ESTA is pleased to announce the release of a study commissioned from London Economics on the fine-cut tobacco (FCT) excise taxation in the European Union. This study illustrates the key economic mechanisms of fine-cut tobacco taxation by using the examples of 4 meaningful FCT markets: Belgium, Germany, the Netherlands and the United Kingdom. The study is based on data coming from publicly available sources including national statistical agencies and the European Commission. The 2018 London Economics study reaffirms the key findings of the initial 2015 study, underlining the buffer function of fine-cut tobacco. By providing an affordable legal alternative to price-sensitive consumers when faced with prohibitive tobacco excise increases, fine-cut tobacco mitigates losses in government revenue resulting from rises in illicit trade and non-domestic consumption.
The London Economics’ analysis provides evidence that no European market for fine-cut tobacco exists, but also that there is a strong interdependency between neighbouring European markets. It also demonstrates that abrupt and sharp increases in tobacco taxation do create strong incentives for consumers to change their purchasing behaviour and fuels illicit trade. The study established that higher price-sensitivity and affordability constraints characterise fine-cut consumers across Europe. Finally, the London Economics study finds that tobacco taxation requires flexibility to allow Member States to freely set the appropriate taxation structure and rates that best fits their national context, their market specificities and their fiscal policy objectives.
ESTA Secretary General Peter van der Mark said: “The study teaches that tobacco tax policy must be delicately balanced between safeguarding government revenues and acknowledging public health objectives. Economic principles also apply to tobacco taxation which policy makers must recognise. However, this study also shows that countries can learn from their mistakes by establishing long-term step-by-step fiscal plans that provide predictability and maintain a tax differential between fine-cut tobacco and cigarettes.”
The study is available here.