Distributional Impacts of Tobacco Excise Taxes in Serbia

Numerous studies worldwide have investigated the impact of tobacco tax increase on household welfare, focusing on concerns regarding potential tobacco taxation regressivity and its effects on the poorest, whereas their scope was limited to the working population.

To explore the effects of tax changes on household budgets, accounting for the retired population as well, we employed the modified Extended Cost-Benefit Analysis framework, assuming a 43.6% specific tax increase that fits the European Union (EU) Tobacco Tax Directive recommendation of minimum EUR 90 excise taxes per 1000 cigarettes. Our analysis encompassed changes in (1) tobacco expenditure (accounting for price elasticities by income groups: low-, middle-, and high-income), (2) medical costs linked to smoking-related diseases (utilizing relative risk of morbidity or mortality and smoking-attributable fractions), (3) years of working life (considering the years of working life lost among the working population), and (4) years of pension receipt (accounting for the years of retirement life lost due the premature death).

Under an assumed specific excise increase leading to a 22.4% retail tobacco price rise, the net gains in disposable household budgets would be 0.01% for high-income, 1.3% for middle-income, and 2.9% for low-income households.

A tax increase would yield a progressive effect on income distribution, benefiting the most economically disadvantaged population thereby contributing to a more equitable income distribution.

To effectively reduce tobacco consumption, subsequent smoking-related medical costs, and associated productivity and pension losses, it is recommended that Serbia implement a minimum 43.6% increase in the specific tobacco excise tax.