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Higher excise taxes pushed retail prices up across most markets, with Africa and Southeast Asia seeing the fastest tax increases in decades. Photo credit: Leon Brooks, Pixnio.
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The Philippines loses about US$424 million in tobacco tax revenue each year—more than the country’s entire annual disaster fund. Photo credit: Kguimela, CC3.0.
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Policymakers are falling behind fast-moving product innovation, as new options like nicotine pouches reshape the market. Photo credit: Mmaart, CC4.0.
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Lower-risk nicotine products have increased consumer options, creating instability for governments that depend heavily on taxes from combustible cigarettes. Photo credit: Basil MK, Pexels.
The first signs of a shift in global nicotine excise taxes didn’t appear in parliaments or at industry trade forums, but instead on pricing boards outside small shops in cities like Nairobi, Jakarta, Dhaka, and London. It’s the places where combustible cigarette prices increased, illicit alternatives surged, and governments imposed harsh fiscal measures to balance revenue, public health, and growing political pressure. In markets such as Africa and Southeast Asia, cigarette taxes are rising at the fastest pace in decades.
In the UK and parts of Europe, policymakers believe that large tax hikes will speed up the shift toward a smoke-free future. However, as governments adopt taxation measures more aggressively, an emerging uncomfortable truth is that tax policy is no longer guiding the market as effectively as it once did.
In sub-Saharan Africa, new research published in BMJ Tobacco Control shows that the tobacco industry is responding to tax hikes in unpredictable ways. In 12 African markets studied between 2016 and 2020, companies consistently “overshifted” taxes in countries such as Botswana, Madagascar, and Tanzania—raising retail prices by more than the tax increase—while “under-shifting” in places like Lesotho, South Africa, Nigeria, and Malawi. The strategy varied by year, brand identity, and manufacturer, indicating that tax increases are no longer consistently leading to higher consumer prices.
The findings strike at the core of global tobacco control, which depends heavily on excise taxes to discourage smoking. They also raise concerns about the long-term fiscal viability of tobacco taxes, especially as nicotine pouches, heated tobacco, and vaping products transform consumer behavior more rapidly than governments can adapt.
Meanwhile, in Southeast Asia, the Center for Market Education (CME) recently estimated that ASEAN countries will lose more than US$11 billion in tobacco excise revenue between 2025 and 2028 due to illegal trade—almost 8% of the region’s yearly health budgets. The figures are stark. Indonesia alone loses about US$1.68 billion annually; Malaysia nearly US$770 million; the Philippines US$424 million, more than its entire annual disaster fund. As structural gaps grow wider, governments across the region are sharply increasing taxes in an effort to regain control, even if it risks fueling the very flow of illegal products they are trying to curb.
The tension—between tax ambition and market reality—is now shaping every major discussion about tobacco, nicotine, and public health. As new evidence emerges, it’s clear that the world is entering a much more complex phase of excise tax policymaking.
Policy colliding with reality
In Brussels, at a recent nicotine industry forum moderated by Tamarind Intelligence managing director Tim Phillips, experts discussed a policymaking environment struggling to keep up with rapid product innovation. “For years, there was no innovation in tobacco,” said British American Tobacco’s (BAT) Christa Pelsers. “Now we have an explosion of new products—governments are still trying to catch up.”
The European Commission’s proposed overhaul of its Tobacco Taxation Directive (TED), the first major update since 2010, would significantly increase minimum taxes on cigarettes and extend harmonized tax minimums to e-cigarettes, heated tobacco products, and nicotine pouches starting in 2028. The EU estimates that the update will generate €15 billion in additional annual revenue and reduce healthcare costs by an extra €6 billion.
However, stakeholders warn that the proposal could destabilize the market if enforced too aggressively. The Commission is advocating for a 139% increase in the minimum cigarette tax, despite growing evidence that tobacco’s price elasticity has increased significantly in advanced economies. An analysis published by the Tax Foundation states that elasticity estimates frequently used by European policymakers are outdated—based on data as old as 2006.
Updated models indicate that demand now responds more strongly to price increases. If this is accurate, the EU’s revenue forecasts might be overstated by billions, and in cases of extreme elasticity, tax hikes could even decrease overall cigarette tax collections.
“Ten years ago, my job was complexity [level] 5; now it’s 50,” said Stefano Santi, senior director external affairs in economic and fiscal policy at Philip Morris International, urging regulators to differentiate taxes between combustible and smoke-free products. “If you raise taxes too fast, consumers will find cheaper, often illicit alternatives.”
Recent EU data support Santi’s warning. In several member states, including Hungary and parts of Eastern Europe, excise instability and cross-border disparities have driven consumers to illegal market channels—reducing the legal market but not significantly lowering overall consumption.
BAT’s Kingsley Wheaton went further, telling Euractiv that if the EU proceeds with its steepest proposed increases, Europe risks “becoming another Australia,” referencing the collapse of the legal tobacco market there and the explosive growth of criminal networks. In Australia, the Australian Criminal Intelligence Commission estimates illicit tobacco has drained A$3.3 billion (US$2.1 billion) in excise revenue, with organized crime responsible for more than 200 firebombings linked to territorial disputes.
Wheaton emphasized that the Commission’s plan could reduce access to less harmful products as smokers transition to them. “Smokeless products are not risk-free,” he said, “but they are significantly less harmful than smoking and need to remain accessible.”
Single-stick sales further complicate the situation. Despite bans in countries like Ethiopia, Nigeria, and South Africa, the BMJ study confirms that single cigarettes are still widely available and are often undershifted more aggressively than packs. For young smokers—who are highly sensitive to prices, single-stick availability can offset even well-designed tax increases.
Maria Angelova, head of legal and HR at Socotab Frana SA, reminded the Brussels audience that excise taxes not only influence consumer choices but also affect agricultural livelihoods. “Tobacco is an agricultural product that supports families,” she said. “Nowhere else in the world [meaning Africa] is raw tobacco subject to excise tax. Making local tobacco less affordable than imported tobacco doesn’t help anyone.” It should be noted that Poland recently implemented taxes on raw tobacco; however, that is currently challenged in court.
Many African governments are now increasing tobacco taxes: Mauritius by 10%, Uganda doubling taxes on imported cigarettes, Senegal considering an increase from 70% to 100%, and Egypt raising excise by 50 piastres (US$1.06) with 12% annual hikes planned through 2027. However, even where intentions are strong, the BMJ paper shows that the tobacco industry’s pricing strategies can undermine progress, suggesting that tax enforcement must evolve along with tax rates.
And markets with significant illicit activity face a bigger challenge: without strong track-and-trace systems, border transparency, and reliable tax collection, raising rates alone may generate less revenue, not more.
Global consequences emerging
In Southeast Asia, the region most impacted by illegal tobacco, authorities are facing a more unstable and connected environment. CME’s fiscal-loss analysis warns that smuggling, counterfeit production, and cross-border arbitrage are weakening public finances during a time when governments are still dealing with post-pandemic deficits. In Indonesia—where illegal cigarettes make up more than 10% of the market—lost revenue could instead be used to support an extra 42.6 million people through the national nutrition program.
Malaysia’s yearly losses from illegal trade nearly match the government’s estimated savings from recent fuel subsidy reforms. In the Philippines, illegal tobacco costs the treasury more than the national disaster preparedness fund.
These dynamics shape global debates on excise taxes. When Philip Morris, BAT, and Japan Tobacco International evaluate tax proposals in Brussels or London, the calculation now takes into account the risk of replicating illicit channels in Southeast Asia in Western markets. At the same time, aggressive tax policies in Europe and swift fiscal reforms across Africa and Asia intersect with a broader question raised by economists world-wide: Are tobacco taxes still a dependable source of revenue?
The Tax Foundation’s analysis indicates that many governments have reached or gone beyond the revenue-maximizing point predicted by the Laffer Curve. When elasticity increases—as consumers switch to vaping, pouches, heated tobacco, or illegal sources—raising taxes can reduce both legal consumption and revenue.
Frontier Economics recently found the UK cigarette price elasticity to be 2.61, based on the latest data, a sharp increase from previous decades (which was significantly higher than the estimate derived from older data: 1.01). With such high elasticity levels, any substantial tax hike ultimately reduces revenue instead of boosting it.
This trend is accelerating due to widespread substitution. Lower-risk nicotine products—ENDS, pouches, HnB, Swedish snus—have increased consumer options. While this shift is beneficial for tobacco harm reduction, it creates instability for governments that depend heavily on taxes from combustible cigarettes. Still, international institutions such as the World Health Organization and the Bloomberg School of Public Health argue that tobacco-tax increases must continue, not retreat. Their position rests on the long-term public health benefits and the assertion that many governments still tax below the WHO Framework Convention on Tobacco Control (FCTC) Article 6 recommendations.
Their guidance is fueling active reform efforts in many countries—ranging from Croatia’s comprehensive tobacco tax hikes to Vietnam’s adoption of a mixed excise structure, Bhutan’s broad reforms impacting cigarettes, cigars, and vaping products, Poland’s new tax stamps and nicotine pouch taxes, and Australia’s planned excise escalators. Across regions, one factor seems clear: the next decade will reshape how governments use taxation to regulate nicotine markets, generate revenue, and influence approaches to tobacco harm reduction.
The road ahead
Despite the global push to update excise systems, the policy environment still faces difficult trade-offs. Taxation, which once followed predictable, linear patterns, now operates in a fragmented marketplace influenced by illicit trade, political pressure, emerging nicotine delivery systems, and technological advancements.
At the Brussels forum, speakers highlighted what they referred to as the “3 essentials” for effective tax policy: scientific grounding, market realism, and regulatory harmonization. Pelsers pointed out that differing rules among EU member states add unnecessary complexity. Santi urged policymakers to use taxation as a guiding tool rather than a punitive one. Angelova stressed that agricultural communities and supply chains cannot be overlooked.
Few dispute the public-health benefits of reducing smoking or the fiscal need to stabilize revenue. But worldwide—from Nigeria’s single-stick markets to London’s growing vape use, from Indonesia’s excise shortfalls to Europe’s TED revision—the same question is becoming unavoidable: Can excise policy keep pace with a nicotine landscape going through the fastest transformation in its history?
The near future will require a more collaborative approach, uniting efforts from governments, industries, researchers, and law enforcement agencies, according to industry experts. Track-and-trace systems will need improvements. Tax structures should be simplified, and enforcement strategies will need modern updates. As substitution increases, policymakers must reconsider whether traditional tax models from the smoking era still suit a market where combustibles are no longer dominant.
What is certain is that the stakes are rising. Whether it’s about revenue, public health, or illegal activity, the world is reaching a critical point in tobacco and nicotine taxation—where old assumptions are breaking down, and new realities are emerging in real time.