A simulation impact evaluation of a cigarette excise tax increase on licit and illicit cigarette consumption and tax revenue in 36 European countries.

Abstract

To assess the impact of a simulated 10% tax-induced cigarette price increase on licit and illicit consumption and tax revenues in 36 European countries. Employing panel data for licit and illicit cigarette consumption, fixed effects regression models were applied for different income clusters. Total cigarette consumption dropped by about 3.1% as a result of the simulated tax-induced price increase. Annual illicit cigarette consumption increased by 1.52%, (95% confidence interval: 0.21, 2.83), while annual licit cigarette consumption decreased by 4.61% (95% confidence interval: -6.51, -2.72) in the observed 36 European countries. With total consumption decreasing by about 8%, the Czech Republic, Latvia, Lithuania, Poland and Slovakia were affected the most by the price hike. More specifically, licit consumption in these countries decreased by 18.43% (95% confidence interval: -19.91, -16.95) while illicit use increased by 10.99% (95% confidence interval: 6.01, 15.96). Moreover, the overall annual tobacco tax revenue increased by US$14.69 billion in the simulation. Results of the study suggest that European policy makers continue to implement tobacco taxation policies to control smoking prevalence and national health care expenditures. At the same time, efforts to kerb contraband activities along EU Eastern borders should be intensified.