Tobacco tax policy must be delicately balanced to safeguard government revenues and protect fair competition, jobs and public health, whilst also deterring illegal tobacco trade. Precipitous taxation of tobacco spurs the sale of illegal tobacco products, increases criminality and risks billions in EU tax revenue. Smart tax policy balances market realities with health objectives and the dangers of tobacco smuggling.
In 2020 alone, excise taxes on tobacco products raised almost €89 billion for EU governments (approximately €110 billion VAT included).
Tobacco smuggling and sales of illegal tobacco products threaten this income and society at large. Sales of illegal products mean that governments and citizens lose out on tax revenue, which instead flows into the hands of criminals who also traffic drugs and guns into Europe. Proceeds from the sale of illegal tobacco may also be used to fund terrorism. The fight against illegally traded tobacco is therefore a fight to protect EU citizens.
Authorities state that, from a health perspective, consumers are put at risk when they consume counterfeit tobacco products. These products are not held to EU quality standards and are passed off as legitimate products in Europe. As these illegal products are not subject to the same rigorous scrutiny as legal tobacco products, authorities assert that consumers cannot be sure of what they contain.
Fine-cut tobacco plays a vital role in reducing the risk of counterfeit cigarettes and securing government tax revenues. High unemployment and falling wages over the last ten years, combined with steady increases in tobacco taxation, have significantly reduced price-sensitive consumers’ ability to afford legal tobacco products. While rising cigarette prices force consumers to seek out cheaper products, consumers who can no longer afford cigarettes find in fine-cut tobacco a legal and affordable alternative to illegally traded cigarettes. Fine-cut tobacco therefore acts as a buffer between legal and illegal products, due largely to its lower price reflecting its semi-finished nature.
Smart tax policy should maintain this tax differential with cigarettes, allowing fine-cut tobacco to fulfil its buffer function between legal and illegal tobacco trade.
Most of ESTA’s members are mid-sized or small, often family-owned, operations. Many ESTA members operate in rural and economically disadvantaged areas where employment opportunities are scarce. Their activities contribute to the local economy and society. Poorly conceived taxes on tobacco can have disproportionate effects on smaller manufacturers, driving them out of the market, thereby further increasing market concentration. A well-balanced tobacco tax policy should take into account local industries by addressing the differences between smaller and large manufacturers.