Tax Design Matters: The Impact of Cigarette Excise Tax Structure in Shaping Government Revenues in the EU
Natalia Kornienko
ABSTRACT
The reform of the EU Tobacco Tax Directive offers an opportunity to reassess tobacco taxation’s role in raising stable and predictable revenues. This paper analyses how specific versus ad valorem excise tax structures affect tobacco tax revenues across 27 EU countries from 2010 to 2024 using fixed-effects panel regression. In the analysis two hypotheses are tested: first, whether systems with a high reliance on specific excise taxation generate higher per capita tobacco tax revenues; and second, whether the revenue impact of such systems depends on regular adjustments to the specific tax component, such as indexation.
The results show that countries with a high share of specific excise taxes consistently collect more tobacco tax revenue per capita than those relying more on ad valorem taxation. The regression results suggest that the EU could potentially collect an additional €4 billion in revenue. However, this estimate should be interpreted with caution, as other unobserved factors may influence revenue outcomes. This increase is associated with a higher reliance on the specific component within the overall tax structure, even without raising tax rates, although other factors may also contribute. However, the analysis also reveals that, in the absence of indexation, increases in the specific share are associated with declines in revenue, likely reflecting erosion in real tax levels over time. By contrast, when specific taxes are regularly indexed, each additional percentage point in the specific share is associated with a positive and statistically significant change in revenue.
Based on this evidence, two key policy recommendations emerge:
• EU member states may wish to consider prioritising specific excise taxes over ad valorem components to enhance fiscal returns, while considering national circumstances and administrative capacity.
• Specific tax systems should incorporate adjustment mechanisms to safeguard revenues against inflation and market shifts.
