EU-wide excise tax on novel tobacco products: A tough equation to solve

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The European Commission’s intention to impose an EU-wide minimum excise tax on novel products, such as electronic cigarettes, heated tobacco and nicotine pouches, has divided relevant stakeholders over whether it could bring the desired results.

Some argue that heavy taxation would result in smokers not switching to novel products, which some studies claim are less harmful than traditional cigarettes.

Others insist that such a move is needed, considering that harm is still harm, and therefore, taxation is a tool to prevent people from consuming these products at all, particularly young people.

Currently, there is no EU-wide excise framework as there is for traditional tobacco products. The situation in the EU single market is quite fragmented, as member states tax e-liquids and heated tobacco products at different rates.

The EU executive now wants to regulate the market with a minimum tax rate on novel products. Asked if the Commission was considering postponing its proposal to increase tobacco taxation amid the worst inflation crisis since the 1980s, an EU official replied:

“The Commission publishes online the ‘Liste des points prévus’, which is the indicative agenda of topics to be discussed at each weekly meeting of the College of Commissioners. However, this is a provisional agenda which may always be subject to changes”.

Most public health advocates are fighting for the highest rate, while the tobacco industry and novel tobacco product backers pressure for the lowest excise tax possible.

Unknown health effects

The World Health Organisation (WHO) and the EU have backed increasing taxation on both tobacco and novel products to prevent people from using them.

Asked if the Commission is concerned that a possible new high excise tax on novel products will push people back to cigarettes, the EU official replied, “We have no comment to make at this stage”.

Cornel Radu-Loghin, a public health advocate for the European Network for Smoking and Tobacco Prevention (ENSP), told EURACTIV that the tobacco industry is hiding behind the argument that novel products are less harmful, so they should be taxed less.

“In the 50s, all doctors promoted tobacco, and 20 years later everything changed, who knows what will happen in 20 years. Maybe everyone will agree that these new products are very dangerous and carcinogenic […] so we cannot predict this related to taxation”, Loghin said.

Loghin added that governments are looking for money while the industry pushes forward the loss-revenue argument.

“The tobacco industry always says they are big contributors to the state budget […], but the money is not coming from them but from smokers”, he said.

“But at the end, if a person stops using tobacco products, he will spend the money on other products, so the taxes will come back to this state budget”, he added.

“So, all this discussion, to tax or not to tax at the same level, is about commercial and business interests and a way to manipulate the governments to show them that they are good contributors”.

A risk-based approach to taxation

David Sweanor, a Canadian lawyer and professor at the University of Ottawa, said the EU should avoid the “mistake” of taxing less harmful alternatives to smoking cigarettes.

“It’s like saying we really want to move away from internal combustion engines, but because we might lose money on gasoline taxes that we need revenue, we will tax electric cars, which prevents people from moving to those vehicles”, he told EURACTIV on the sidelines of the 5th Scientific Summit on Tobacco Harm Reduction conference in Athens.

Critics suggest that following the pandemic crisis and amid a war in Ukraine, EU governments are cash-strapped and looking for fresh revenue.

“If we increase a lot of the price of the novel products, that will mean that consumers will start to shy away from them. Some people who are vaping would switch back to cigarettes”, Said Emanuele Bracco, an associate professor of economics at the University of Verona.

Bracco said the evidence is still not as strong because these products are new but insisted that the health profile of novel products is very different from traditional cigarettes.

“We have good evidence that these novel tobacco products are incredibly less harmful”, he noted.

Similarly, Frederic de Wilde, president of the Philip Morris International tobacco company (PMI) in the European Union Region, told EURACTIV that most member states had adopted differentiated taxation, recognising smoke-free products, such as heated tobacco and e-cigarettes, are different from cigarettes.

“And it is common sense to treat them differently, to encourage cigarette smokers who do not quit to switch to better products. Differentiated treatment also incentivises companies to innovate and commit to change”, he said, adding that smoking is declining more quickly in countries where this differentiation was made.

De Wilde also referred to the open consultation for the Tobacco Excise Directive (TED), saying 81% of those asked, including scientists and experts, supported risk-based tax differentiation.

“In June 2020, the Council issued a recommendation that any tobacco excise review at the EU level should look at the best cases among member states, taking into account products’ different characteristics and usage,” he said.

Black markets waiting in the corner

De Wilde also stressed that a balanced tax burden does not encourage smokers to buy in the illicit market like in France, “where excessive taxation pushed illicit trade up by 30% in 2021 to more than a third of total consumption”.

“The recent KPMG report clearly shows excessive tax burden incentivises illicit trade in EU countries,” he said.

Following a significant tax increase, almost three times the minimum level set by the European Commission, the illicit market in France skyrocketed from 13.1% in 2017 to 29.4% in 2021.

This led to an estimated loss of €6.2 billion in tax revenue in 2021, and press reports in France suggest that the government plans a new tax increase to adjust to rising inflation.

Overall, illicit consumption in the EU increased by 3.9% or 1.3bn cigarettes in 2021, compared to 2.3% in 2020.

“Had these cigarettes been legally purchased in the countries in which they were identified, an additional €10.4bn in taxes would have been raised in the EU”, the industry-funded KPMG report noted.

The problem of illicit trade also appeared in Ukraine, depriving the country of much-needed cash for its war against the Russian invasion.

The illicit tobacco trade cost the Ukrainian budget approximately €180 million, forcing President Volodymyr Zelenskyy to intervene and shut down a factory responsible for the illegal production.

[Edited by Alice Taylor]

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