%0 Journal Article 
%A López Nicolás, Ángel
%T Tobacco Taxes in the European Union: An Evaluation of the Effects of the European Commission’s Proposals for a New Tobacco Tax Directive on the Markets for Cigarettes and Fine Cut Tobacco
%D 2023
%U http://hdl.handle.net/10317/13803
%X Background and Objectives

Europe’s Beating Cancer Plan aims to create a Tobacco-Free Generation—where less than 5 percent of the European Union’s (EU) population uses tobacco—by the year 2040, with an intermediate goal of 20 percent in 2025. One of the key supranational policy levers for achieving these goals is the update of the EU’s Tobacco Tax Directive. The European Commission was expected to launch a proposal for a revised Directive in December 2022, but this step in the legislative process was postponed until further notice; meanwhile, a full draft for a new Directive has circulated unofficially. The expectation of a new legislative framework at the EU level might have stopped some states from advancing tax reforms at the domestic level; however, the realization that a new Directive will not be available anytime soon could also prompt some states to act within the current legislative framework. 
This study aims to contribute to the evidence base that must inform policy in these circumstances. It does so by first providing an overview of the current situation and recent evolution of retail prices for cigarettes and fine-cut tobacco in the bloc. Second, it presents an evaluation by means of model-based simulations of the effects on those outcomes and on market demand and excise revenue of the European Commission’s aborted proposals for a new Directive. This evaluation highlights the opportunity cost of the delay in the legislative process as well as potential enhancements to the proposals from the point of view of tobacco control.    

Methods

The analysis is based on a panel database of prices, taxes, market volumes and sales for the EU member states over the period 2012–2022, which is supplemented with data on several other variables such as population, smoking prevalence, purchasing power parities, or inflation. The effects of tax changes are simulated by means of econometric models that produce country-specific estimates of prices, market volumes, market sales, and excise revenue. 

Results

The Commission’s aborted proposals would affect all EU members except the six countries with the highest current tax rates (Denmark, Belgium, Finland, France, the Netherlands and Ireland). The proposals would have a modest impact on price convergence and on affordability, yet they would not contribute significantly to a reduction in the gap between the prices of cigarettes and fine-cut tobacco.  
Compared to a scenario where the tax parameters are kept constant at their 2023 values, the proposals would reduce the combined market demand for the two products in the bloc by between 3.3 percent in 2025 (the first year of implementation of the new Directive) and 4.1 percent in 2028 (the last year of the simulations horizon). Despite these reductions, excise revenue in the bloc would increase by between 8.5 percent in 2025 and 6.4 percent in 2028. 

Conclusions

The Commission’s proposed revisions to the Tobacco Tax Directive are necessary. The sooner the legislative process is re-started the better. But they are also insufficient. Two modifications would enhance the public health value of a new Directive. First, is the removal of the asymmetric tax treatment of cigarettes and fine-cut tobacco, whereby the minimum tax applicable to the latter may be calculated as a fraction of the retail price, thus opening the possibility of undervaluation practices on behalf of the industry. Second, is an increase in the minimum tax per unit of product noted in the proposals to account for the surge in inflation experienced throughout the bloc in recent years. 
There is scope for action by governments willing to prioritize tobacco control when setting domestic taxes and acting on this front is of paramount importance given the uncertainty about the date of enactment and contents of a revised Directive. The policy recommendations presented herein are useful in this regard, and the analytical tools developed in the process can be used to evaluate bespoke tax reforms at the country level.
%K Economía Aplicada
%K Economic impacts of tobacco control
%K Impact on demand
%K Tax and price
%K Tax levels and structure
%K Tobacco taxes revenues
%K 5301 Política Fiscal y Hacienda Publica Nacionales
%K 3212 Salud Publica
%K H23
%K H24
%K H30
%K H73
%K H87
%~ GOEDOC, SUB GOETTINGEN