Excise duties only partially contribute to the fight against smoking: greater efficiency is hampered by the parallel market

However, experts interviewed by Elta note that excise duties are only one of the measures that help to slightly reduce the number of smokers – however, according to them, to achieve the objectives, complex measures related to the reduction of the market parallel are required. and revenue collection to the budget are necessary.

Algirdas Bartkus, associate professor at the Faculty of Economics and Business Administration of Vilnius University (VU), says that the increase in excise duties leads to some reduction in the number of smokers, but that it generally does not meet expectations. In addition, according to him, governments set excise taxes in order to raise revenue for the budget.

“The increase in excise duties naturally leads to the fact that the price of cigarettes as a product increases and, therefore, when cigarettes become more expensive, since each product has an elasticity of demand with respect to price, its demand decreases slightly. In this place, the reality can be very different from what we would like,” A. Bartkus told Eltai.

“We believe that if we increase the price of cigarettes by 10 percent, then 10 percent their consumption will decrease. In any case, consumption could drop by only about 1 percent and no more. On the other hand , governments impose excise taxes in order to collect revenue for the budget Yes, in a way, to solve certain societal problems so that people smoke less, live healthier (…), but the governments aim to collect revenue in the budget,” he explained.

The economist noted that if, thanks to excise policy, cigarette consumption was reduced and no one smoked, governments would have to think about how the budget could obtain revenue from excise duties.

“If I were to engage in the formulation of such a policy, I would set myself the task of reducing demand, while maintaining the same flow of income to the budget, and perhaps even increasing it. Income is necessary for the budget, because they finance all the consecutive work,” said the associate professor of the Faculty of Economics and Business Administration at VU.

“We have to understand that excise taxes should be set in a reasonable way such that when excise taxes are increased, consumption decreases somewhat. Demand is always somewhat elastic with respect to prices. If we raise prices, we will to some extent destroy demand, but we must not lose the income that we receive in the budget. These are obvious interests,” he said.

Mindaugas Štelemėkas, a professor at the Lithuanian University of Health Sciences (LSMU), also explained that excise taxes do not allow a complete reduction in cigarette consumption, but he pointed out that in the long term, public health indicators are slightly better, and the state receives additional revenue in the budget.

“The general principle that explains why we have excise taxes is that they are called ‘sin taxes’. Their aim is to reduce the affordability of tobacco products, such as alcohol, etc. In the case of alcohol and tobacco, the goal is to reduce the consumption of these products so that people harm their health less,” said Štelemėkas.

“In the case of tobacco and alcohol, we have a relative price inelasticity of demand, which means that if the price increases a little or more, say by 10 percent, if we increase the price of tobacco products, consumption decreases by less than 10 per cent, by 4 to 5 per cent. This means that not all consumption is down.

But this is good news for the country insofar as consumption is down slightly. This means that over a long period public health indicators are slightly better and at the same time it represents additional income for the state budget,” he told Elta.

The excise rate on the specific element of cigarettes from 2023. 1 January is 79.6 euros, and it is also stipulated that the combined excise rate must be at least 130 euros per 1000 cigarettes. The rate of excise duty on cigars and cigarillos is EUR 79 per kilogram of product, that of smoking tobacco is EUR 104.6 per kilogram of product.

From the new year, the excise rate for heated tobacco products is 60.2 euros per 1000 units of heated tobacco products, for electronic cigarette liquid – 0.19 euros per milliliter of liquid and for raw tobacco – 104.6 euros per kilogram of raw tobacco.

The weak point is the growth of the parallel market

Mr. Štelemėkas said that the weak point of this subject lies in the fact that the increase in excise rates, especially in the case of tobacco and cigarettes, leads to an increase in the parallel market. According to him, a balance must be found in this area and the state must make additional efforts to prevent parallel trade.

Mindaugas Stelemekas

“We conducted a survey on the assessment of unaccounted tobacco in Lithuania a few years ago, then it soon turned out that there were no x-rays at the border. Only now the trains have recently began to be scanned, the crisis in Ukraine began and the situation has changed dramatically But the very principle that at the beginning of the investigation it turns out that Lithuania has not done its homework for a long time and that the trains haven’t been x-rayed, means it’s easier to smuggle smuggled cigarettes in and it distorts our market even more,” the LSMU professor said.

“Combating parallel trade always requires a complex approach, not just the immediate abandonment of the idea of ​​an immediate increase in excise duties on tobacco. This is a tax policy tool that helps improve people’s health, it is one of many complex tools, an important tool, the World Health Organization considers excise taxes to be one of the best and most cost-effective tools to reduce smoking,” he noted. .

Mr. Štelemėkus was seconded by A. Bartkus regarding the problem of the parallel market with regard to cigarettes, who pointed out that excise duties should be applied taking into account their tariffs in neighboring countries. According to him, if the excise rate is applied regardless of people’s income and the level set by neighboring countries, people will not quit smoking and start buying contraband.

“We have to specifically model and take into account that we can find substitutes for legal cigarettes, produced on the illegal market. It is no secret that if the product is very expensive, e.g. sin” – cigarettes, alcohol, if legal cigarettes and legal alcohol become hard to buy, there is a supply. Cunning businessmen (or whatever one should call these people) find ways to provide them with these ‘sin goods’ at a price they can afford,” the economist said.

“We always have to take into account that there are parallel market opportunities and that we cannot somehow transfer budget revenues to other countries. If we produce very expensive alcohol at home and the neighbors have a lot of money, many people will start buying alcoholic products from their neighbors (…) As people’s incomes and the general price level increase, we also need to review excise duties as they are a source of budget revenue,” he stressed.

According to data from the National Data Agency, the officially unaccounted economy’s share of gross domestic product (GDP) in 2021 was 12.5 percent. The largest share was recorded in wholesale and retail trade, transportation, and accommodation and food services – 5.3 percent. Furthermore, industry accounted for a large share of the unaccounted economy – 3.4 percent. and processing production – 3.2 percent.

The tobacco market is changing and it is becoming more and more difficult to quit smoking

The LSMU professor also drew attention to the fact that the tobacco market is undergoing a certain transformation: electronic cigarettes and smokeless tobacco products are becoming popular, they produce more nicotine and potentially increase the level of addiction, which which makes quitting smoking more difficult. smoking.

“Electronic cigarettes and smokeless tobacco products are also taxed, but the market is changing quite quickly and there are many advantages and disadvantages and many dangers for society and the state, because it is possible that smoking will decrease , and according to a survey of e-cigarette users, a significant number of people smoke both regular cigarettes and smokeless tobacco products,” Štelemėkas said.

“When you smoke smokeless tobacco products, e-cigarettes, you get more nicotine and that potentially increases the level of addiction and makes it harder for people to quit, which is the main indicator of smoking cessation,” he said.

Source: The Delfi





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