives of any citizens in the country. Counties need to find policies beyond punitive taxation to incentivize behavioral change.
Create an environment that supports the innovation of tobacco alternatives and smoking cessation products.
To support innovation, regulatory barriers will be lowered to a minimum, and a simple and transparent tax policy will be adopted. Many smokers want to quit or switch to less harmful nicotine consumption methods – the addictive chemicals consumers crave. Businesses are eager to create products to meet consumer demands.
Since the European Union's tobacco taxation directive, alternative nicotine consumption products have become increasingly popular. The two most popular products are electronic cigarettes (or e-cigarette products) and heated tobacco products (HTPs).
Electronic cigarettes produce an aerosol that resembles water vapor, which users inhale instead of smoke. The cartridges used in electronic cigarettes typically contain nicotine, flavorings, and other chemicals.
HTP heats tobacco electronically to a temperature that does not cause combustion and extracts nicotine using an aerosol. In the European Union, HTP sales increased by over 2000% from 2018 to 2020.
Although the harm caused is less than smoking, the EU has implemented a ban on all non-tobacco flavored HTPs, which will take effect on November 23, 2022. The EU is also considering implementing an e-cigarette tax across the entire union, as part of the new tobacco taxation directive. These policies hamper future innovation and will lead to fewer consumers quitting smoking.
The policy emphasis should be placed on reducing smoking. Other tobacco products have less harm to smokers and bystanders, and should be taxed less or not at all compared to cigarettes.
Smoking continues to be one of the leading preventable causes of death worldwide. As previously mentioned, recent developments have led to increased consumption of nicotine without the need to inhale burnt toxins. As a result, the harms of these alternative nicotine products are much smaller.
A recent study has found that many smokers are willing to switch to e-cigarettes when they are provided as an alternative option. While the long-term health risks of using e-cigarettes are still uncertain, a comprehensive and independent review of scientific evidence has determined that the short-term harm of using e-cigarettes and their products is 95% lower than smoking.
After conducting a thorough review of the available evidence, the Royal College of Physicians in the UK has concluded that e-cigarettes pose significantly lower risks to health compared to traditional cigarettes and can effectively help smokers quit. They recommend promoting the use of e-cigarettes, nicotine-replacement therapies (NRT), and other non-tobacco nicotine products as alternatives to smoking for public health reasons.
Other products offer nicotine replacements that do not involve smoking, including heated tobacco, chewing tobacco, snuff, and disposable products (lozenges, pills, patches, etc.). Each one carries varying degrees of health risks, but these risks are significantly lower than smoking.
The use of these alternative products is considered a major factor behind the extremely low smoking rates in Sweden. Only 6.4% of adult Swedes smoke on a daily basis, making it the lowest smoking rate among adult EU countries, roughly one-third of the EU average.
The EU should establish appropriate tax differences for nicotine and tobacco to encourage a shift towards alternative forms of nicotine consumption. Simply prohibiting nicotine consumption has not had the desired effect. Countries hoping to reduce smoking rates should strongly consider emulating the Swedish model.
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