The European Union (EU) can serve as an example of a successful regional cigarette tax harmonisation and integration regime. This level of integration was motivated by an effort to ensure the proper functioning of the EU internal market, which required a reduction in inter-country variation in tobacco product prices.

Yet, despite the effort to harmonise, the variation in cigarette taxes and prices between the EU member states is greater than, for example, that across states in the USA. The USA is a large internal market, but has little tobacco tax harmonisation and integration. The coefficient of variation (CV) for cigarette prices in the USA is 0.20 versus 0.44 in the EU, in 2010.1 This is likely due to US states being much more homogenous than the EU member states, particularly with respect to incomes. These differences may drive the price strategies of the tobacco industry, which have implications for the affordability of tobacco products.

EU directives on cigarette taxation have two important features:

1. a minimum excise tax burden (percentage share of tax in price)

2. an excise tax floor, measured in Euros per 1000 cigarettes sold.

These two components create different binding constraints for two groups of countries: the EU-15 (Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal, Spain, Sweden and the UK) and the EU-12 (Bulgaria, Czech Republic, Cyprus, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Romania, Slovakia and Slovenia). EU-15 countries are all developed, high-income countries, many of which were founding members of the EU. Generally speaking, the countries in this group have higher per capita incomes (which are growing at a slower …