Tobacco and taxation: an excisable good
An excise duty is a tax applied to certain goods at the moment of manufacturing, rather than at the time of sale. Maintaining different excise tax levels between tobacco products is necessary to reflect varying levels of consumer price sensitivity, manufacturer profiles, and modes of production for different products.
Tobacco tax policy must be delicately balanced to safeguard government revenues and protect fair competition, jobs and public health. Smart tax policy should maintain the tax differential between tobacco products.
Most of ECMA’s members are medium or small, often family-owned companies operating in rural areas and directly, and indirectly, contributing to the local economy. Poorly designed taxes on tobacco can have disproportionate effects on smaller manufacturers, pushing them out of the market, and therefore fostering market concentration. A well-balanced tobacco tax policy should continue to take into account differences between smaller and large producers, and between mass consumed and niche tobacco products.
Tobacco Taxation in the European Union
In 2019 alone, taxes on tobacco products raised more than €110 billion for governments across Europe.
In the European Union, extensive tobacco control measures regulate the production, trade, packaging, advertising and taxation of tobacco products. Specifically in terms of taxation, the Tobacco Excise Directive (2011/64/EU) set out the EU legislative framework for pricing and taxation of tobacco products placed on the EU market.
EU legislation on excise duties for manufactured tobacco defines:
- the categories of manufactured tobacco products
- the principles of taxation
- the minimum rates and structures to be applied.
Manufactured tobacco is also subject to the common provisions for excisable goods under EU law.
Directive 2011/64/EU requires Member States to levy a minimum rate of excise duties on cigarettes and sets down minimum excise duty rates for manufactured tobacco other than cigarettes. The structure for taxing “other tobacco products” is slightly different than for cigarettes.
Taxation is a national competency in the European Union, with Member States having the individual freedom to set their own levels of taxation, taking into account the differences between national markets, structures and consumer profiles. As taxation in the EU is mainly a national prerogative, excise rates differ from one Member State to another. You can find the latest Excise Duty table on the website of the European Commission’s Directorate General on taxation (situation as of 1st July 2021).
Member States can choose between applying a specific component or an ad valorem component, or if they wish, they may apply a mixture of the two.
Minimum rates are set out for three distinct categories of “other tobacco products”
| Product Category | Minimum Rate |
| Fine-cut smoking tobacco | 50% of the weighted average retail selling price Or EUR 60 per kilogram |
| Cigars and Cigarillos | 5% of the retail selling price Or EUR 12 per 1000 or per kilogram |
| Other smoking tobaccos | 20% of the retail selling price Or EUR 22 per kilogram |
While cigars and cigarillos benefit from lower minimum rates, these excise rates reflect the well-known higher fixed production costs – translated into higher retailing prices – when compared to mass consumption tobacco products.
Revision of the Directive 2011/64/EU
The European Commission is currently looking to amend Directive 2011/64/EU on the structures of the excise duty on manufactured tobacco products, primarily in order to integrate e-cigarettes and new smokeless tobacco products within the scope of the Directive.
ECMA would like to present some key findings from the Economisti Associati studies highlighting the specificities of cigars/cigarillos, that, in ECMA’s opinion, should be taken into account when deciding any further action for Directive 2011/64/EU and especially in relation to the EU minima for cigars/cigarillos:
- Cigars/cigarillos are niche products and only represent 0.9% of the total tax receipts collected from manufactured tobacco (1).
- The market of cigars/cigarillos continue to decrease since 2011 (2).
- The lower excise rates for cigars/cigarillos reflect their well-known higher production costs, as a labour intensive process, when compared to cigarettes (3).
- Cigars/cigarillos present a very limited risk and magnitude of cross-border licit or illicit shopping (4).
- The average price of cigars and cigarillos is well-above the price of cigarettes and other tobacco products.
- The existing provisions of the Directive already gives Member States all the tools necessary to tax cigars/cigarillos according to fiscal and health objectives.
- From a fiscal policy point of view, an increase on the minimum tax for cigars/cigarillos would have no positive effect, whereas the impact on medium-sized family businesses, very present on this market, could be serious.
- The current risk of tax-induced substitution caused by some ‘borderline products’ is considered to be extremely marginal with consumption declining due to recent national regulatory and tax revisions (5).
- As a niche market, there are practical constraints in using the tax leverage, and especially minimum rates, for reducing the consumption of cigars/cigarillos (6) considering that:
- They are only smoked occasionally (7);
- They are predominantly smoked by older men consumers (8); and
- They are not attractive nor consumed by young people (9).
- As a niche market, there are practical constraints in using the tax leverage, and especially minimum rates, for reducing the consumption of cigars/cigarillos (6) considering that:
In conclusion, cigars/cigarillos generally do not pose tax-driven substitution issues, “either because their market is marginal or because their price is well-above the price of cigarettes, or simply because for their inherent characteristics and consumption patterns, they are only weak substitute of cigarettes” (10). This is confirmed by the very low number of Member States perceiving cigars/cigarillos as tax driven substitution problems (11).
(1) Study on Council Directive 2011/64/EU on the structure and rates of excise duty applied to manufactured tobacco, Final Report, Volume 1, January 2019 (hereinafter EA 2019), p. 105.
(2) Ibid., p. 28.
(3) Study on Council Directive 2011/64/EU on the structure and rates of excise duty applied to manufactured tobacco, Final Report, Volume 1, May 2017 (hereinafter EA 2017), p. 130.
(4) EA 2019, p. 169.
(5) EA 2017, p. 174.
(6) EA 2019, p. 169.
(7) Eurobarometer 506, Attitudes of Europeans towards tobacco and electronic cigarettes, February 2021, p. 26.
(8) Eurobarometer 429, Attitudes of Europeans towards tobacco and electronic cigarettes, May 2015, p. 21.
(9) EA 2019, p. 76.
(10) Ibid., p. 175.
(11) Ibidem.