Yesterday, the European Commission adopted not only the first part of the so-called Multiannual Financial Framework, but also agreed on a proposal for a revised Tobacco Excise Directive.
The Tobacco Excise Directive proposal demonstrates a total lack of understanding of the economics of tobacco taxation and breaks with the EU’s 50-year framework, which has historically ensured stable government revenues, a proper functioning of the internal market, and allowed Member States to achieve their health objectives.
Under the guise of the misconception that taxation is the most essential tool to bring tobacco and nicotine use rates down to 5% across the EU, the proposal massively increases minimum tax rates for European niche tobacco products, with a 258% increase for fine-cut tobacco.
Member States, such as France and the Netherlands, which have already increased their excise rates on fine-cut tobacco to unsustainable levels, are not only experiencing double-digit illicit tobacco sales but are also losing significant excise tax revenues. For the Netherlands, this loss represents over half a billion euros in 2024 alone, whereas illicit tobacco costs the French government some €11 billion. When taking the price levels of illicit tobacco into account, overall tobacco prices have come down in the Netherlands and France, and use rates have remained on a stable decline, contrary to what is claimed. The costs of heightened law enforcement, as suggested in the proposal, will further strain government budgets, in addition to declining excise revenues. Despite these examples and available studies on the subject, the Commission incredibly states in its proposal that increases in excise tax are not directly linked to increased illicit tobacco trade.
ESTA represents European small, medium-sized, and mid-cap companies – many of which are family-owned – based throughout the European Union that manufacture and distribute traditional European tobacco products, including fine-cut tobacco, European pipe tobacco, nasal snuff, and chewing tobacco. The Commission stated it would reduce regulatory burdens and increase Europe’s competitiveness, especially for SMEs, but this is now clearly ‘trumped’ by its wish to directly fill its coffers with €11.2 billion annually coming from Member States’ tobacco excise income.
Lessons are not learned: whilst the Commission was stating that the Trump presidency had the economics wrong in applying tariffs, the Commission itself is not far behind in not understanding tobacco excise economics. Just like tariffs cannot generate income at current import levels and simultaneously significantly decrease imports, tobacco excise at the proposed levels cannot create billions in the Commission’s resources and reduce smoking to 5% from the current 24% of the population.
