The structure of cigarette excises in the EU : from myths to reality

Although it may at first seem unimportant, the structure of excise taxes on cigarettes greatly affects the price of cigarettes, the structure of the consumption, but also the amount of the tax revenue. EU Directive 2011/64/EU prescribes the combination of the specific and the proportional (ad valorem) excise tax on cigarettes. However, Member States independently determine the shares of one or another component in the overall excise tax structure, whereby the EU directive only prescribes the upper and the lower limit. The purpose of this article is to challenge several myths related to the cigarette taxation in the EU. The first one is that an increase of the specific component of the cigarette excise negatively affects the consumption of cigarettes, whereas this does not hold for the proportional component. The second assumption empirically tested in the paper is that an increase of the specific excise increases the government revenue from cigarette excises, whereby this can not be confirmed for the proportional component. Lastly, since both previous hypotheses have been confirmed, we tried to delve into reasons why certain countries - despite obvious advantages of the specific in relation to proportional excise - still predominantly rely on the latter. To this end, we tested the assumption that countries with domestic production of tobacco increasingly use proportional excises to increase the price gap between domestic (usually cheaper) and more expensive (imported/international) brands. The results of the empirical analysis were consistent with this hypothesis and confirmed that domestic tobacco production is a significant determinant of the structure of cigarette excises.