Tobacco taxation policy in three Baltic countries after...

2012, Vol.2, No.2| Tobacco control and public health in Eastern Europe Konstantin Krasovsky | 81

Tobacco taxation policy in three Baltic countries after the EU accession

Konstantin Krasovsky

BACKGROUND: Estonia, Latvia and Lithuaniajoined the EU in 2004 and had to increase tobaccoexcise rates. The aim of the paper is to explore theimpact of tax policies on tobacco consumption,revenue and tobacco market in the Baltic coun-tries.

METHODS: Data on tobacco sales, tax rates,prices, revenues, and smoking prevalence weretaken from databases and reports. Tobacco afford-ability index was calculated using data on pricesand GDP.

RESULTS: Tobacco taxation policy had three simi-lar stages in Baltic countries: (1) In 2004-2007,tax rates increased slowly and cigarettes becamemore affordable in years of economic boom. To-bacco consumption and smuggling out of Balticcountries was on the rise, which caused increaseof sales and revenues. (2) In 2008-2009, Balticcountries had to hike excise and VAT rates in yearsof economic recession, which caused sharp declineof cigarette affordability and resulted in large de-cline of consumption and sales and some exciserevenue downfall in 2009-2010; however, all coun-tries had higher revenues in 2010 than in 2007.

(3) In 2011, economic situation improved and to-bacco sales and revenue increased.

The tobacco taxation policy in Baltic countries in2004-2011 resulted in: (1) decline of total (licit +illicit) annual cigarette consumption by 30% bothin Latvia and Lithuania, and by 10% in Estonia;(2) decline of daily smoking prevalence by 10-20%; (3) decline of the out-of-country smuggling;(4) almost no changes in volumes of smugglinginto Lithuania and Estonia; (5) three-fold increaseof the annual tobacco revenues in three countriescombined.

CONCLUSIONS: Decrease of tobacco affordabilitycaused by tax hikes and economic recession wasthe key factor of tobacco consumption decline. To-bacco tax hike is a win-win policy, while in years ofeconomic boom it has more fiscal benefits and inyears of economic recession it has more publichealth benefits.

KEYWORDS: tobacco; excise tax; Estonia; Latvia;Lithuania; Baltic countries; affordability; smokingprevalence; tobacco consumption; tobacco smug-

gling.

Политика налогообложения табака в трех Балтийских странах после их

присоединения к Европейскому Союзу

Константин Красовский

УДК 336.226.331:663.97(474)

АКТУАЛЬНОСТЬ: Латвия, Литва и Эстония при-соединились к Европейскому Союзу в 2004 году,и это потребовало от них повышения акцизов натабак. Целью данной работы является анализвлияния налоговой политики на потреблениетабака, доходы бюджета и табачный рынок вБалтийских странах.

МЕТОДЫ: Данные о продажах табачных изде-лий, уровнях налогов, ценах, доходах и распро-страненности курения были взяты из баз дан-ных и отчетов. Индекс ценовой доступноститабака вычислялся с учетом цен и ВНП.

РЕЗУЛЬТАТЫ: Политика налогообложения та-бака имела три подобных стадии в Балтийскихстранах: (1) В 2004-2007 годах налоги увеличи-вались медленно, и на фоне экономического ро-ста сигареты становились более доступными.Потребление табака и контрабанда из Балтий-ских стран возрастали, что приводило к росту

продаж и доходов бюджета. (2) В 2008-2009 го-дах, на фоне экономического кризиса, Балтий-ские страны были вынуждены резко повыситьакцизы и НДС, что привело к резкому снижениюдоступности сигарет, их потребления и продаж,а также некоторому снижению акцизных по-ступлений в бюджет в 2009-2010 годах, хотя вовсех странах эти поступления в 2010 году быливыше, чем в 2007. (3) В 2011 году экономиче-ская ситуация улучшилась, продажи табака идоходы бюджета возросли.

Политика налогообложения табака в Балтийскихстранах в 2004-2011 годах привела к следую-щим результатам: (1) общее (легальное и неле-гальное) потребление сигарет сократилось на30% в Латвии и Литве и на 10% в Эстонии;(2) распространенность ежедневного куренияснизилась на 10-20%; (3) контрабанда сигаретиз Балтийских стран сократилась; (4) уровниконтрабанды сигарет в Литву и Эстонию почтине изменились; (5) ежегодные поступления в

Krasovsky, K. (2012). Tobacco taxation policy in three Baltic countries after the EU accession.

[Original study]. Tobacco Control and Public Health in Eastern Europe, 2(2), 81-98.

doi:10.6084/m9.figshare.97290

original sTudy

82 | Konstantin Krasovsky Tobacco control and public health in Eastern Europe | 2012, Vol.2, No.2

Tobacco conTrol

IntroductIon

Estonia, Latvia and Lithuaniajoined the European Union (EU) onMay 1, 2004. This involved, amongothers, substantial changes in theirtax systems. According to the EUDirective 2002/10, excise dutieslevied on cigarettes should accountfor at least 57% of the retail sellingprice, inclusive of all taxes, and,since July 2006, to be at least €64per 1000 cigarettes for the ciga-rettes belonging to the most popu-lar price category (MPPC). Under

their Acts of Accession, all threeBaltic States were granted deroga-tions to postpone the application ofthe minimum excise duties till 31December 2009.

As of May 2004, the cigarette ex-cise was just 12 euro in Latvia, 21euro in Lithuania, and 26 euro inEstonia, so the excise rates increaseshould be rather high. Tax increasewas not an initiative of local gov-ernments, but the EU requirement.These unprecedented increases

would not have happened in the ab-sence of EU uniform tobacco ex-cise tax policy.

There is sufficient evidence that theincreases in tobacco excise taxesthat enhance prices result in a de-cline in overall tobacco use(Chaloupka, Straif, & Leon, 2011).The Baltic countries ratified theWorld Health Organization Frame-work Convention on Tobacco Con-trol (WHO FCTC) and it enteredinto force for all 3 countries in2005. The WHO FCTC Article 6

бюджет от табачных акцизов для трех странвместе взятых, выросли втрое.

ЗАКЛЮЧЕНИЕ: Снижение ценовой доступноститабака, вызванное повышением налогов и эко-номической рецессией, стало ключевым факто-ром снижения потребления табака. Повышениетабачных налогов является стратегией с двой-ной выгодой, при этом в годы экономического

роста преобладающими являются финансовыевыгоды, а в годы экономического спада – вы-годы для общественного здоровья.

КЛЮЧЕВЫЕ СЛОВА: табак; акцизный налог;Эстония; Латвия; Литва; Балтийские страны;ценовая доступность; распространенность куре-ния; потребление табака; контрабанда табач-ных изделий.

Політика оподаткування тютюну у трьох країнах Балтії після їх

приєднання до Європейського Союзу

Костянтин Красовський

АКТУАЛЬНІСТЬ: Естонія, Латвія і Литва приєдна-лися до Європейського Союзу у 2004 році, щовимагало від них підвищення акцизів на тютю-нові вироби. Метою цієї роботи є аналіз впливуполітики оподаткування тютюну на його спожи-вання, надходження до бюджету та ринок тютю-нових виробів у країнах Балтії.

МЕТОДИ: Дані стосовно продажів тютюнових ви-робів, податків, цін, надходжень і поширеностікуріння брали з баз даних та звітів. Індекс ціно-вої доступності тютюну обчислювали з ураху-ванням цін та ВНП.

РЕЗУЛЬТАТИ: Політика оподаткування тютюнумала три подібні стадії у країнах Балтії: (1) У 2004-2007 роках податки зростали по-вільно, і сигарети ставали доступнішими на тліекономічного зростання. Споживання тютюну таконтрабанда з країн Балтії зростали, що призво-дило до росту продажів та надходжень до бюд-жету. (2) В 2008-2009 роках під час економічноїкризи країни Балтії були змушені суттєво підви-щити акцизи та ПДВ, що призвело до зниженняцінової доступності сигарет, їх споживання тапродажів, а також до деякого зниження акциз-них надходжень у 2009-2010 роках. Але в усіхкраїнах ці надходження 2010 року перевищу-

вали такі 2007 року. (3) В 2011 році економічнаситуація покращилася, продажі тютюну та над-ходження до бюджету зросли.

Політика оподаткування тютюну в країнах Балтіїв 2004-2011 роках призвела до таких результа-тів: (1) загальне (легальне та нелегальне) спо-живання сигарет скоротилося на 30% у Латвії йЛитві та на 10% в Естонії; (2) поширеність що-денного куріння знизилася на 10-20%; (3) конт-рабанда сигарет з Балтійських країн зменши-лася; (4) рівні контрабанди сигарет до Литви таЕстонії майже не змінилися; (5) щорічні надход-ження від тютюнових акцизів до бюджетів трьохкраїн разом узятих, зросли втричі.

ВИСНОВКИ: Зниження цінової доступності тю-тюну внаслідок підвищення акцизів та економіч-ної кризи є ключовим фактором зниження спо-живання тютюну. Підвищення тютюновихподатків є стратегією з подвійною вигодою, прицьому в роки економічного зростання перева-жають фінансові вигоди, а в роки економічноїкризи – вигоди для громадського здоров’я.

КЛЮЧОВІ СЛОВА: тютюн; акцизний податок;Естонія; Латвія; Литва; країни Балтії; цінова до-ступність; поширеність куріння; споживання тю-тюну; контрабанда тютюнових виробів.

original sTudy


Tobacco conTrol

states that each Party should imple-ment tax policies and price policieson tobacco products so as to con-tribute to the health objectivesaimed at reducing tobacco con-sumption.

Cases of tobacco taxation policy inthe Baltic countries were presentedby the tobacco industry sponsoredthink tank (International Tax & In-vestment Center, October 2011) asan example of ineffective policiesleading to growing illicit marketwith little revenue benefit. How-ever, no analysis of public healtheffects of tobacco tax policies inthe Baltic countries were found inavailable literature.

The aim of the paper is to explorethe impact of tax policies imple-mented in Estonia, Latvia andLithuania in 2000s on tobacco con-sumption, revenue and tobaccomarket.

The tasks addressed in this casestudy in order to evaluate effective-ness of the taxation policies in theBaltic countries after the EU acces-sion were as follows:

1. To estimate impact of tobaccotaxation policies on tobacco prod-ucts prices and affordability takinginto account national economic sit-uation.

2. To estimate impact of tobaccotaxation policies on tobacco smug-gling both into and out of the coun-tries.

3. To estimate tobacco excise rev-enue trends.

4. To estimate the impact ofchanges in tobacco products afford-ability on tobacco consumption(amount of tobacco products usedin a country) and smoking preva-lence (percentage of smokersamong the population) in the Balticcountries.

MaterIals andMethods

Data on tobacco (cigarettes andother tobacco products) sales, taxrates, prices and tax share in retailprice were taken from the Euro-pean Commission database (Euro-pean Commission, 2012) and re-ports as well as from the nationalstatistics databases and reports.

Real (inflation and/or income ad-justed) prices and tax rates werecalculated using the consumerprice index (CPI) data. CPI datawere taken from national statisticsdatabases for Latvia (Central Sta-tistical Bureau of Latvia, 2012) andLithuania (Statistics Lithuania,2012) and Harmonized Index Con-sumer Price (HICP) was takenfrom the Eurostat (European Com-mission. Eurostat, 2012) site data-base for Estonia, as CPI for to-bacco products is not available inthe Estonian national statisticsdatabase.

Inflation adjusted price increaseswere calculated as:CPItobacco/CPIall_items, for ex-ample, if CPItobacco was 6.1% andCPIall_items was 4.4%, inflationadjusted price increase was 1.6%(106.1:104.4=101.6). Because theBaltic countries experienced eco-nomic boom in 2002-2007 and thensevere economic recession in 2008-2009 and some economic growth in2011, to adjust tobacco prices to in-come changes, the tobacco afford-ability index was calculated as: In-flation adjusted price increase /Gross domestic product (GDP) an-nual change (GDP data were takenfrom the national statistics data-bases). For example, if the realGDP increase was 5.5%, inflationadjusted price increase was 1.6%,the tobacco affordability index was3.8% (105.5:101.6=103.8).

Data on illicit tobacco consumptionwere taken from the World Cus-

toms Organization (WCO) Reports(World Customs Organization,2004, 2008, 2010, 2012) and theKPMG Reports(KPMG, 2005,2011, 2012), with some precau-tions. Recent KPMG Reports(KPMG, 2011, 2012) on tobaccoconsumption in the EU were com-missioned by the Philip Morris In-ternational. These reports mainlyuse the Empty Pack Surveys (EPS)to estimate both non-domestic cig-arette consumption (“inflow”) andnumber of cigarettes, which weretaxed in a country, but smoked inother countries (“outflow”). Theauthors of the reports admitted thatsuch surveys have many limita-tions, for instance the sample ismore heavily weighted towardspopulous, urban areas. Other re-searchers (Adams & Effertz, 2011)argue that the EPS study makes useof systematic misspecifications andimpreciseness and thus seems topursue the aim of showing an exag-gerated high amount of illegallyimported cigarettes. It is knownthat the tobacco industry exagger-ates smuggling claims to precludetax increases (Mackay, Eriksen, &Ross, 2012), so the industry com-putations on tobacco smugglinginto the country were considered asupper estimates. For all the abovementioned indicators change overtime was examined.

Smoking prevalence trends wereestimated with data from bi-annualFinbalt Health surveys reports(Sippola & Sipilä, 2011), includingnational reports (Grabauskas et al.,2005; Grabauskas et al., 2003;Grabauskas et al., 2007;Grabauskas et al., 2011;Grabauskas et al., 2009; Pudule etal., 2003; Pudule et al., 2005; Pud-ule et al., 2010; Pudule et al., 2007;Tekkel & Veideman, 2011; Tekkel,Veideman, & Rahu, 2007; 2009)and Euromonitor database (Eu-romonitor International, 2012).

original sTudy


Tobacco conTroltab

le 1

. c

igare

tte e

xcis

e tax a

nd

Va

t r

ate

s in

latv

ia, e

sto

nia

an

d l

ith

uan

ia in

2002-2

012 (ra

te in

cre

ase b

y b

old

sh

ift)

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

ES

TO

NIA

1 Ja

n1

July

1 Ju

ly1

July

1 Ju

ly1

Jan

1 Ju

ly1

July

1 Ja

n1

Jan

1 Ja

n

spec

ific

rate

(kr

oons

/100

0)15

0175

210

240

275

360

500

500

525

spec

ific

rate

(eu

ro/1

000)

9,6

11,2

13,4

15,3

17,6

23

32

3233,5

538,3

542,1

8

adva

lore

m r

ate

(%)

2123

24

25

26

28

31

3133

3333

VA

T,%

18

1818

1818

1818

20

2020

20

LAT

VIA

1 Ja

n1

Sep

t1

July

1 Ja

n1

Jan

1 Ja

n1

Jan

1 Ju

ly1

Jan

1 Ja

n1

Jan

1 Ju

ly

spec

ific

rate

(la

ts/1

000)

5,1

5,8

5,8

6,3

6,9

7,6

8,4

10

17,8

22,5

22,5

25

spec

ific

rate

(eu

ro/1

000)

9,0

10,3

9,8

9,7

10,3

10,9

212,1

14,4

25,2

831,7

331

,73

35,2

adva

lore

m r

ate

(%)

00

1,8

6,1

10,5

14,8

19,2

25

32

34,5

34,5

34

VA

T,%

1818

1818

1818

1818

1821

22

22

LIT

HU

AN

IA1

Jan

1 O

ct1

Mar

ch1

Jan

1 Ju

ly1

Jan

1 Ja

n1

Mar

ch1

Sep

t1

Mar

ch

spec

ific

rate

(lit

s/10

00)

3230

,242,6

47,5

66

79

7995

132

140

spec

ific

rate

(eu

ro/1

000)

8,8

8,3

12,3

13,8

19,1

22,9

22,9

27,5

38,2

40

adva

lore

m r

ate

(%)

010

1015

1520

2025

2525

VA

T,%

18

1818

1818

1819

1921

21

original sTudy


Tobacco conTrol

results

tax rates

All the Baltic countries started toincrease tobacco excise rates priorto the EU Accession and in 2002-2004 the rates were increased sev-eral times (Table 1).

Since 2005, Latvia, which had thelowest excise yield, increased ratesat least annually till 2010, whiletwo other countries had 2.5 yearsperiods of no tax change (Estonia:1.07.2005-1.01.2008; Lithuania:1.01.2005-1.07.2007). Then bothcountries had periods of sharp taxincreases to meet the EU rules: dur-ing the 2008 Estonia increased spe-cific rate from 275 to 500 kronsand advalorem rate from 26% to31%. Lithuania in 2008-2009 in-creased specific rate from 66 to132 lits and advalorem rate from15% to 25%.

In 2009, all three countries in-creased VAT rates due to the eco-nomic recession (see Table 1).

After tax rates changes in 2004-2009, the total excise yield ex-ceeded the EU level of 64 euro in2009 in Estonia and Latvia and in2010 in Lithuania. In Latvia, theyield increased almost 6-fold, inLithuania 3.3-fold and in Estonia2.6-fold (Figure 1).

In 2010-2011, there were no excisetax rates increases in Lithuania; Es-tonia had rather small increases andLatvia even slightly decreased ad-valorem excise rate, while in-creased specific excise rate andVAT.

According to the EU Council Di-rective 2011/64/EU, the minimumexcise yield should increase to 90euro by 1 January 2014, but all theBaltic countries were allowed atransitional period until December31, 2017 in order to reach the re-quirements.

Before the EU accession, exciseshare in the cigarette retail pricewas below 50% in the Baltic coun-tries. Total tax (excise + VAT)share was about 60%, and then itgradually increased and reachedthe highest level in 2008 for Esto-nia (92%) and Latvia (90%). InLithuania, this proportion increasedannually, but did not exceed 80%.In 2012, the total tax and excise taxproportions were respectively 84%and 68% in Estonia, 81% and 64%in Latvia and 78% and 61% inLithuania (European Commission,2012).

After the EU accession, the excisetax policy had similar stages in allthree countries: 1) moderate tax in-creases in 2004-2007; 2) steep in-creases in 2008-2009 to meet theEU requirements; 3) minimal taxincreases after the EU level wasmet.

Figure 1. average excise yield (in euro per 1000 cigarettes) in the Baltic countries in 2002-2012.

original sTudy


Tobacco conTrol

table 2. Price indexes, annual rates of change (%)

ESTONIA 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

HICP all items 2,7 1,2 4,8 3,6 5,1 9,7 7,5 -1,9 5,4 4,1

HICP tobacco 4 9,9 10,3 4,1 5,1 1,6 50,5 0,8 9,9 9,3

Inflation adjusted tobacco price 1,3 8,6 5,2 0,5 0,0 -7,4 40,0 2,8 4,3 5,0

Real GDP change, as percent of previous year 6,6 7,8 6,3 8,9 10,1 7,5 -3,7 -14,3 2,3 7,6

Tobacco affordability index 5,3 -0,7 1,0 8,4 10,1 16,1 -31,2 -16,6 -1,9 2,5

LATVIA 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

CPI, all goods and services 1,9 2,9 6,2 6,7 6,5 10,1 15,4 3,5 -1,1 4,4

CPI, tobacco 7,5 1,6 8,9 6,4 8 23,4 76,3 26,2 5,3 6,1

Inflation adjusted tobacco price 5,5 -1,3 2,5 -0,3 1,4 12,1 52,8 21,9 6,5 1,6

Real GDP change as percent of previous year 7,2 7,6 8,9 10,1 11,2 9,6 -3,3 -17,7 -0,9 5,5

Tobacco affordability index 1,6 9,0 6,2 10,4 9,7 -2,2 -36,7 -32,5 -6,9 3,8

LITHUANIA 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

CPI, all goods and services -1,0 -1,3 2,9 3,0 4,5 8,1 8,5 1,3 3,8 3,4

CPI, tobacco 7,0 12,0 6,3 0,2 -0,2 12,3 19,4 46,4 5,1 2,7

Inflation adjusted tobacco price 8,1 13,5 3,3 -2,7 -4,5 3,9 10,0 44,5 1,3 -0,7

GDP change, as percent of previous year 6,8 10,3 7,4 7,8 7,8 9,8 2,9 -14,8 1,4 5,9

Tobacco affordability index -1,2 -2,8 4,0 10,8 12,9 5,7 -6,5 -41,0 0,1 6,6

CPI – Consumer Price Index

HICP – Harmonized Index Consumer Price (index harmonized by the Eurostat)

Figure 2. nominal prices in euro per 1000 cigarettes: Most popular price category (MPPc) prices

for 2002-2010; weighted average prices (WaP) for 2011-2012.

original sTudy


Tobacco conTrol

Figure 3a. cigarette sales in estonia in 2002-2011 (billion sticks).

Prices

For cigarette prices, we also seethree similar stages (Figure 2) aswith tax rates: (1) moderate priceincreases in 2002-2007; (2) sharprise in 2008 for Estonia and Latviaand in 2009 for Lithuania; (3) verymoderate price increase over thesubsequent years. It should benoted that in the EC taxation data-base for 2002-2010, data on themost popular price category(MPPC) were presented. Since2011, the database displays aweighted average price (WAP) andit was very close in all three coun-tries (about 2.2 euro per pack of 20cigarettes).

Price changes were also estimatedadjusted for inflation and GDPgrowth (Table 2).

For all Baltic counties, tobacco af-fordability increased in 2002-2007and sharply declined in 2008-2010due to combined effect of sharp taxhikes and economic recession. Dur-ing those three years combined, thetobacco affordability index de-clined by 60% in Latvia, by 44% inEstonia and by 45% in Lithuania.In 2011, it started to increase again.

cigarette sales

For some years data on sales arenot consistent and different sourcesprovide different estimates. Itshould be noted that the govern-ments provide data on tax-paid cig-arettes (European Commission,2012) and the industry sources (Eu-romonitor International, 2012;KPMG, 2011) provide data on ac-tual legal retail sales. The maincause for inconsistency is fore-stalling, which is a release of largevolumes of products immediatelyprior to a tax rates increase.

The forestalling impact is espe-cially obvious for Estonia (Fig. 3a),which had large increases of tax-paid sales in 2007 and 2009, just

Figure 3b. cigarette sales in lithuania in 2002-2011 (billion

sticks).

Figure 3c.cigarette sales in latvia in 2002-2011 (billion sticks).

original sTudy


Tobacco conTrol

Figure 4. tobacco excise revenues (in million euros). data from the ec (european commission,

2012).

before tax increases (see Table 1),and sales declines in 2008 and2010, when tax rates were higher.

However, total sales in Estonia for2007-2010 are almost equal for allthree data sources. Retail sales hadslight upward trend in 2003-2007:from about 2.1 billion cigarettes toabout 2.3 billion cigarettes. Thensales declined, but since 2009 theywere rather stable: about 1.8 billiona year.

In Lithuania, forestalling-driven“jumps and falls” of tax-paid salesare obvious as well (Figure 3b).

Tax hikes in Lithuania took placein 2003-2004, 2007 and 2009 (seeTable 1) and tax-paid sales fallstook place exactly in those yearswith tax-paid sales jumps in yearspreceding the tax increases. Afterlarge decline in 2002-2004, sales inLithuania experienced sharpgrowth in 2004-2008 and even be-

came higher than in 2002. Thenthey declined in 2009-2010, but in2011 sales slightly increased.

Latvia increased taxes regularly butanyway it had forestalling “jumps”in 2006 and 2008 (Figure 3c).

KPMG report noted (KPMG, 2005)that the governmental indicators ofsales in 2002-2004 in Latvia werebased on the fiscal stamps, but theydid not match with the quantitiesper annum communicated by thetobacco industry. Moreover, the EUfigures (based on the governmentalreports) on quantities did not matchwith the duties collected taking intoaccount the excise duty rates appli-cable. The estimates of the tobaccoindustry are far lower and show aminor volume increase from 2002through 2004 (see Fig. 3c). Basedon the industry data, there was anupward trend in tobacco sales in2002-2007, sharp decline in 2008-2010 and small increase in 2011(Fig. 3c).

Cigarette sales trends have com-mon stages in all 3 countries: (1) amoderate increase in 2002-2007;(2) a sharp decline in 2008-2010;(3) a small increase in 2011. Com-bined annual sales for three Balticcountries were about 9-10 billioncigarettes in 2002-2005, then theyincreased to about 12 billion in2007-2008 and declined to about6 billion in 2010-2011.

revenues

Revenue trends in 2002-2011 werealso similar for the Baltic countries(Fig. 4).

In 2003-2007, steady but slow an-nual increases of excise tax rev-enues were observed in all threecountries. Revenue increased evenover those years when the tax rateswere not raised (see Table 1) astax-paid sales increased (see Fig-ures 3a-c). In 2008, Estonia sub-stantially increased excise rates,

original sTudy


Tobacco conTrol

table 3. the economic consequences of tobacco taxation policies in the Baltic countries after the

eu accession

Estonia Latvia Lithuania

2003 2011 Change

%

2003 2011 Change

%

2003 2011 Change

%

Excise tax yield, euro per 1000 cigarettes 22 75 240 10 73 628 13 65 402

Cigarette price, euro per 1000 48 110 129 30 111 270 40 108 170

Real (inflation-adjusted) cigarette price,

euro per 1000

48 77 61 30 68 126 40 77 91

Revenue nominal,

million Euro

53 145 174 38 160 321 59 186 215

Real (inflation-adjusted) revenue,

million Euro

53 102 93 38 98 157 59 132 124

Tax-paid cigarette sales, billion

(KPMG data)

2,1 1,77 -16 2,7 1,8 -33 3,9 2,7 -31

Non-tax-paid cigarette sales, billion

(KPMG data)

0,4 0,37 -8 0,35 0,9 157 1,5 1,18 -21

Proportion of non-tax paid cigarettes in

total sales

(legal consumption + outflow + inflow),%

16,0 17,3 8 11,5 33,3 190 27,8 30,4 9

but had no revenue increase due toforestalling. Instead, it had largerevenue growth both in 2007 and2009, while there were no exciseincreases in those two years. Salesdata (Fig. 3a) explain this paradox.

Lithuania highly increased tax ratein 2009 but also had almost no rev-enue increase in that year due tothe combined effect of forestallingand reduced affordability duringthe recession.

In 2008, Latvia’s revenue increasedalmost twice due to the combinedeffect of forestalling and tax rateincrease. Subsequently, the revenuedeclined in 2009.

All three countries experiencedrevenue decline in 2010 and rev-enue growth in 2011 (Fig. 4), inspite of the fact that Lithuania didnot increase tax rates in 2010-2011

whereas Estonia and Latvia hadvery small increases of tax ratesover those years (Table 1).

As with tax rates, prices and sales,the revenue trends in the Balticcountries had three stages:(1) moderate annual revenue in-creases in 2003-2007; (2) mixedtrends in 2008-2010; (3) revenueincrease in 2011. The second pe-riod was the most peculiar: whileeventually each country had higherrevenues in 2010 than in 2007, theyexperienced revenue decline insome years: Estonia in 2008 and2010; Latvia in 2009 and 2010, andLithuania in 2010.

Anyway, overall economic conse-quences of tobacco taxation poli-cies, which were introduced in theBaltic countries after the EU acces-sion, were rather beneficial(Table 3) as revenues increasedboth in nominal and real terms in

all three countries. The countrywith the highest tax increase(Latvia) had the largest price in-crease, largest revenue increase andthe largest decline in sales.

tobacco consumption and

smuggling

Tobacco consumption is usuallymeasured as the number of ciga-rettes sold or taxed within certaintime period. As it was shownabove, annual tax-paid sales datamay be distorted by forestalling,which is expressed in large vol-umes of products being released towarehouses immediately prior to atax increase.

In some countries, when cigaretteexcise rates increase, some smok-ers switch to “other tobacco prod-ucts” (OTP). According to the ECdatabase (European Commission,2012), amounts of fine-cut tobacco

original sTudy


Tobacco conTrol

table 4. smuggling out of the Baltic countries (outflow) and smuggling into the Baltic countries

(inflow) in 2006-2011, billion cigarettes, KPMG estimates

Outflow Inflow Difference Total *

Estonia Latvia Lithuania Estonia Latvia Lithuania Estonia Latvia Lithuania

2002 0,3 0,4 0,8

2003 0,4 0,35 1,5

2004 0,4 0,35 1,4

2005

2006 0,65 0,82 0,9 0,55 0,53 2,4 -0,10 -0,29 1,50 5,85

2007 0,52 0,89 0,74 0,29 0,39 1,7 -0,23 -0,50 0,96 4,53

2008 0,43 0,18 1,19 0,18 0,39 1,09 -0,25 0,21 -0,10 3,46

2009 0,33 0,07 0,41 0,56 0,88 1,18 0,23 0,81 0,77 3,43

2010 0,24 0,04 0,19 0,39 1,14 1,67 0,15 1,10 1,48 3,67

2011 0,24 0,05 0,37 0,37 0,9 1,18 0,13 0,85 0,81 3,11

* - Total illicit market (inflow + outflow) for three Baltic countries

released for consumption increasedin the Baltic countries in 2004-2011. However, in 2011, the shareof fine-cut tobacco in the generaltobacco consumption was just 6%in Estonia, 3% in Latvia, and 2% inLithuania. Hence, cigarette con-sumption is rather a good indicatorof the general tobacco consumptionin the Baltic countries.

Cigarette consumption may behigher than sales (if tobacco smug-gling into the country is high) orlower (if tax-paid tobacco smug-gling out of the country is high).Reports usually focus on the firstkind of smuggling, while overlook-ing the second one. However, tax-paid tobacco smuggling out of theBaltic countries was also very highin 2000s.

According to the World CustomsOrganization “Customs and To-bacco Reports” (World CustomsOrganization, 2004, 2008, 2010,2012), Lithuania was among thetop cigarette “departure” countriesin 2002-2011. In 2002-2003, aver-age of 23 large (more than 100,000cigarettes) seizures of Lithuanian

cigarettes were registered by theWCO annually. In 2006-2009, theannual average number of largeseizures increased to 53, and thendeclined to 36 in 2010 and 15 in2011. Latvia was also mentioned inthe WCO reports: in 2002-2003about 80 million Latvian cigaretteswere seized (World Customs Or-ganization, 2004). Cigarettes werealso smuggled from Estonia intoFinland and Sweden and the scopeof smuggling had increased inyears before the Estonian EU ac-cession (Junninen & Aromaa,2000).

According to the KPMG ProjectStar reports (KPMG, 2011, 2012),the “outflow” of cigarettes from theBaltic countries was rather high in2006-2008 (Table 4).

Estonian cigarettes were mainlysmuggled to Finland, while Latvianand Lithuanian cigarettes were pre-dominantly smuggled to the UKand Ireland. In some years(Table 4), outflow was higher thaninflow. Outflow could be one of theexplanations of legal sales increasein 2004-2007 (See Fig. 3 a-c).

According to the KPMG estimates(KPMG, 2005, 2012), there was al-most no cigarette “inflow” increasein 2006-2008 in comparison with2002-2004 in any Baltic country(Table 4). Then inflow highly in-creased in 2009-2010 and declinedin 2011. In 2011, the number ofcigarettes smuggled into Estoniaand Lithuania was almost the sameas annual average numbers for2002-2004 or 2006-2008, only inLatvia it was higher. The inflowcigarettes mainly came from Rus-sia, Belarus (Krasovsky, 2012) andUkraine (Ross, Stoklosa, &Krasovsky, 2012), where exciserates were much lower than in theBaltic countries.

If illicit market is estimated as sumof “inflow” and “outflow” we seedownward trend of illicit market in2006-2011 for the Baltic countriescombined while taxes were in-creasing (Table 4).

With legal cigarette sales and bothcigarettes “inflow” and “outflow”,KPMG (KPMG, 2012) estimatedtotal domestic cigarettes consump-

original sTudy


Tobacco conTrol

Figure 5. total (licit + illicit) domestic cigarette consumption in

estonia, latvia and lithuania in 2006-2011, billion cigarettes,

KPMG estimates.

Figure 6. cigarette market in three Baltic countries combined in 2003-2011, billion cigarettes.

KPMG reports data.

tion (legal sales – outflow + in-flow) in 2006-2011 for each of thethree Baltic countries (Figure 5).

The total consumption trends arethe same for all 3 countries: a smallincrease in 2007 and then a declineevery subsequent year. In 2007-2011, the total cigarette consump-tion declined by 15% in Estonia, by38% in Latvia and by 43% inLithuania.

In Latvia, according to the KPMG(KPMG, 2005), the annual legalsales in 2002-2005 were about 3-4billion cigarettes, and average an-nual legal sales+inflow was about 4billion cigarettes. So we can as-sume some increase in consump-tion in mid-2000s in Latvia.

In Lithuania, according to theKPMG data (KPMG, 2005), annuallegal sales+inflow decreased from5.6 billion cigarettes in 2002 to 4.5billion cigarettes in 2004. So even

if outflow is not taken into account,cigarette consumption increased inLithuania in mid-2000s.

Tobacco consumption trends weresimilar in all the Baltic countries in

2000s: consumption slightly in-creased in 2002-2007 and sharplydeclined in 2007-2011.

This sharp consumption declinewas the main factor of cigarettessales decline in 2007-2010. Ac-

original sTudy


Tobacco conTrol

cording to the KPMG estimates, le-gal sales in the Baltic countriescombined were 12.4 billion ciga-rettes in 2007 and 6.0 billion in2010 (Fig. 6).

Combined “outflow” smugglingdeclined from 2.2 billion to 0.5 bil-lion cigarettes over those years. To-tal (legal sales minus outflow plusinflow) domestic cigarette con-sumption declined from 12.5 bil-lion in 2007 to 8.7 billion cigarettesin 2010. The difference betweenthe total domestic consumption andthe legal sales equals to the differ-ence between outflow and inflow.Sales decline in 2007-2010 in theBaltic countries combined was 6.46billion cigarettes, but it was causedby: (1) total domestic consumptiondecline (3.97 billion – 61% of sales

decline); (2) reduction of the out of

smuggling (1.68 billion – 26% ofsales decline); (3) increase of theinto cigarette smuggling in 2007-2010 by 0.82 billion cigarettes(13% of sales decline). So, increaseof illicit sales within the Balticcountries was not a critical factorof sales and revenue decline.

smoking prevalence

Since 1990s, a collaborative projectbetween Estonia, Finland, Latviaand Lithuania called Finbalt HealthMonitor is conducted (Prättälä,Helakorpi, Sipilä, Sippola, & Sääk-sjärvi, 2011). The nationally repre-sentative cross-sectional postal sur-veys of the Finbalt Health Monitorproject were carried out every sec-ond year in Estonia, Finland,

Latvia, and Lithuania. Randomsamples were selected from the tar-get population defined for Estoniaas those aged 16–64, for Latviathose aged 15–64 and for Lithuaniathose aged 20–64. All countrieshave followed the common proto-col and procedures to conduct thesurvey. The response rates in thesurveys varied between 51% and80%, and decreased over the yearssince 2002. In 2011, the FINBALTReport was issued (Prättälä, et al.,2011) to describe trends in healthbehaviors, including smoking, over1998–2008 for the 20–64-years-oldrespondents of the surveys.

Estonia (Tekkel & Veideman,2011) and Lithuania (Grabauskas,et al., 2011) conducted subsequentsurveys in 2010 according to the

table 6.smoking prevalence rates, %. euromonitor data

2005 2006 2007 2008 2009 2010 2011

Estonia 33,8 31,2 30,3 29,7 28,9 28,5 28,4

Latvia 31,0 30,6 29,9 29,2 29,0 28,2 28,1

Lithuania 31,5 30,2 29,1 28,3 26,0 23,6 23,2

table 5. daily smoking prevalence rates

1998 2000 2002 2004 2006 2008 2010

Estonia - total (16-64 years old) 29,7 30,3 28,3 32,8 29,9 26,2 26,2

Estonia - male 45,1 47,9 46,3 50,6 44 41,6 36,8

Estonia - female 20,1 21,2 17,7 22,5 21,3 19,3 18,7

Latvia - total (15-64 years old) 33,2 30,1 30,4 27,9

Latvia -male 55,7 55,5 56,4 52,2 49,5 48,4

Latvia -female 20,9 18,8 19,9 18,5 18,1 16,1

Lithuania - total (20-64 years old) 26,5 25 26,5 24,2 21,8

Lithuania - male 49,4 51,7 44,2 42,6 43,8 38,8 34,2

Lithuania - female 12,4 15,8 13,1 15,1 13,5 14,4 14,4

Harmonized data for 20-64 years old males and females are taken from the Finbalt Report (Sippola & Sipilä, 2011).

Non-harmonized data for total adults are taken from the national reports (Grabauskas, et al., 2005; Grabauskas, et al., 2003;

Grabauskas, et al., 2007; Grabauskas, et al., 2011; Grabauskas, et al., 2009; Pudule, et al., 2003; Pudule, et al., 2005;

Pudule, et al., 2010; Pudule, et al., 2007; Tekkel & Veideman, 2011; Tekkel, Veideman, & Rahu, 2007; Tekkel, et al., 2009)

original sTudy


Tobacco conTrol

table 7. tobacco consumption changes in the Baltic countries in 2006-2011

Estonia Latvia Lithuania

2006 2011 Change

%

2006 2011 Change

%

2006 2011 Change

%

Total tobacco Consumption (billion cigarettes),

KPMG estimates

2,16 1,9 -12,0 4,15 2,63 -36,6 5,65 3,52 -37,7

Share of illicit sales in total domestic

consumption, %, KPMG estimates

25,5 19,5 -23,5 12,8 34,2 168,0 42,5 33,5 -21,1

Adult smoking prevalence, % (Euromonitor) 31,2 28,4 -9,0 30,6 28,1 -8,2 30,2 23,2 -23,2

Adult daily smoking prevalence, % (Finbalt

data: 2006-2010 for Estonia and Lithuania,

2006-2008 for Latvia)

29,9 26,2 -12,4 30,4 27,9 -8,2 26,5 21,8 -17,7

same protocol, while Latviachanged the protocol. Although the2010 smoking prevalence estimatesare available for Latvia, authors ofthe report (Pudule et al., 2011) cau-tion that because of the changes itis not advisable to directly comparethe 2010 data with data from previ-ous years. FINBALT surveys dataon daily smoking are presented inTable 5.

In late 1990s – early 2000s, smok-ing prevalence rates increased inthe Baltic countries, reaching thehighest levels in 2000 in Lithuania,in 2002 in Latvia and in 2004 inEstonia. Then daily smoking preva-lence rates decreased in all coun-tries, the decline was the largest in2004-2008 for Estonia, in 2006-2008 for Latvia, and in 2006-2010for Lithuania.

Data on smoking prevalence fromthe Euromonitor website (Eu-romonitor International, 2012) arepresented in Table 6.

Euromonitor does not disclose thesource of the data, age groups andsmoking status (daily or currentsmoking). Euromonitor data con-firm downward smoking preva-lence trend in 2005-2011 in every

Baltic country. The sharpest de-cline was observed in Lithuania in2009-2010.

Smoking prevalence decline in2006-2011 was not as high as ciga-rette consumption decline in Latviaand Lithuania (Table 7). Probablymany smokers decreased numberof cigarettes smoked during the re-cession, but did not quit smoking,for example, in Lithuania, propor-tion of daily smokers who smokedmore than 15 cigarettes a day de-creased from 51% in 2006 to 43%in 2010 (Grabauskas, et al., 2007;Grabauskas, et al., 2011).

Share of illicit sales in total domes-tic consumption (= tax-paid sales –outflow + inflow) in 2006-2011 in-creased only in Latvia, while in Es-tonia and Lithuania this share de-creased (Table 6).

Change of tobacco affordabilitywas a key factor of tobacco con-sumption and sales changes(Figure 7).

The graph reveals a time lag be-tween the magnitude of change intobacco affordability and tobaccoconsumption declines. In 2008-2009, the decline of affordability

was much greater than consump-tion decline, while in 2010-2011consumption decline was largeenough despite rather small afford-ability changes (Figure 7). A plau-sible explanation is that smokersneed some time to quit smoking forgood. Lower affordability can alsoprevent smoking initiation and newsmokers only partially replacethose smokers who quit or die.

dIscussIon

Since regaining their independencein the 1990s, the Baltic countrieshave been facing pressure fromtransnational tobacco industry,which found these countries apromising market. Tobacco indus-try started aggressive advertisingand sophisticated marketing of to-bacco products targeting mainlywomen and youth. At that time,smoking prevalence was highamong men, but low amongwomen, especially in Lithuania(Helasoja et al., 2006; Pudule et al.,1999).

Just before the Baltic countiesjoined the EU, the InternationalTax and Investment Centre (ITIC)claimed in its report (International

original sTudy


Tobacco conTrol

Tax & Investment Center, 2003)that transition period was too shortand it posed threat to governmentrevenue as smuggling was encour-aged. Recent ITIC report (Interna-tional Tax & Investment Center,October 2011) claims that “overall

the EU tobacco taxation policy has

created an even larger and growing

EU illicit market with little revenue

benefit”. Latvian doctoral students(Strateičuks, Kaže, & Fadejeva,2011) claimed that in Latvia “to-

bacco market is the brightest exam-

ple of inefficient tax policy, com-

pletely reflecting the concept of the

Laffer curve that beyond a certain

rate of taxation, the increase in tax

rate leads to decrease in the rev-

enues”.

Contrary to those claims, tobaccoexcise revenues in the Baltic coun-tries increased after the EU acces-sion, both in nominal and realterms.

The tobacco excise revenues in-creased every year except for theperiod of 2009-2010. Critics of tax-ation policy claimed that tax in-crease in those years was too highand it caused growth of illicit sales,which eventually caused revenuedecline. However, the analysis ofavailable data revealed that rev-enue decline in 2009-2010 wascaused by the combination of thefollowing phenomena:

1. Income decline caused by theeconomic recession combinedwith tax rates hikes greatly de-

creased affordability of tobaccoproducts. In 2008, 2009 and 2010combined, the tobacco affordabilityindex on average declined by 50%in the Baltic countries. Tobacco

consumption decline caused bythe affordability decline was themain factor of tax-paid cigarettessales decline.

2. VAT increase. In 2009, all theBaltic countries increased VAT

rates. It had some impact on to-bacco price increase, which causedsome consumption and sales de-cline. Most probably, VAT revenuefrom tobacco products increased,but VAT-driven sales declinecaused some reduction of exciserevenue.

3. Forestalling also contributed tosales decline in 2009 in Latvia andLithuania and in 2010 in Estonia.

4. Decrease of cigarette smug-

gling out of the Baltic countries.

In 2009, “outflow” of cigarettessharply declined in the Baltic coun-tries and it was another factor oftax-paid sales decline.

5. Increase of cigarette smuggling

into the Baltic countries. Increaseof cigarette smuggling from Rus-sia, Belarus and Ukraine, where thetaxes and prices were lower, alsocontributed to the tax-paid sales de-cline, but impact of this factor wasrather low.

Figure 7. annual changes (in percents) of legal sales and total domestic consumption and average

tobacco affordability index in three Baltic countries combined.

original sTudy


Tobacco conTrol

In 2010, all three countries experi-enced revenue decline, as salescontinued to decline. There wereno excise rates increases in thatyear in Latvia and Lithuania andonly small increase in Estonia,which experienced the lowest rev-enue decline. The revenue declinein 2010 was mainly caused by theeconomic recession and could havebeen avoided if excise rates werehighly increased. For example, inLithuania, in 2008-2009 legal salesdeclined by 1.7 billion cigarettes orby 29%. However, in 2009 Lithua-nia had risen excise rates twice (inMarch and in September) and therevenue in 2009 was higher than in2008, despite large reduction in le-gal sales. In 2010, legal sales fur-ther declined, mainly due to the de-cline in total consumption and, asthere was no excise rate increase in2010, the revenue reduced by 20%.So, contrary to the critics’ opinion,in 2010 the Baltic countries experi-enced revenue decline not becausetax hike was too high, but becausethere was no tax hike.

Suggestion (Strateičuks, et al.,2011) referring to the concept ofthe Laffer curve, which implies thatbeyond a certain rate of taxation,the increase in tax rate leads to de-creased revenues, is not supportedby available data. Estonia had thehighest proportion of taxes in retailprices in 2008-2010, but the lowestdecline in revenues. In 2011, thetax share in retail price was above80% in Estonia and Latvia, and thehighest ever in Lithuania (78%),but all three countries experiencedrevenue increase over that year.

Latvia had the highest increase ofboth tax yield and prices for ciga-rettes in 2003-2011 and it also hadthe highest revenue increase bothin nominal and real terms. Latviahad the highest revenue increasedespite the fact that it is the onlycountry which experienced largeincrease in non-tax-paid cigarette

sales in 2006-2011. In Estonia andLithuania, volumes of non-tax-paidcigarette sales declined in 2003-2011, while the proportion of thesesales paradoxically increased. Thisphenomenon is explained by thelarge decline in total tobacco con-sumption in the Baltic countries.Tobacco industry in its media re-leases usually uses data on propor-tion of non-tax-paid cigarettes intotal sales, sometimes to hide thefact that volumes of total sales de-creased. Share of illicit sales couldbe estimated either as a proportionof total sales (including legal im-port, tax-paid “outflow” and non-tax-paid “inflow”) or as a propor-tion of total domestic consumption(total sales without “outflow”).Second option gives higher figuresand this is what the tobacco indus-try usually uses.

In 2002, the market share of illegalcigarettes in Estonia was estimatedat 22-25% (Ahermaa, 2003). Ac-cording to KPMG reports, it was18% in 2003-2004 (KPMG, 2005),then increased to 25% in 2006,while in 2011 it was below 20%.For Lithuania, KPMG estimatedthat market share of illegal ciga-rettes in 2003-2006 was above40%, while in 2011 it was 33%.Latvia had the lowest cigaretteprices before the EU accession andshare of illegal cigarettes in 2002-2008 was about 10% and thenKPMG (KPMG, 2012) estimatedthat in 2009-2011 it was above30%.

In 2003-2007, cigarette sales in theBaltic countries increased, whichwas partly caused by cigarettesmuggling out of the Baltic coun-tries, which in 2006 and in 2007exceeded 2 billion cigarettes.

The history of contraband cigaretteexport indicates a regular whole-sale flow from the low-price BalticStates to the Western EU countries(Markina, 2007; van Duyne, 2003).

In early 2000s, wholesale operatorshave turned to exporting bulk ship-ments of legally purchased ciga-rettes to Lithuania only to smugglethem back to Germany later (VonLampe, 2002). The excise rates fortobacco remained relatively low af-ter Estonia’s accession to the Euro-pean Union and the Estonian ex-perts expected an intensification oftobacco smuggling after accessionto the European Union (Saar &Markina, 2004). As we see, the ex-pectation was true for the firstyears after the EU accession. Es-tonian customs have discoveredcontraband cigarettes within trans-port directed to Belgium, Germany,Ireland, UK, Sweden, and Norway(Markina, 2007). In 2006-2007,more than 20% of cigarettes taxedin the Baltic countries were eventu-ally smoked in other EU countries(KPMG, 2012). However, by 2010,the excise rates in the Baltic coun-tries exceeded the EU minimumlevel of 64 euro per 1,000 ciga-rettes. Baltic cigarettes became tooexpensive for large-scale bootleg-gers, who switched to cheaperRussian and Belorussian cigarettes.This caused huge decline of “out-flow” smuggling from 2.4 billioncigarettes in 2006 to 0.5 billion cig-arettes in 2010.

In early and mid 2000s, cigaretteswere also smuggled from Latvia,which had the cheapest cigarettes,to other Baltic countries. In Esto-nia, about 30% of non-tax-paid cig-arettes was from Latvia in 2006(Markina, 2007). Since 2009, ciga-rette price differences in the Balticcountries are rather small andsmuggling between the Balticcountries downfalls.

Contrary to the ITIC claims (Inter-national Tax & Investment Center,October 2011) that “EU tobaccotaxation policy has created an evenlarger and growing EU illicit mar-ket”, total illicit market (inflow +outflow) greatly declined in the

Baltic countries in 2006-2011 evenby estimates made in the reportcommissioned by the Philip Morris(KPMG, 2012).

Public health consequences of to-bacco taxation policies which wereintroduced in the Baltic countriesafter the EU accession were alsorather beneficial. In 2006-2011, to-tal (licit+ illicit) tobacco consump-tion greatly declined in the Balticcountries, and the decline was thelargest in Latvia and Lithuania,which had higher rates of tax andprice increases. The Baltic coun-tries have also experienced smok-ing prevalence decline, while inLatvia and Lithuania it was smallerthan the consumption decline, assome smokers just reduced numberof cigarettes smoked daily after thereduction in cigarette affordability.

As tobacco consumption had someupward trend in 2004-2006, we cansuggest that after the EU accession,total (licit + illicit) annual cigaretteconsumption declined by about30% in both Latvia and Lithuania,and by about 10% in Estonia.

The Baltic countries also intro-duced some other tobacco controlpolicies after the EU accessionalong with tobacco taxation. To-bacco advertising was banned.Smoke-free policies were intro-duced in 2006-2007. Latvia intro-duced pictorial health warnings in2010. In Estonia, each county has asmoking cessation counselingclinic (World Health Organization,2011). These policies have obvi-ously contributed to the observedtobacco consumption decline.

Tobacco taxation policy after theEU accession had three similar

stages in the Baltic countries.

1. In 2004-2007, tax rates and ciga-rette prices increased rather slowly.As Baltic counties experiencedeconomic boom, cigarettes even

became more affordable and to-bacco consumption as well assmuggling out of the Baltic coun-tries were on the rise, which causedincrease of tax-paid sales. Increaseof tax paid sales in combinationwith moderate excise rates risecaused stable growth of tobaccoexcise revenues. The first periodwas beneficial in fiscal terms, buthad no public health benefits.

2. In 2008-2009, the Baltic coun-tries had to implement sharp hikesof tobacco excise rates to meet theEU requirements. By chance, it co-incided with severe economic re-cession, and the governments alsohad to increase VAT rate. Incomedecline and rise of excise and VATrates caused sharp decline of ciga-rette affordability, which led tosharp decline in tobacco consump-tion. Decline of tobacco consump-tion combined with decline ofsmuggling out of the Baltic coun-tries and some increase of smug-gling into the Baltic countriescaused downfall of tax-paid sales.However, Estonia and Lithuania in-creased tobacco excise revenueseven in 2009 due to tax hikes. In2008-2009, tobacco consumptiongreatly declined and it was benefi-cial for public health, while allthree countries also experiencedfiscal benefits as each of them hadmuch higher tobacco excise rev-enues in 2009 compared to 2007.

3. In 2010-2011, there were almostno tax rates increases and cigaretteprices again increased ratherslowly. As the economic recessioncontinued in 2010, cigarette salesdeclined and without tax rates in-creases the revenues fell down. In2011, economic situation im-proved, cigarettes became more af-fordable and tobacco sales in-creased. In such situation evenmoderate excise rise led to revenueincrease.

lessons learnt

• In times of economic boom, mod-erate tax increases do not reducetobacco affordability and do not re-duce tobacco consumption. Tomeet public health aims in years ofeconomic boom, excise ratesshould be increased rather sharplyto overweight income growth.

• In times of economic recessiontax hikes combined with reducedincomes substantially reduce to-bacco affordability and tobaccoconsumption downfall. To increasetobacco excise revenue in years ofeconomic recession, excise ratesshould be increased rather sharplyto overweight sales decline.

• Sharp tax hike is a win-win pol-icy in any time, while in years ofeconomic boom it gives more fiscalbenefits and in years of economicrecession it provides more publichealth benefits.

conclusIons

The tobacco taxation policy (incombination with other tobaccocontrol policies) produced the fol-lowing effects in three Baltic coun-tries in 2004-2011:

1. Decline of total (licit + illicit)annual cigarette consumption byabout 30% both in Latvia andLithuania and by about 10% in Es-tonia.

2. Decline of adult daily smokingprevalence rates by 10-20%.

3. Decline of the out of countrysmuggling.

4. Almost no changes in volumesof smuggling into Lithuania andEstonia, although the market shareof this kind of smuggled cigarettesincreased, as the total consumptiondeclined.

Tobacco conTrol


original sTudy

original sTudy


Tobacco conTrol

5. Three-fold increase of the annualtobacco excise revenues in threecountries combined: from 164 mil-lion euro in 2004 to 473 millioneuro on average in 2008-2011.

Decrease of tobacco affordabilitycaused by tax and price hikes andeconomic recession was a key fac-tor of tobacco consumption de-cline.

aBout the author

Konstantin S. Krasovsky, PhD, isthe director of Alcohol and DrugInformation Centre (ADIC-Ukraine). In 1994, he was a Con-sultant of the Alcohol, Drugs andTobacco Unit WHO Regional Of-fice for Europe. In 2007-2009, hewas the National Tobacco ControlOfficer, WHO Country Office inUkraine. Since 2009, he is theHead of the tobacco control unit inthe Ukrainian Institute for StrategicResearch of the Ministry of Healthof Ukraine. In 2000-2007, he was acoordinator of the NGO Coalition"For Tobacco Free Ukraine”. In2001, he coordinated the WorldBank project on tobacco controleconomics in Ukraine. In 2003-2004, he was a policy fellow of theOpen Society Institute (Budapest)on Tobacco Economics and Advo-cacy. In 2002-2010, he was a con-sultant of Tobacco Control Re-source Center for Russian speakingcountries. He is an author of over60 publications on tobacco controlissues.

E-mail: [email protected]

This article was received Septem-ber 16, 2012; accepted November7, 2012; published November 14,2012.

reFerences

Adams, M., & Effertz, T. (2011).[Excise taxes on tobacco and theproblem of smuggling - concerningthe credibility of the tobacco

industry's "Discarded-Cigarette-Packages-Study"].Gesundheitswesen, 73(10), 705-712.

Ahermaa, E. (2003). Estonian ExcisePolicy on the Threshold of theEuropean Union (based on cigarettePolicy). Baltic Journal of Economics,4(1), 121-129.

Central Statistical Bureau of Latvia.(2012). Key Indicators. fromhttp://www.csb.gov.lv/en/dati/key-indicators-30780.html

Chaloupka, F. J., Straif, K., & Leon, M.E. (2011). Effectiveness of tax andprice policies in tobacco control.Tobacco Control, 20(3), 235-238.

Euromonitor International. (2012).Market research for tobacco industry.fromhttp://www.euromonitor.com/tobacco

European Commission. (2012).Taxation. Tobacco Products. fromhttp://ec.europa.eu/taxation_customs/taxation/excise_duties/tobacco_products/index_en.htm

European Commission. Eurostat.(2012). Statistics database. fromhttp://epp.eurostat.ec.europa.eu/portal/page/portal/statistics/search_database

Grabauskas, V., Klumbienė, J.,Petkevičienė, J., Katvickis, A.,Šaþkute, A., Helasoja, V., et al.(2005). Health Behaviour amongLithuanian Adult Population, 2004.Helsinki: National Public HealthInstitute, Finland.

Grabauskas, V., Klumbienė, J.,Petkevičienė, J., Kinderytė, G.,Šaþkute, A., Helasoja, V., et al.(2003). Health Behaviour amongLithuanian Adult Population, 2002.Helsinki: National Public HealthInstitute, Finland

Grabauskas, V., Klumbienė, J.,Petkevičienė, J., Šakytė, E.,Kriaučionienė, V., Paalanen, L., et al.(2007). Health Behaviour amongLithuanian Adult Population, 2006Helsinki: National Public HealthInstitute, Finland

Grabauskas, V., Klumbienė, J.,Petkevičienė, J., Šakytė, E.,Kriaučionienė, V., & Veryga, A.(2011). Health Behaviour amongLithuanian Adult Population, 2010

Kaunas Lithuanian University ofHealth Sciences Academy ofMedicine, Lithuania.

Grabauskas, V., Klumbienė, J.,Petkevičienė, J., Šakytė, E.,Kriaučionienė, V., Veryga, A., et al.(2009). Health Behaviour amongLithuanian Adult Population, 2008.Kaunas: Kaunas University ofMedicine.

Helasoja, V. V., Lahelma, E., Prattala,R. S., Patja, K. M., Klumbiene, J.,Pudule, I., et al. (2006). Determinantsof daily smoking in Estonia, Latvia,Lithuania, and Finland in 1994-2002.Scand J Public Health, 34(4), 353-362.

International Tax & Investment Center.(2003). Cigarette Taxation: Issues forthe EU Accession countries. SpecialReport.

International Tax & Investment Center.(October 2011). An Analysis ofTobacco Taxation and Affordabilityin Ukraine. Special Report.

Junninen, M., & Aromaa, K. (2000).Professional crime across theFinnish-Estonian border. Crime, Lawand Social Change, 34(4), 319-347.

KPMG. (2005). Study of the collectionand interpretation of the dataconcerning the release forconsumption of cigarettes and finecut tobacco for the rolling ofcigarettes. Contact numberTAXUD/2004/DE/313. Final report

KPMG. (2011). Project Star Results,2010. Report on tobaccoconsumption in the EU prepared inaccordance with specific terms ofreference agreed between PhilipMorris International ManagementS.A. and KPMG LLP. fromhttp://www.pmi.com/eng/tobacco_regulation/illicit_trade/documents/Project_Star_2010_Results.pdf

KPMG. (2012). Project Star 2011Results. Report on tobaccoconsumption in the EU prepared inaccordance with specific terms ofreference agreed between PhilipMorris International ManagementS.A. and KPMG LLP. fromhttp://www.pmi.com/eng/tobacco_regulation/illicit_trade/documents/project%20star%202011%20results.pdf

original sTudy


Tobacco conTrol

Krasovsky, K. (2012). Dynamics ofsmoking prevalence and tobaccoproducts market in Belarus. TobaccoControl and Public Health in EasternEurope, 2(1), 9-16.

Mackay, J., Eriksen, M., & Ross, H.(2012). The Tobacco Atlas ( 4th ed.):American Cancer Society.

Markina, A. (2007). Cigarette blackmarket in Estonia. In P. C. vanDuyne, A. Maljevic, M. van Dijck,K. von Lampe & J. Harvey (Eds.),Crime business and crime money inEurope. The dirty linen of illegalenterprise. (pp. 95-208): Wolf LegalPublishers (WLP).

Prättälä, R., Helakorpi, S., Sipilä, N.,Sippola, R., & Sääksjärvi, K. (2011).Social Determinants of HealthBehaviours – Finbalt Health Monitor1998–2008 (No. 25/2011). Helsinki,Finland: National Institute for Healthand Welfare (THL).

Pudule, I., Grinberga, D.,Kadziauskiene, K., Abaravicius, A.,Vaask, S., Robertson, A., et al.(1999). Patterns of smoking in theBaltic Republics. J EpidemiolCommunity Health, 53(5), 277-282.

Pudule, I., Grīnberga, D., Villeruša, A.,Dzērve, V., Zīle, S., Helasoja, V., etal. (2003). Health Behaviour amongLatvian Adult Population, 2002Helsinki: National Public HealthInstitute

Pudule, I., Jece, I., Velika, B.,Grīnberga, D., Villeruša, A., Dzērve,V., et al. (2005). Health Behaviouramong Latvian Adult Population,2004. Helsinki: National PublicHealth Institute.

Pudule, I., Villeruša, A., Grīnberga, D.,Velika, B., Taube, M., Behmane, D.,et al. (2011). Health Behaviouramong Latvian Adult Population,2010. Riga: Veselibas ekonomikascentrs.

Pudule, I., Villeruša, A., Grīnberga, D.,Velika, B., Tilgale, N., Dzērve, V., etal. (2010). Health Behaviour amongLatvian Adult Population, 2008 Riga.

Pudule, I., Villerusa, A., Grinberga, D.,Velika, B., Tilgale, N., Dzērve, V., etal. (2007). Health Behaviour amongLatvian Adult Population, 2006Helsinki: National Public HealthInstitute, Finland.

Ross, H., Stoklosa, M., & Krasovsky,K. (2012). Economic and publichealth impact of 2007-2010 tobaccotax increases in Ukraine. TobControl, 21(4), 429-435.

Saar, J., & Markina, A. (2004). Cross-Border Crime and Estonia’sAccession to the European Union.Juridica International, IX, 78-88.

Sippola, R., & Sipilä, N. (2011). Basictables of the report SocialDeterminants of Health Behaviours.Finbalt Health Monitor 1998-2008:National Institute for Health andWelfare

Statistics Lithuania. (2012). Databaseof Indicators. fromhttp://db1.stat.gov.lt/statbank/SelectTable/Omrade0.asp?

Strateičuks, A., Kaže, V., & Fadejeva,D. (2011). Excise tax policy foralcohol and cigarettes in Latvia, itsimpact on state revenues and theLaffer curve. Paper presented at theCurrent issues in Economic and

Management Sciences (InternationalConference for Doctoral Students),Riga.

Tekkel, M., & Veideman, T. (2011).Health Behavior among EstonianAdult Population, 2010. Tallinn:National Institute for HealthDevelopment.

Tekkel, M., Veideman, T., & Rahu, M.(2007). Health Behavior amongEstonian Adult Population, 2006.Tallinn: National Institute for HealthDevelopment.

Tekkel, M., Veideman, T., & Rahu, M.(2009). Health Behavior amongEstonian Adult Population. Tallinn:National Institute for HealthDevelopment.

van Duyne, P. C. (2003). Organizingcigarette smuggling and policymaking, ending up in smoke. Crime,Law and Social Change, 39(3), 285-317.

Von Lampe, K. (2002). The Traffickingin Untaxed cigarettes in GermanyUpperworld and underworld in cross-border crime (pp. 141-162).Nijmegen: Wolf.

World Customs Organization. (2004).Customs and Tobacco 2003.

World Customs Organization. (2008).Customs and Tobacco Report 2007.



World Health Organization. (2011).Joint national capacity assessment oftobacco control policies in Estonia.Copenhagen.

Tobacco taxation policy in three Baltic countries after...

Documents

Transcript of Tobacco taxation policy in three Baltic countries after...