EU tobacco tax hike benefits compromised by weak anti-smuggling action

EU tobacco tax hike benefits compromised by weak anti-smuggling action

Intent on slashing smoking rates in the bloc, the EU is set to unveil tobacco tax proposals that have already ruffled the tobacco industry’s feathers. This major facelift of the 2011 EU tobacco taxation directive will double the minimum cigarette excise tax from €1.80 to €3.60, which would significantly impact prices in low-tax member states.

Brussels’ plans have been hailed by public health and tobacco control experts, with Rob Branston of the University of Bath declaring that this “long overdue” policy intervention will “save lives.” But while the EU is moving in the right direction on taxation, the track and trace system it has implemented to tackle rising smuggling is underperforming, wasting the potential of effective track and trace to maximise the revenue generation and public health benefits of higher excise taxes.

Curbing public health crisis

While smoking has broadly declined in recent years, the EU rate remains relatively high at roughly 25%, posing a serious public health challenge. Tobacco use is the EU’s primary cause of premature death, with half of smokers’ lives cut short by an average of 14 years, amounting to nearly 700,000 avoidable deaths annually. What’s more, smoking significantly increases the risk of non-communicable diseases (NCDs) such as heart disease and cancer, making Brussels’ anti-smoking agenda crucial.

The European Commission’s “tobacco-free generation” initiative aims to slash rates from 25% to less than 5% by 2040, with the proposed revamp of EU tobacco taxation set to be an essential driver of this agenda. World Health Organisation (WHO) Director General Dr Tedros Adhanom Ghebreyesus has acknowledged that “taxation is the single most effective tool for reducing tobacco use,” a well-documented reality supported by the high and rising smoking levels in low-tax countries such as Greece and Bulgaria – currently 42% and 38% respectively.

Smuggling on the rise

Dr Ghebreyesus has also highlighted that the “illicit trade in tobacco products undermines the effectiveness of tax policies,” in addition to increasing tobacco consumption and widening health inequalities as “they are often cheaper and more accessible to vulnerable populations, such as young people.”

The EU’s illicit tobacco trade represents a mounting threat, costing the bloc millions in unpaid customs fees and excise taxes. However, despite the tobacco industry’s frequent lobbying of governments to discourage tobacco tax hikes, misleadingly claiming that they fuel smuggling, a body of independent research and data refute this assertion.

While the tobacco industry may point to France – which has the bloc’s second-highest cigarette excise taxes and the largest smuggling market – to support its narrative, the WHO has highlighted that “in Europe, high levels of illicit tobacco trade are found in the countries with the lowest tobacco taxes” while “countries with high taxes do not necessarily have high smuggling levels.” For example, Greece has well-below average excise tax yet the second-largest illicit market in the EU, while Germany has a strong tax regime and weak illicit trade.

Cross-border action failing

 As the WHO has explained, the illicit tobacco trade does not stem from high taxation, but “from a lack of control on cigarette manufacturing and the movement of cigarettes across international borders.” This conclusion suggests an ideal solution combining high excise taxes and effective anti-smuggling track and trace systems, a crucial part of implementing the WHO’s Protocol to Eliminate Illicit Trade in Tobacco Products (ITP).

Unfortunately, the EU’s bloc-wide track and trace system has not lived up to its strong taxation track record. Most concerningly, this system fails to meet ITP-required tobacco industry independence standards. In 2017, Dentsu, one of its main operators, acquired Blue Infinity, the company that implemented the much-maligned Codentify system created by Philip Morris International.

Concerns over industry ties were expressed during a recent European Commission consultation dubbed ‘Tobacco product traceability – targeted revision of EU system,’ where leading NGOs such as the Danish Cancer Society and Smoke Free Partnership raised concerns over evidence indicating that the EU system’s control mechanisms might be under the influence of Big Tobacco.

The University of Bath’s Tobacco Control Research Group has long highlighted the dangers of this industry presence, citing its “historical involvement in tobacco smuggling.” The Group further concludes that any track and trace system “based on Codentify” or on IP currently or previously owned by the industry “would not serve to reduce illicit trade.” The fact that the vast majority—some estimates have indicated around 70%–of seized black market tobacco in the EU is genuine product, reflect the Group’s findings.

Fragile budgets in time of crisis

Intervention is urgently needed, as major excise tax losses to the illicit tobacco trade – €10 billion last year alone – are compounding the budgetary situation in EU countries, where the combination of high public spending to manage the Covid-19 pandemic and stunted economic activity during lockdowns sent debt-to-GDP ratios spiralling. In 2021, average public debt in the eurozone soared to roughly 100% of GDP, far exceeding the 60% target, with extremes like Italy and Greece reaching an eye-watering 160% and 200% of GDP, respectively.

Eurozone debt remains high at 94.2% in 2022, at a time when inflation is undermining EU-funded national Covid recovery plans. As consultant Christopher Glück has explained, “the problem is that everything decided in the recovery plans will now cost much more than scheduled” and that “member states are told that their only solution is to top up from their own national budget.”

Considering the cost-of-living pressures facing citizens as the winter approaches, as well as European Central Bank President Christine Lagarde’s pessimistic projection that inflation has not yet peaked, governments would greatly benefit from additional tax revenue recovered from the tobacco black market to shield citizens from soaring food and energy prices, while shoring up health budgets to tackle smoking’s widespread health impacts.

The EU has made strong progress in cutting smoking within the bloc in recent years, but much work lies ahead to reach its “tobacco-free” ambition. Fresh tobacco tax hikes would play a key role in accelerating this agenda; however, if this move is to have a truly transformative impact on public health and budgets, Brussels will need to bolster its lagging approach to the continent’s growing illicit tobacco trade.

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