Public health and fiscal impacts of radical decrease of ad valorem excise share in the mixed tobacco excise system

Background Guidelines for implementation of the FCTC Article 6 recommend implementing specific or mixed excise systems with a minimum specific tax floor. Over recent years, many EU countries decreased the share of ad valorem excise. The most radical changes have been undertaken in 2011-2013 in Sweden, Denmark and the Netherlands, where ad valorem excise rate was decreased to 1%. The aim of the paper is to estimate public health and fiscal impacts of radical ad valorem excise share decrease in the mixed excise system. Methods Data on tobacco excise rates, revenues and sales were taken from the European Commission site. For average cigarette prices calculations, consumer price index for cigarettes was used. Net-of-tax cigarette price was calculated as: Average price - Specific excise - Average price * (VAT + Excise) ad valorem rate. Results After radical decrease of ad valorem excise share, Sweden, Denmark and the Netherlands experienced rather common trends: (1) Tobacco sales substantially (by 10-20%) decreased; (2) Tobacco revenues stagnated; (3) Tobacco industry increased net-of-tax cigarette price to much greater extent than the specific excise increase and inflation rate. As the ad valorem excise rate was substantially reduced, the tobacco industry could increase profits by increasing the industry's part of the price. Conclusions Radical decrease of ad valorem excise weight in the mixed excise system reduces tobacco consumption. However, such policy does not increase tobacco excise revenue, while tobacco industry apparently keeps its incomes as cigarette prices rise by more than the tax yield. Countries with mixed tobacco excise systems should be careful in changing their excise tax structures to keep tobacco taxation a "win-win" policy. Large increase in the specific excise rate is the most beneficial change in terms of public health, but ad valorem rates do not need to be much reduced