BACKGROUND: The potential for cigarette tax increases to reduce consumption is dampened if people who smoke can avoid tax hikes by switching to a cheaper brand. The scope for such substitution is measured by the dispersion of cigarette prices: a wider gap between premium- and budget-priced cigarettes facilitates brand switching after a tax increase. Theory predicts that the structure of the excise tax affects the dispersion of cigarette prices. However, empirical studies examining the association are scarce and limited in geographical coverage. This study is the first to examine the link between cigarette excise tax structure and price dispersion using data from a global sample of countries.
METHODS: Using World Health Organization data on cigarette excise tax structures and price dispersion (ratio of cheapest to premium cigarette prices) in 170 countries from 2014-2022, results are estimated with mixed-effects panel models controlling for tax structure, corruption, advertising bans, GDP, unemployment, and region. In the analysis, tax structures are categorised into 10 groups based on uniformity, type (ad valorem, specific, mixed), and the presence of a minimum specific tax (MST).
RESULTS: Relative to a uniform specific structure, any tiered system is associated with wider price dispersion. Tiered mixed structures are the extreme case: price dispersion is 45%-55% (p<0.01) wider than under a uniform specific system. The dispersion of cigarette prices is 25%-33% (p<0.01) wider under uniform ad valorem systems than under uniform specific systems. Adding an MST to a uniform ad valorem system does not significantly tighten the dispersion of prices. Among uniform mixed structures, the gap between premium- and budget-priced cigarette brands is lower, by 26% (p<0.01), under those with MSTs compared to those without.
CONCLUSIONS: Countries that adopt a uniform specific structure, or combine uniform mixed systems with MSTs, can reduce tax avoidance opportunities and more effectively leverage tax increases to reduce cigarette consumption.