Effects of specific versus ad valorem excise taxes: empirical evidence on cigarette pricing in the EU

This study examines the effects of excise taxes on cigarette prices across EU member states, with a particular focus on the differential impacts of specific and ad valorem excise taxes. EU Directive 2011/64/EU mandates the use of both tax types but allows Member States to determine their relative shares within prescribed limits. Motivated by the need to understand how these taxes influence cigarette prices, the research investigates the extent to which specific and ad valorem taxes are passed through to consumers. Using a panel dataset with annual observations from 28 EU countries between 2010 and 2020, the study applies fixed-effects regression models to evaluate the pass-through effects of these taxes on cigarette prices. The findings reveal that both specific and ad valorem taxes are under-shifted, with ad valorem taxes nearly fully passed on to consumers, resulting in larger price increases, while specific taxes are passed on to a lesser extent, with manufacturers absorbing part of the tax burden. Increasing the share of specific taxes could help stabilize government revenues by minimizing down-trading to cheaper brands, while also reducing smoking prevalence, particularly among price-sensitive groups. The study provides updated insights into the dynamics of cigarette taxation in the EU, offering valuable guidance for policymakers and scholars aiming to optimize tax structures to meet both public health and fiscal goals.