EU tobacco taxation: The fine line between killing smoking and illicit tradeACTA
The European Union’s plans to further increase tobacco taxation and reduce declining smoking rates across the bloc have pleased public health advocates, but the industry warns that tax revenues may be disrupted by the rise of illicit markets that flourish when taxes are high.
According to the World Health Organisation (WHO), tobacco taxation is an efficient tool, reducing tobacco consumption faster than any other single measure.
Following the WHO line, EU countries have put differentiated excise taxes on tobacco, and according to a Financial Times report, the European Commission is now considering even doubling the level of taxation in a new legislative proposal expected soon.
Some observers in Brussels suggest that this may be motivated at least partly by inflation, which has put EU budgets under pressure and in urgent need of fresh cash.
From a health point of view, Europe’s push for increased tobacco taxation has indeed resulted in reduced smoking rates. Since 2017, Eurobarometer surveys have shown an average 3% decline in tobacco consumption across the bloc.
However, the industry claims that the countries that increased excise taxes to curb smoking have simultaneously opened the backdoor to illicit tobacco trade.
According to the annual KPMG report, funded by the tobacco industry, illicit tobacco consumption in the EU increased by 3.9% or 1.3 billion cigarettes in 2021, building on the 2.3% growth in 2020.
“Had these cigarettes been legally purchased in the countries in which they were identified, an additional €10.4 billion in taxes would have been raised in the EU 27”, the KPMG report said.
Emanuele Bracco, an associate professor of economics at the University of Verona, told EURACTIV earlier this year that making tobacco products expensive opens a “huge backdoor to smuggling”.
“If you act too abruptly in these markets, even with good intentions, you may end up with unintended consequences, such as an increase in counterfeit and an occasion in smuggling,” he said.
Bracco also warned about adverse health outcomes because these products are outside the regulation and not subject to the same level of controls and standards as legal chains.
But the World Bank does not share the argument about lost tax revenues.
According to a World Bank report, increasing excise tax rates on tobacco will reduce its affordability and “as evidence shows, lower its consumption”.
“By implementing tobacco tax reforms now, policymakers can choose a fast road to healthier, more prosperous societies”, the report said.
France and Ireland have been the two member states with the highest excise taxes on tobacco, €6.61 and €8.42, respectively, while the EU average is €3.34, and Paris was the first to impose higher taxes on cigarettes above the EU level.
Both countries saw a significant drop in smoking rates.
According to a 2017 Eurobarometer, smokers in France represented 36% of the population, while the same survey in 2020 found an eight-percentage-point decrease to 28% – the same level as in 2012, according to a special Eurobarometer published that year.
In Ireland, 24% were smokers in 2017, while in 2020, the percentage dropped to 18%.
However, according to the KPMG report, both countries are EU champions in the illicit tobacco trade.
In 2021, illicit trade in France represented 29% of the total consumption (15.1 billion cigarettes), while in Ireland, it represented 17% of the total consumption (500 million cigarettes).
Critics suggest that cross-border shopping from neighbouring countries with lower tobacco taxes is an additional problem for Paris. In order to face the price gap, the WHO has urged close coordination between neighbouring countries when it comes to taxing tobacco.
Poland, whose excise tax stands at €2.08, has only 5% illicit trade and has also achieved sizeable reductions in smoking rates, from 30% in 2017 to 26% in 2020.
Germany, whose excise tax is close to the EU average (€3.30), has also seen considerable decreases in the amount of illicit consumption (2% of the market) as well as a marginal 1% decrease in smoking rates (24% 2020 compared to 25% in 2017).
Greece, Bulgaria cause headaches
But the situation in Greece and Bulgaria, the two southeastern countries that top the EU list of smokers, further complicates the picture.
Athens has imposed a €2.74 excise tax, below the €3.34 EU average, but is still the second biggest illicit tobacco trade market in the EU after France (24%).
At the same time, it’s the only EU member state recording a significant increase in smoking rates (37% in 2017, going up to 42% in 2020).
For its part, Bulgaria levies the lowest excise duties (€1.81), and the illicit trade is at just 2%.
However, smoking rates increased from 36% in 2017 to 38% in 2020.
According to EURACTIV Bulgaria, the state has ended the debate over the issue while the ban on smoking indoors is poorly implemented, and state controls are almost inexistent.
New nicotine and tobacco products
Another important issue is what minimum level of excise tax on novel tobacco and nicotine products the European Commission will propose.
The WHO and a large part of the scientific community are pushing for high taxation to prevent people from switching to these products amid uncertainty over their safety.
On the other hand, the industry insists, quoting other scientific studies, that these new products are much less harmful than traditional tobacco and that high taxation would only discourage heavy smokers from turning to safer products.
Speaking to EURACTIV, Swedish MEP Sara Skyttedal (EPP) expressed her concerns that minimum taxes “might be set at a level so high that the chances of these novel products to replace traditional cigarettes will be limited”.
“Which indeed would go against the objectives of Europe’s Beating Cancer Plan,” she said.
She added that Sweden has the lowest tobacco-related mortality in Europe thanks to snus, a tobacco product banned in the rest of the EU.
“There are no ‘buts’ or nuances in the underlying causes: The reason for this is snus and only snus. Period. If the rest of Europe wants to reduce tobacco-related mortality to Swedish levels, the best advice I can give is to see new nicotine products as a tool in the fight against cancer,” Skyttedal noted.
But Italian MEP Alessandra Moretti (S&D) opposed this view, saying it risks “misinformation”.
“Snus probably does not cause lung cancer but is related to many other diseases such as cardiovascular diseases and other cancers of the digestive system,” she told EURACTIV Italy.
“To decrease the number of smokers, we must not condemn them to another addiction,” she added.