IMF Article Sets Out Three Principles: Cover All Harmful Products, Match Tax Rates to Harm, Improve Cross-Border Coordination

Key Takeaways

• The article argues that effective health taxes require three principles: covering all harmful products, matching tax rates to health harm, and improving cross-border coordination.
• It says many countries still have “leaky” tax systems in which some harmful products remain untaxed.
• On nicotine, the authors say e-cigarettes, heated tobacco products and nicotine pouches reduce toxicant exposure compared with cigarettes and therefore make more sense at lower tax rates.
• The article cites New Zealand, where cigarette smoking fell from 18% in 2012 to 8% in 2024 while e-cigarette uptake rose from near zero to 14%.
• It also says the European Commission’s draft Tobacco Excise Directive would set minimum rates for 13 product categories, with significantly lower rates for e-cigarettes, heated tobacco products and nicotine pouches, while leaving no tobacco or nicotine product exempt.

2Firsts, March 24, 2026

According to the March 2026 Finance & Development article “Taxing Harmful Habits,” Christoph B. Rosenberg and Marius van Oordt argue that tax systems for harmful products such as tobacco, alcohol and sugary drinks should be designed to better reflect the health harm these products cause.

The article sets out three principles: cover all harmful products, align tax rates with harm, and strengthen cross-border coordination

The authors write that simply raising tax rates is not enough to optimize both revenue and health outcomes, because consumers may ultimately switch to untaxed or illicit alternatives. Instead, they propose a broader framework built on three principles: capture all unhealthy products, align tax rates with potential health harm, and cooperate across borders to limit evasion and smuggling.

The article adds that many countries still have “leaky tax nets,” where some harmful products remain untaxed, weakening both revenue collection and public health policy.

E-cigarettes, heated tobacco products and nicotine pouches are described as candidates for lower tax rates than cigarettes

In the section on nicotine products, the article says that as smoking bans expand and consumer preferences change, alternatives to traditional cigarettes — from e-cigarettes to heated tobacco products to nicotine pouches — increasingly serve people who have not quit nicotine use. The authors say these newer products are still harmful, but many reduce exposure to toxicants, and that it therefore makes sense to tax them at lower rates, with those rates adjusted over time as research and revenue needs evolve.

The article also points to the European Union’s direction of travel. It says the European Commission’s recently published draft Tobacco Excise Directive proposes minimum tax rates for 13 product categories, applies similar levels to cigarettes and loose tobacco, and sets significantly lower rates for e-cigarettes, heated tobacco products and nicotine pouches. It also says no tobacco or nicotine product would be exempt from taxation.

New Zealand is cited as an example of how widening tax differentials may shift consumption

The article uses New Zealand as a case study. It says successive governments raised excise rates on combustible tobacco products by 10% or more a year over the past 15 years in a deliberate effort to widen the tax differential with less harmful alternatives. Over the same period, cigarette smoking fell from 18% in 2012 to 8% in 2024, while uptake of e-cigarettes rose from near zero to 14%. The authors note that causality is difficult to prove, but say it appears plausible that the widening price differential contributed to this shift.

The article concludes with a comparison across G20 countries, saying that health-tax alignment with product harm remains mixed: tobacco taxation is generally more comprehensive, alcohol somewhat less so, and sugary drink taxation remains especially patchy.

Image source: Finance & Development