A recent study by Alvarez & Marsal on “Causes and control of illegal tobacco”, reviewing data from 71 countries over the course of 17 years, came up with some interesting conclusions regarding the correlation between taxation and cigarette prices, and the subsequent effect on illegal trade.
The illegal trade in tobacco continues to grow in many regions of the world, up to an estimated 530 billion sticks in 2023. Figures suggest that governments lose between $40 and $50 billion in tobacco excise revenues per year due to the illegal trade.
We asked Johannes Herrle, JTI Fiscal Affairs Director, to highlight and comment on some of the key aspects of the report.
What are some of the key findings from the recent study?
How widespread was the research?
JH: The study applies a very robust and thorough methodology. It clearly finds that a decreasing affordability of cigarettes, often driven by tax hikes, generally leads to an increase in illegal tobacco consumption.
Developed by Alvarez & Marsal, the econometric model analyzed cigarette prices, affordability and the share of illegal trade within total consumption, as well as other relevant metrics… and this in 71 countries over a period of 17 years.
The study finds that law enforcement continues to also play an important role in dealing with the issue: Countries with strong enforcement have a lower share of illegal trade in total cigarette consumption in comparison to countries with weaker enforcement.
Johannes Herrle,
JTI Fiscal Affairs Director
How can the correlation between price increases (induced by taxation) and growth of illegal tobacco trade be quantified?
JH: The strong methodology and broad range of data analyzed allows a quantification of the relationship between affordability and illegal trade. The key finding of the analysis is that when cigarettes become 1 percentage point more expensive relative to smokers’ incomes, the illegal trade market share grows by 0.8 percentage points.
If, for instance, a pack of cigarettes costs 10% of an average person’s daily income and this ratio increases to 11%, it can be expected that the share of illegal trade in total cigarette consumption increases from a level of, say, 14% to 14.8%.
What should EU policy making consider with the current revision cycle of the Tobacco Excise Directive (TED)?
JH: The report clearly demonstrates that increases to tobacco taxes make cigarettes less affordable and contribute to the growth in illegal trade. Therefore, policymakers need to consider the potential impacts of updating minimum excise requirements in a revised TED on the affordability of impacted products. If increases are excessive and force individual Member States to raise taxation suddenly and significantly on products in scope of the Directive, this may lead to a subsequent increase in illegal trade.
This is clearly demonstrated in the Romania case highlighted in the A&M report, where EU-induced tax increases resulted in an almost doubling of illegal trade from ~15% of total cigarette consumption in 2008 to almost 30% in 2010. Over the same time, legal cigarette volumes plummeted by 30%.
About the study
The study on “Causes and Control of Illegal Tobacco” has been prepared by Alvarez & Marsal Corporate Performance Improvement LLP (A&M) and was commissioned by JT International SA (JTI).
This is the fourth edition in the series and was published in June 2024.
