Indexing tobacco taxation to purchasing power: what are the consequences in Europe?

Aligning tobacco taxation with the purchasing power of European countries could contribute to increasing tobacco prices, particularly in Member States with high incomes and low tobacco prices, according to a study published in the journal Tobacco Control, in the context of the revision of the European directive on tobacco taxation.

The issue of price elasticity is a key parameter in implementing effective tax policies for tobacco products. From a public health perspective, tobacco price increases must exceed a certain threshold to trigger a decrease in consumption. Below this threshold, price increases have no effect on consumption and only penalize smokers' purchasing power.

However, research shows that taking into account the affordability of tobacco products is necessary for the implementation of an effective public health policy. In other words, it is a question of measuring the sensitivity of consumers to changes in the price of tobacco, based on changes in purchasing power (income variations, inflation).[1]. Integrating the issue of affordability of tobacco products has a dual intention. First, this criterion aims to ensure that the taxation of tobacco products corresponds to the evolution of purchasing power. Second, the objective pursued is to ensure sufficiently dissuasive taxation in high-income countries.[2].

Tobacco prices: disparate situations in Europe

The authors of the study propose equating the minimum tax on tobacco products to a fraction of each country's income in purchasing power parity. Since different European Union countries have very different income levels, the ratio between the minimum tax on tobacco products and income levels varies enormously: while in Ireland it is 2%, it is only 0.36% in Luxembourg, a country characterized by its low taxes and high income levels. In other words, in Ireland, the tax applied per 1000 cigarettes is equivalent to 2% of per capita income in purchasing power parity.

Taxation of 1000 cigarettes equivalent to 0.83% of national income in purchasing power parity

As an illustration, because it is the poorest member state of the European Union, the researchers took the case of Bulgaria as a reference rate. The ratio between the minimum taxation of tobacco products and income in purchasing power parity is 0.85%, slightly above the European average (0.83%). Based on this reference rate, the study sought to calculate what the prices of tobacco products would be in all the member states, if each were to ensure that the tax on 1000 cigarettes corresponded to at least 0.83% of its own national income in purchasing power parity.

A general increase in tobacco prices in Europe

Implementing such a measure would significantly increase the average price of a pack of cigarettes in most European countries. The researchers' estimates show that, on average, the average price of a pack of 20 cigarettes would increase by 43 cents, from 5.27 to 5.70. Germany would see the largest increase, with a pack going from 5.90 to 7.45 euros, while Austria and Sweden would be the other two countries with an increase of more than one euro per pack. However, implementing such a rate would not allow for a price increase in eight European Union countries, including France. Similarly, this policy would result in a significant increase in the price of rolling tobacco in Europe. Thus, on average, the price of 20 hand-rolled cigarettes would increase by 54 cents. Germany would see an increase of more than two euros, while Austria and Belgium would see an increase of more than one euro.

The conditions and limits of such a mechanism

Such a measure could allow for a significant increase in taxation, and therefore in the price of tobacco, particularly in certain wealthy countries with limited taxation. However, according to the study's authors, it would not resolve the issue of harmonizing tobacco prices between Member States. Furthermore, calculating income by purchasing power parity does not take into account disparities that may exist within a single country. For the researchers, the objective of this mechanism must be clearly understood: it would only be to ensure that tobacco products do not become too affordable. In other words, this reference rate should not, according to them, replace or prevent the implementation of dissuasive tax increases. Finally, the authors emphasize the need to include a non-regression mechanism in this system, in order to block the possibility of reducing taxes in the event of a decline in national income. This measure would be one of the aspects aimed at improving the functioning of the European internal market and ensuring compliance with the treaty's health objectives.

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[1] Nigar Nargis, PhD, Michal Stoklosa, PhD, Ce Shang, PhD, Jeffrey Drope, PhD, Price, Income, and Affordability as the Determinants of Tobacco Consumption: A Practitioner's Guide to Tobacco Taxation, Nicotine & Tobacco Research, Volume 23, Issue 1, January 2021, Pages 40–47, https://doi.org/10.1093/ntr/ntaa134

[2] Branston JR, López-Nicolás Á, Promoting convergence and closing gaps using affordability-based minimum taxes: an illustration using the European Union Tobacco Tax Directive, Tobacco Control Published Online First: 11 February 2022. doi: 10.1136/tobaccocontrol-2021-056960