Tobacco taxes in the European Union: An evaluation of the European Commission’s Tobacco Tax Directive proposals for cigars, cigarillos, pipe tobacco, electronic cigarettes, heated tobacco products, and nicotine pouches

Abstract

Background and objectives This research presents an evaluation of the European Commission’s proposals for the reform of taxation of cigars, cigarillos, pipe tobacco, and so-called “novel products”—electronic cigarettes, heated tobacco products (HTP), and nicotine pouches—in the context of the revision of the European Union’s (EU) Tobacco Tax Directive (TTD). It is a companion to a previous study that focused on cigarettes and fine-cut tobacco (FCT). Both this study and its predecessor analyze a draft that circulated unofficially after a postponement in the revision process was announced in late 2022. The overall objective is to contribute to the evidence base that should inform the policy process. This study first provides an overview of the current situation of the markets for the products under focus and their fiscal treatments. Second, it presents a simulation of the likely effects of the Commission’s plans. This evaluation highlights the opportunity cost of the delay in the launch of the revision plans and also suggests ways to enhance the plans’ strength, since the revision plans are crucial to tobacco control policy in the bloc as well as potential future members’ willingness to harmonize their tax systems with those of the EU. 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, purchasing power parities, and inflation. The effects of the rules proposed in the draft are simulated by computing the excise yield that they would generate from products selling at representative prices. Results Cigarettes and FCT are still the predominant products in the market for tobacco and tobacco-related products in the EU. However, the share of the rest of the products in this market has grown remarkably over the past seven years and is expected to increase further. This trend is driven by the advent and consolidation of novel products. A simulation of the effects of the Commission’s proposals on the excise yield at currently representative price levels shows little impact on cigarillos, cigars or pipe tobacco. For novel products, the effects of the proposals are more nuanced. In the case of electronic cigarettes and nicotine pouches, the most tangible impact is the imposition of excise duties in countries where they currently do not apply. On the other hand, for HTP, the impact on excise yields at current prices is noticeable in most countries. Conclusions The European Commission’s proposals for the revision of the TTD include the creation of separate tax categories for HTP, liquids for electronic cigarettes, and nicotine pouches. They also include increases in the rates for traditional tobacco products and adjustments for inflation and purchasing power differences across member states. While these are welcome innovations, the proposed architecture of the minimum rates for the products considered here is found lacking from the point of view of tobacco control: the revised TTD would allow their excise tax to be a fraction of the retail selling price, likely leading to the proliferation of cheap brands. The onus would be on member states to close this loophole, which permits industry undervaluation as a strategy to minimize tax burdens. Perhaps the most important single reason why the EU’s TTD is recognized as a crucial piece of legislation for tobacco control is its potential to create an excise tax floor for tobacco products. This is strongest in the case of cigarettes, for which both a fixed minimum and a relative minimum based on the product’s weighted average price (WAP) must be satisfied. This strength is partly undermined in the case of FCT because the excise tax floor must reach either one or the other minimum rather than of both. This limitation also affects the products under focus here. Moreover, if the base for the relative minimum is the brand’s retail price—instead of a measure less vulnerable to manipulation, such as the WAP—the ability of the legislation to set an effective excise floor is severely undermined. Foregoing the chance to close this loophole in this round of revision would be regrettable, especially when the market outlook for the novel products is one of strong growth.