The Future of Tobacco Taxation in Europe

Taxes

Later this week, the European Union is expected to release a new Tobacco Tax Directive, the first update in more than a decade. Early reports indicate that the EU will propose a significant increase to the existing minimum cigarette tax rates levied across the Union and expand the product categories that are taxed, including a block-wide vaping tax.

If the EU decides to increase the scale and scope of tobacco taxation, they will miss a real opportunity to decrease both the harms of smoking and the harms of punitive fiscal policy. Decades of empirical research have found that most smokers keep smoking despite tax-induced price increases and that most of these smokers come from low-income households. Therefore, cigarette taxation pushes low-income households further into poverty.

The current EU Tobacco Tax Directive requires Member States to levy a minimum excise tax rate on cigarettes and other tobacco products. EU cigarette taxes include both a specific cigarette tax (a fixed euro amount per pack of cigarettes) and an ad valorem tax (an added percentage of the retail selling price).

In total, the current minimum cigarette excise taxes in the EU are €1.80 (US $1.89) per 20-cigarette pack and the total excise duty must be at least 60 percent of an EU country’s weighted average retail selling price (certain exceptions apply). These tobacco excise taxes come in addition to the broad consumption value-added taxes (VATs). EU legislation only establishes minimum rates. Several countries levy higher rates.

To see how high these taxes are when taken together, below is a set of calculations using EU average rates on a pack of 20 cigarettes. The base market price (pre-tax) for a pack of cigarettes is €1. Adding the excise duty—a minimum of 60 percent of the retail selling price (RSP)—of €3.44 brings the pre-VAT price to €4.44. Finally, adding the VAT €0.95 brings the retail selling price including all taxes to €5.39.

EU Average Tax Types and Rates on a Pack of 20 Cigarettes as of May 2022
Tax Average Rates and Prices
Base Market Price (excluding taxes) €1.0
+ Excise duty (min. 60% of RSP) €3.44 (63.8% of RSP)
= Pre-VAT Price €4.44
+ VAT €0.95 (21.4%)
= Retail Selling Price (incl. all taxes) €5.39
Source: European Commission Taxation and Customs Union, Tax Foundation, and author calculations.

In 2022, the average EU member state levied taxes on cigarettes that exceed 80 percent of the retail selling price. This is a tax-induced price increase of more than 500 percent. Again, mostly paid by low-income Europeans.

The EU also requires minimum taxes on other tobacco-smoking products. Those include fine-cut smoking tobacco, cigars and cigarillos, and other smoking tobacco products.

Minimum EU Tax Rate on Other Tobacco Products
Product Category Minimum Rate
Fine-cut smoking tobacco 50% of the weighted average retail selling price or €60 per kilogram
Cigars and Cigarillos 5% of the retail selling price or €12 per 1000 items or per kilogram
Other smoking tobaccos 20% of the retail selling price or €22 per kilogram

Source: European Commission Taxation and Customs Union.

The EU does not currently include vapor products in the tobacco tax directive. That may change with the release of the next report, along with the existing tax rates applied to tobacco products. 

We have repeatedly written about the reasons tobacco taxes make poor public policy. Most notably, cigarette taxes are regressive, increase smuggling, and use a narrow base to generate a volatile revenue source that isn’t used to address problems related to smoking. While the World Health Organization (WHO) attempts to categorize these real problems as SCARE (smuggling, court issues, anti-poor regressivity, revenue reduction, earmarking tax revenues) tactics without merit, the WHO is unable to offer empirical analysis that ameliorates these concerns.

There are real problems with using cigarette taxes to improve individual and global welfare. In the next EU Tobacco Tax Directive, the EU has a tremendous opportunity to shift away from draconian policy toward policy that is aimed at improving the welfare of as many EU citizens as possible. Last year, a group of international scholars released a set of three international best practices for tobacco and nicotine public policy. These simple rules can guide EU policy on tobacco and nicotine products.

1. Use more rewards and fewer punishments to incentivize cigarette smoking behavior change.

This means less reliance on taxes as a tool to encourage smokers to quit smoking or switch to less harmful products.

Instead of punitive taxes, public policy can offer help to smokers who want to quit smoking and incentives to do so. Smokers are more likely to quit smoking with the help of nicotine replacement therapies (gum, patches, lozenges) if those products are less expensive, subsidized, or free. Smokers are much more likely to quit if paid to quit. A 2009 study published in the New England Journal of Medicine found that a $750 incentive increased smoking cessation by nearly 300 percent compared to a control group. A more recent study used even larger incentives and found similar results.

Cigarette taxes simply create too many problems and fail to improve the lives of citizens in any country. Counties need to find policies other than punitive taxes to induce behavior change.

2. Create an environment that supports innovation in tobacco alternatives and smoking cessation products.

To support innovation, keep regulatory hurdles to a minimum and apply a simple, transparent tax policy. Many smokers wish to quit smoking or switch to a less harmful means of consuming nicotine—the addictive chemical smokers crave. Businesses are eager to create products to facilitate consumer wishes.

Alternative nicotine consumption products have grown in popularity since the last EU Tobacco Tax Directive. Two of the most popular products are electronic cigarettes (or vaping products) and heated tobacco products (HTP).

Vaping products create an aerosol that looks like water vapor that users inhale instead of smoke. Vaping products use cartridges that typically contain nicotine and flavorings along with other chemicals.

HTPs electronically heat tobacco to a temperature at which combustion occurs. Nicotine is extracted from the heated tobacco using an aerosol. In the EU, HTP sales increased by more than 2,000 percent from 2018 to 2020. 

Despite creating less harm than smoking cigarettes, the EU implemented a flavor ban of all non-tobacco flavored HTP, effective November 23, 2022. The EU is also considering a union-wide vaping tax as part of the new Tobacco Tax Directive. These kinds of policies discourage future innovation and will lead to fewer consumers switching away from cigarette smoking.

3. Focus policy on decreasing cigarette smoking. Other tobacco products are less harmful to smokers and bystanders and should be taxed less than cigarettes or not taxed at all.

Cigarette smoking remains one of the leading causes of preventable death in the world. As noted previously, recent developments have facilitated nicotine consumption without the need to inhale burning toxins. As such, these alternative nicotine products are remarkably less harmful.

Research has demonstrated that many smokers are willing to substitute e-cigarettes for cigarettes when provided with vaping products. While the long-run health risks of vaping and e-cigarette use have yet to be identified, comprehensive and independent reviews of the scientific evidence have found that short-term use of e-cigarettes and vaping products is 95 percent less harmful than smoking.

After a thorough review of the empirical evidence, the (UK) Royal College of Physicians found that e-cigarettes were significantly less harmful than cigarettes and smokers use e-cigarettes as an aid to quit smoking. They conclude, “[I]n the interests of public health it is important to promote the use of e-cigarettes, NRT and other non-tobacco nicotine products as widely as possible as a substitute for smoking.”

Additional products offer alternative forms of nicotine that don’t involve smoking, including heated tobacco, chewing tobacco, snus, and single-use units (lozenges, pills, patches, etc.). Each poses a varying degree of health risk, but those health risks are all considerably less than smoking.

Adoption of these alternative products is considered a major factor in the remarkably low smoking rates achieved in Sweden. With only 6.4 of adults smoking daily, Swedes have the lowest rate of adults who smoke daily in the EU, roughly a third of the EU average.

EU nicotine and tobacco tax policy should create appropriate tax differentials to encourage switching from alternative forms of nicotine consumption. Abstinence-only approaches to nicotine consumption fail to achieve the desired results. Countries that wish to decrease smoking rates should strongly consider following the Swedish model.

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