Tax harmonization in tobacco products: a risk-based approach

Economic theory suggests that harmful goods should be taxed according to their level of harm, to reduce the externalities and internalities imposed on society. When multiple goods with different harmfulness levels are present in the market, tax policy may wish to push consumers towards the less harmful ones; in the tobacco market, where traditional and innovative products are economic substitutes, this implies levying tax rates which are proportional to the level of harm, which is believed to be substantially lower in the case of non-combustible nicotine and tobacco products (NNTP) as opposed to factory-made cigarettes (FMC). Market projections on EU27 show that doubling tax minima for traditional cigarettes while maintaining a substantial tax differential with NNTPs, grounded in their relative harmfulness, will substantially reduce smoking prevalence. Levelling traditional cigarettes and NNTP tax minima to a single harmonized amount would instead limit drastically the expansion of NNTPs as less harmful alternative to cigarettes and maintain higher level of smoking prevalence.