LONDON ECONOMICS

Germany Case Study

BELGIUM | NETHERLANDS | UNITED KINGDOM

Moderate and step-by-step increases in tobacco duties, along with a tax differentiation between product categories, instils stability and predictability in government revenues in Germany whilst at the same time reducing overall tobacco consumption levels.

The German government has successfully managed to strike a balance between its fiscal and public health objectives in the Tobacco and Duty Model by maintaining a tax differentiation between FCT and FMC that allows substitution. Modest excise increases, combined with the maintenance of a price differential between FMC and FCT mean that German excise revenues remain stable both when consumers who are priced out of the legal market choose to quit smoking, but also when they continue to choose to smoke – as the buffer function of fine-cut tobacco now offers them a legal, and excise-generating, alternative.

Tobacco taxation, consumption and illicit trade in Germany

An example of smart policy

A German illustration of the Buffer Function

Sources & References

Between 2008 and 2012, consumption of fine-cut tobacco in the EU28 increased by 37%, even though the increase varies heavily per Member State. Because of the severe economic crisis, consumer disposable income was under pressure, impacting the growth of fine-cut tobacco consumption. This increase demonstrates the price sensitivity of fine-cut tobacco smokers.

As the economic crisis subsided between 2012 and 2015, fine-cut tobacco consumption declined in the EU and the market adjusted, returning to its pre-crisis normal order.

In 2016, sales of fine-cut tobacco kept declining by 1.09% in the EU28. This long=term downward trend follows to an extent industry consolidation.

Seemingly out of step, several eastern countries still experience percentage increases in fine-cut tobacco sales whilst starting at very low sales levels. This demonstrates the buffer function of fine-cut tobacco: cigarette consumers who can no longer afford this product find in fine-cut tobacco a legal alternative to illegal cigarettes that are often smuggled from neighbouring countries outside the EU (see London Economics Study, June 2015).

Sometimes fine-cut tobacco is mistakenly presented as a “hook” to smoking because of its relatively higher affordability when compared to cigarettes.

The reality of the market shows a very different picture. In most European countries, fine-cut tobacco was and still is a niche tobacco product enjoyed by “specialist” consumers and traditional tobacco enthusiasts who enjoy fine European craftsmanship.

Few exceptions exist with high market shares in countries where fine-cut tobacco has a long history and forms part of the cultural heritage. In these specialised tobacco markets, the significance of fine-cut tobacco stems from its century-old local manufacturing.

Every year, taxes on tobacco products raise more than €100 billion for EU governments. Tobacco tax policy must be delicately balanced to safeguard government revenues, protect fair competition, jobs and public health, whilst also deterring trade in illegal tobacco. Tobacco smuggling and sales of illegal tobacco products threaten this income and society at large. The fight against illegally traded tobacco is part of a wider effort to protect EU citizens.

A successful implementation of Track & Trace will be of crucial importance, and requires workable standards that fit business and trading practices, making them likely to be internationally shared.

Read more about tobacco track & trace