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Abstract
Objectives The European Commission has formally opened a process of revision of its tobacco tax directive. The purpose of this study is to analyse the evolution of cigarette and roll-your-own (RYO) tobacco prices in order to identify avenues for the improvement of public health goals.
Methods Pooled cross-sectional data on prices and taxes on cigarettes and RYO tobacco in the Member States over 2004–2015 is used to track the distributions of the most popular price category and the weighted average price of these products and to relate them to the underlying tax structure.
Results The inflation-adjusted prices for the two products have increased over the period, but the dispersion of prices across Member States has remained constant. Throughout the period, there was a pervasive price gap between cigarettes and RYO tobacco within the Member States. Such features are explained by the underlying tax design.
Discussion The current tax stance has been successful at increasing both cigarette and RYO tobacco prices. To further enhance the public health impact of the European Union tax directive, the revision should promote the convergence of prices across Member States and aim at closing the price gap between cigarettes and RYO tobacco. These objectives call for increasing the mandatory minimum levels of excise duty on the two products, preferably linking them to the evolution of a European weighted average price. The pace of increase should be faster for RYO tobacco in order to close the gap with respect to cigarette prices.
- economics
- hand-rolled/ryo tobacco
- price
- public policy
- taxation
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Background
The European Union (EU) is the world’s leader in terms of increasing cigarette tax to best-practice levels.[1] Sufficiently large tobacco tax increases that result in higher cigarette prices make many smokers buy less of tobacco products or stop buying them altogether. The EU is the region with the highest cigarette prices in the world. While the retail price of a cigarette pack, when adjusted by purchasing power parity, averaged $4.87 globally, $7.19 in high-income counties, the price was $8.27 in the EU in 2016.1
The European communities introduced regulations on tobacco products in the 1970s and, over the last four decades, the tax harmonisation provisions have been enhanced, expanded and improved numerous times. The two most recent legislative documents regulating the application of tobacco excise taxes in the EU are Council Directive 2008/118/EC and Council Directive 2011/64/EU.2 3 These directives define the categories of manufactured tobacco and the tax structure, as well as setting the minimum tobacco tax rates for different product categories.2 3 The product categories defined by Council Directive 2008/118/EC are: cigarettes (Article 3), cigars and cigarillos (Article 4), fine-cut tobacco (Article 5) and other smoking tobacco (Article 5).2 In terms of tax structure, for cigarettes, all countries must apply a specific excise tax, expressed in monetary value per 1000 cigarettes, and an ad-valorem tax, levied as a percentage of the retail selling price. Additionally, countries may apply a minimum excise duty (MED) which serves as a tax floor on a per-quantity basis. For other product categories, countries may apply specific tax only, ad-valorem tax only or the mixture of both. Finally, the directives promote the convergence of tax levels by establishing mandatory minimum tax rates.2 4 5 The current minimum tax rates for cigarettes and fine-cut tobacco are presented in tables 1 and 2.
Minimum tax rates for cigarettes in the European Union, 2004–2018
Minimum tax rates for fine-cut smoking tobacco in the European Union, 2004–2018
Since their very inception, the EU provisions to harmonise excise duties on tobacco products have served three primary objectives: (1) to ensure the proper functioning of the internal market, (2) to maintain a high level of health protection and (3) to generate fiscal revenue for Member States.6 The first aim, to ensure the proper functioning of the internal market and avoid distortion of competition, is especially important for the EU as an economic union.7 The free movement of goods among the EU Member States requires common rules, and the tobacco tax directives help harmonise national legislations.6 Second, the health aim of the tobacco tax directives satisfies the EU Treaty requirement to ensure high levels of human health protection in the definition and implementation of all policies and activities of the EU,8 as well as the requirement of Article 6 of the WHO Framework Convention on Tobacco Control (WHO FCTC) to implement tax policies contributing to public health.9 Finally, the directives’ revenue aim is to ensure that the processes and activities are appropriate for the collection of taxes, to safeguard the budgetary interests of Member States.10
As shown by Bouw in a 2017 World Bank Group publication, these three objectives of the tax directives have not been contradictory so far.7 Specifically, tax harmonisation not only ensures a proper functioning of the EU market, but also serves public health purposes. Applying more uniform tax levels on each tobacco product among Member States decreases tax avoidance, tax evasion and fraud2 which undermine both public health and the proper functioning of the market. Similarly, harmonising tax levels between different tobacco products in each country protects public health. Finally, even though the current tax harmonisation efforts have contributed to declines in cigarette consumption in the EU, tax revenues have remained stable.7
Although the directives served their three purposes, it is unclear whether the mechanisms have been used to their full potential. Recent studies have found that despite the efforts to promote the convergence of cigarette prices between countries, price differentials are still significant enough to drive cross-border tobacco purchases.11 12 Additionally, large price gaps still exist between different product categories. For example, a survey conducted in 18 European countries found that in countries with higher prices for factory-made cigarettes, it is significantly more likely to smoke less-expensive roll-your-own (RYO) cigarettes (OR 2.13; 95% CI 1.74 to 2.62).13 Another survey of over 7000 smokers in four EU countries (the Netherlands, Germany, France and the UK) found that over three-quarters of RYO tobacco users reported lower prices as one of the motives for consuming this product.14 In Spain, the price gap between cigarettes and RYO was shown to be directly related to loopholes in the tobacco tax legislation.15
It has been more than 8 years since the last increase in the EU minimum tax rates in 2010. The Commission re-evaluates the tax directive every 4 years and submits its report to the Council.5 The next report is due in 2019 and will examine the need for the minimum rates increase.16 A major response to this process from the tobacco control community came in February 2017, when the Smoke Free Partnership (SFP) issued its position paper on the directive’s revision.17 The SFP is a Brussels-based initiative focused on supporting tobacco control legislation in Europe. In this article, we report the analysis that sustains the SFP position on the revision of the directive. We focus on analysing cigarette and RYO tobacco prices and the roles that the tax directives and their detailed mechanisms play in shaping tobacco product prices in Europe. Because the EU is a valuable example of tax harmonisation, this study will inform similar initiatives in other regions.
Methods
The Member States included in the study are those that acceded the EU in 2004 or earlier except Malta and Cyprus. These two countries are excluded due to lack of data for substantial parts of our study period. Thus, the full list of 23 countries included in our sample is: Austria, Belgium, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, the Netherlands, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden and the UK.
Data on tax rates applied on cigarettes and RYO tobacco in these countries for the period stretching from 2004 to 2015 were obtained from the European Commission’s Communication and Information Resource Centre for Administrations, Businesses and Citizens (CIRCABC) database.18
As for cigarette prices, the CIRCABC database contains information on the most popular price category (MPPC) and a weighted average price (WAP) in each member state. Unfortunately, these two price measures are not available for all countries over the whole of the study period because the EU changed the directive’s price benchmark from the MPPC to the WAP in January 2011, and some countries stopped reporting the MPPC soon thereafter (namely Austria, France, Latvia, Lithuania, Netherlands, Poland, Slovakia, Spain and the UK). However, a comparison of both price measures for the countries that kept reporting MPPC after 2011 shows that their average difference is €0.18 per 20 cigarettes (SD €0.38), or about 4% of the average price measured by either WAP or MPPC. Moreover, their coefficient of correlation is 0.98. On the basis of this evidence, we use the WAP as a proxy for MPPC when the latter is not available.
The CIRCABC database is somehow less rich when it comes to information on the price of RYO tobacco. as it contains data on its WAP for only 13 out of the 23 countries included in our study and only as of 2011. Even then, the full 2011–2015 period is only available for 11 out of these 13 countries. In these circumstances, we have derived a measure of prices for RYO tobacco from the Euromonitor Passport Database.19 The sources for Euromonitor data are both official (eg, Ministries of Finance) as well as trade associations. Although this database is conceived mainly for corporate research, there are recent examples where it has been exploited for research in public health.20–22 Indeed, Lynch and Stuckler recommend its use as a valuable source for international comparisons in epidemiological research.20 This source contains measures of total sales in both monetary value, in €, and volume, in million stick equivalents, from which an estimate of the WAP in terms of RYO can be obtained. This covers 22 out of the 23 countries included in our study period (the Euromonitor series for RYO tobacco do not include Luxembourg).
In order to examine the validity of this source, we compare the Euromonitor RYO volume figures with the CIRCABC data on fine-cut tobacco released for consumption which is expressed in terms of weight rather than stick equivalents, for the countries in which the latter series does not include other smoking tobacco (ie, Austria, Germany, Denmark, Greece, Spain, France, Hungary, Ireland, Italy, Netherlands, Portugal, Slovenia and the UK). For these countries, the two measures are nearly perfectly correlated (coefficient of correlation=0.97). Moreover, the distribution of the quotient between these two measures, which captures the average weight content of RYO sticks for each country-year, has an average (and median) value of 1 g per stick, with an SD of 0.15 g per stick, an IQR of 0.93–1.02 g per stick and maximum and minimum values of 0.41 g per stick and 1.41 g per stick, respectively. These distributional features are consistent with the evidence found by Gallus et al 13 in their survey of individual smokers of RYO tobacco in 18 European countries in year 2010. Indeed, Gallus et al reported an IQR for the weight content per rolled stick declared by the survey subjects of 0.51–1.20.
Gallus et al recommend their central (median) estimate of 0.75 g per stick when comparing the fiscal burden of cigarettes and RYO tobacco, and we adopt this weight equivalence for the construction of a measure of the tax gap between the two products.
All monetary figures were adjusted for inflation using the harmonised consumer price indexes provided by the Eurostat23 and are expressed in € of year 2015.
Results
As shown in tables 1 and 2, during our study period, the minimum tax rates set by the EU for both cigarettes and RYO tobacco experienced marked increases. These were accompanied by increases in domestic taxes. In particular, as reflected in table 3, while ad-valorem rates declined by a few percentage points, the real values of the specific tax and the MED along with the number of countries that resorted to this type of tax grew substantially.
Evolution of tax rates, 2004–2015
At the same time, the inflation-adjusted price of cigarettes increased in all countries (a Wilcoxon signed-rank test rejects the null hypothesis of no change between 2004 and 2015). These changes may be visualised in figure 1 (left panel) which depicts the evolution over time of the median and IQR of cigarette prices in the 23 countries included in the study. As this figure reveals, the median price for a pack of 20 cigarettes increased from €3.07 in 2004 to €4.30 in 2015, or a 40.5% increase. The increase was more rapid before 2011, and slowed down after the Council Directive 2011/64/EU was implemented. Prices in the cheapest markets experienced large increases in relative terms. For instance, in Poland, which ranks among the five countries with the cheapest cigarettes both at the start and end of the study period, the price more than doubled passing from €1.35 to €3.07. On the other hand, the relative increases in the most expensive markets were modest. In France, ranked among the five countries with the most expensive cigarettes throughout the study period, the price increased from €5.8 to €6.7.
Tobacco product prices, € per 20 sticks. MPPC, most popular price category; RYO, roll-your-own; WAP, weighted average price.
However, cross-country variation in cigarette prices did not change noticeably over our study period. The spread of the IQR for cigarette prices remained nearly constant: €2.66 in 2004 and €2.49 in 2015. The SD was also stable: €1.95 in 2004 and €1.88 in 2015.
The nominal price of RYO tobacco also increased in all countries over the study period. Prices in real terms did likewise in all but four countries. In particular, after adjusting for inflation, the price of RYO tobacco in the UK, Ireland, Latvia and Hungary was found to be smaller in 2015 than in 2004. Still, a Wilcoxon signed-rank test rejects the null hypothesis of equality of the distributions of RYO prices in constant terms in 2004 and 2015 (p<0.001). Figure 1 (right panel) traces the changes in the distribution of inflation-adjusted prices for RYO tobacco in constant terms over the study period. The median of the distribution increased from €2.15 to €3.31 per 20 sticks, or a 53% change. The bulk of this increase occurred between 2012 and 2015 which coincides with the period over which the minimum tax rate on RYO tobacco set by the EU nearly doubled (table 2).
In similarity to cigarettes, the spread of the IQR of the distribution of RYO tobacco prices remained stable, from €1.05 in 2004 to €1.09 in 2015. Given the stability of the spread of the central part of the distribution, a small drop in the SD, from €2.14 to €1.87, reflects changes at the extremes. While the smallest price in 2004 was found in Poland at €0.9 per 20 sticks, by 2015 the bottom position was occupied by Hungary with €1.43 and Poland registered a price of €1.95, which, in similarity to the case of cigarettes, represents a more than 100% increase. This is an example of how EU legislation has contributed to raise prices in markets with the cheapest tobacco products. In fact, legislation to increase tobacco taxes in Poland was directly justified by the tobacco tax directive requirements.24 In contrast, the top price in the distribution, occupied in both 2004 and 2015 by the UK fell in real terms from €11.12 to €9.25.
Therefore, our study period witnessed an overall increase in the real price of both products. Moreover, the increase was much larger in relative terms in the Member States with the cheapest tobacco products. However, absolute price differentials between Member States were not reduced substantially for either cigarettes or RYO tobacco.
Figure 2 shows that during our study period, there has been a substantial and persistent gap between the prices of cigarettes and RYO tobacco (a Wilcoxon signed-rank test rejects the null hypothesis of equality between the distributions of cigarette prices and RYO prices over the study period (p<0.001)). The price gap was narrowest in 2004 at €0.91, reached a peak in 2011 at €1.50 and slightly declined towards €0.98 in 2015. As shown in table 2, this gentle decline as of 2011 coincides with the period over which the minimum tax rate on RYO tobacco set by the EU nearly doubled (table 2) which has most likely prevented price differentials from becoming ever wider.2 5
Median price of cigarettes and RYO, € per 20 sticks. RYO, roll-your-own.
These price patterns are related to underlying differences in tax rates, particularly in the value of the minimum tax revenue on a per-quantity basis that results from the combination of specific, ad valorem and MED applied to tobacco products in each EU Member State. As figure 3 shows, the variation in minimum tax revenue for cigarettes (RYO) explains 91.7% (82.1%) of the variation in prices.
In this regard, it is useful to estimate a measure of the tax gap between RYO tobacco and cigarettes. As mentioned earlier, for this purpose, we use a weight equivalence rate of 0.75 g per stick as suggested by Gallus et al.13 The resulting implicit tax gaps in our sample of 23 Member States for year 2015 are presented in figure 4. The median value for this tax gap is €1.17 per 20 sticks and, as can be seen, only Greece seemed to apply tax rules that got close to the elimination of the gap, while Belgium and the Netherlands allowed the greatest differentials .
Weighted average price and minimum tax revenue, 2011–2015. RYO, roll-your-own.
Gap in minimum excise revenue, cigarettes vs RYO tobacco, 2015. RYO, roll-your-own.
Discussion
The EU tobacco tax directive has played an important role in increasing tobacco product prices in Europe. Cigarette and RYO tobacco prices increased not only faster than inflation, but also faster than gross domestic product-measured income23 which is a price increase rate recommended in the guidelines for implementation of Article 6 of the WHO FCTC.25 Moreover, the increase was larger in relative terms in the countries with the cheapest tobacco prices. In this regard, the EU directive’s influence on the implementation of domestic tax increases in these countries can be considered effective, and it is reasonable to argue that this relative price convergence would not have happened without the minimum tax thresholds embodied in the EU legislation. As shown in other research, those price increases translated to lower cigarette consumption across EU Member States.26 The EU tax harmonisation efforts safeguarded not only public health,27 but also the Member States’ budgetary revenue.10
However, contrary to what Blecher and colleagues predicted,28 price differentials for both cigarettes and RYO did not decrease in absolute terms. Variation in both cigarette and RYO tobacco prices between Member States has been practically constant since 2004. This calls into question the success of the directives in improving the functioning of the internal market. For Member States with higher tobacco product prices, the availability of cheaper products in their neighbouring Member States poses a threat to public health.
The second shortcoming of the current arrangement is that it did not eliminate the price gap between cigarettes and RYO tobacco. While this gap has declined slightly since the last revision of the tobacco tax directive, it is still larger than in 2004. This price difference gives an unjustifiable market advantage to RYO tobacco. Because, as shown by other studies,13 14 29 lower prices for RYO tobacco drive some cigarette users to switch to RYO, the price gap undermines public health objectives.
This study did not analyse within-country variations in prices of different cigarette and RYO tobacco brands. However, there are concerns that while the EU 2011 switch from MPPC to WAP enabled more accurate assessment of within-country price trends, the WAP could still not fully capture the widening gap between cigarette price segments.30 Tobacco industry tax overshifting on the most expensive brands and shielding the economy brands from tax increases would widen the gap between cigarette price segments, but not necessarily change the WAP.30 The growing price gap enables smokers to trade down to cheaper tobacco products, exacerbating smoking-related inequalities. Therefore, apart from monitoring WAP, governments should also monitor cigarette and RYO price changes by price segments and adjust their tax policies accordingly.
We did not analyse price differences between products other than cigarettes and RYO tobacco. Economic studies demonstrate that cigarettes are being substituted not only with RYO tobacco, but also with cigars and pipe tobacco.31 Limited evidence from the EU shows that electronic nicotine delivery systems are also substitutes for cigarettes.32 While these other tobacco products are not as popular in the EU as cigarettes and RYO tobacco,19 governments should also pay attention to them when revising their tobacco tax policies.
These considerations suggest that improvements in current tax harmonisation mechanisms are clearly needed to reduce price differences between EU Member States in both cigarettes and RYO tobacco, as well as price differences between cigarettes and RYO tobacco within Member States. Indeed, based on this analysis, the SFP has issued the following recommendations for the revision of Council Directive 2011/64/EU.
First, implement an increase in the mandatory MED for cigarettes. As cigarette price levels across Member States are highly correlated with the MED, higher mandatory levels will lead to price increases, especially in countries that keep their taxes at around the current minimum levels. The new directive should also define an EU-level WAP (EWAP), computed as a sales-weighted average of domestic WAPs, and tie the mandatory MED to a fixed fraction of this EWAP to encourage price convergence across member states. This would avoid the need for constant adjustments in minimum tax requirements.
Second, the revised directive should require a MED on RYO tobacco on a per-quantity basis, just as it is required for cigarettes. This would favour the convergence of prices of RYO tobacco across Member States.
Third, the revised directive should guarantee a progression of RYO tobacco excise towards the tax levels applied to cigarettes in order to reduce the gaps between cigarette and RYO prices, and therefore discourage substitution between these two products.
These recommendations for the revision of the tobacco tax directive in the EU take stock of the fact that regional tax harmonisation is a complex policy-making process. Indeed, while for the case of tobacco, the EU may be showcased as an example of relative success, no comparable progress has been made in the harmonisation of taxes on energy and alcohol. That is why these measures consist in agreements on high minimum rates that are compatible with transition periods for Member States that find it difficult to comply initially which has been shown to give better results than agreeing on lower minimum rates with more frequent legislative revisions.7 Likewise, these proposals leave ample margin for those Member States that prefer to enhance tobacco control with a tougher tax stance, again a desirable trait for regional tax integration processes.33
What this paper adds
The European Union (EU) provides a blueprint for regional tax harmonisation and integration. This paper is the first independent study to track the evolution of cigarette and roll-your-own (RYO) tobacco prices and their relationship to taxes under the current tax directive.
We expose two important shortcomings from the point of view of public health that can be traced back to the underlying tax design: (1) a lack of convergence in the prices of these two tobacco products across Member States and (2) a pervasive gap in the price of the two products within Member States that gives an unjustified advantage to RYO tobacco.
We propose changes to the EU tax directive that may correct these defects and are compatible with the inherently complex process of international tax harmonisation.
References
Footnotes
Contributors Study design: ÁL-N. Collected data and prepared database for analysis: MS. Analysed data and interpreted data results: ÁL-N. Drafted and critically revised manuscript, and approved final manuscript version: all authors.
Funding The authors have not declared a specific grant for this research from any funding agency in the public, commercial or not-for-profit sectors.
Competing interests ÁL-N reports personal fees from Smoke Free Partnership, during the conduct of the study. MS has nothing to disclose.
Patient consent Not required.
Provenance and peer review Not commissioned; externally peer reviewed.