Excessive excise on cigarettes encourages cross-border trade, smuggling of tobacco products, internet purchases and even domestic production of counterfeit tobacco products
As tobacco taxes have risen, so has tax evasion. Tax-induced smuggling has become so widespread that it undermines both the revenue and health goals of higher cigarette taxes, while producing unintended consequences for Irish society as a whole, such as criminal activity and negative impacts on small businesses.
Particularly with Brexit looming, a 2018 survey conducted by Retailers Against Smuggling has shown that retailers in the border counties are 63% more concerned about the impact of smuggling and illicit trade in their communities than they were a year ago.
The discovery of an illegal cigarette factory alongside the border in Louth is huge cause for concern and shows that the criminality surrounding the illicit trade is growing in sophistication. According to Revenue’s 2019 Illegal Tobacco Survey, approximately 484 million illegal cigarettes (24 million packs) were consumed in Ireland costing taxpayers €242 million in 2019.
(Average price for package of 20 cigarettes – figures for 2018)
Excise is an unreliable and unsustainable source of revenue and cannot increase indefinitely
Tobacco excise forecasts on Budget day consistently over-estimate what is actually collected, for example in 2016 there was a shortfall of €47.3million on tobacco excise returns. This leads to diminishing, if not negative, returns.
A multiyear sustainable excise model is the only way to guarantee predictable excise revenue receipts, and has been proven as such in other EU member states.
Large excise increases facilitate criminality
There is some acceptance at political level that excise increases are leading to an increase in illicit trade. Cigarettes in Ireland are now the most expensive cigarettes in the EU – increased excise drives consumers away from law-abiding retailers and into the arms of criminal gangs selling smuggled, cheaper, cigarettes. Those who purchase smuggled products knowingly do so because there is no deterrent or risk.
The first ever discovery of an illegal cigarette factory on Irish soil in March 2018 clearly demonstrates that the illegal trade of tobacco is going from strength to strength, with the methodology used by criminals constantly evolving. Up until now, illegal tobacco was assumed to have been sourced only through smugglers, both across the border and through our ports.
Excise is a regressive stealth tax and it disproportionately burdens lower- and middle-income people
As lower-income earners are more likely to smoke, they also bear more of the tax burden than higher-income earners, in absolute terms and as a percentage of income.
Excise on cigarettes is a discriminatory tax on a minority of the population
Smokers represents about 18 percent of the population which is currently subject to discrimination due to the heavy taxation on a product that they consume. Tobacco taxes are part of the “divide and conquer” approach to taxation. Smokers are voters and citizens. As such, they should be treated fairly in terms of fiscal burden. This is not happening when it comes to tobacco taxation.
Excise on cigarettes hurt local businesses and the overall economy.
Many people travel outside Ireland to buy their tobacco products, and now we know that counterfeit products are even manufactured domestically by criminal gangs. This hurts local businesses. Cigarettes in Ireland are now the most expensive cigarettes in the EU – increased excise drives consumers into the arms of criminal gangs selling smuggled, cheaper, cigarettes and away from law-abiding retailers and adult smokers.
Ireland is not aligned with the rest of the EU due to its continued use of the MPPC instead of WAP as a calculation method for excise
Council Directive 2011/64/EU on the structure and rates of excise duty applied to manufactured tobacco (the Tobacco Excise Directive) invites Member States to use the weighted average retail selling price (WAP) as a reference for measuring the importance of specific excise duty within the total tax burden. In a country like Ireland, where the excise structure is 68.87% ((Specific/ad valorem @ WAP + VAT @ WAP + specific))., the use of WAP as opposed to the Most Popular Price Category (MPPC) would provide better tobacco revenue forecast at national level and allow for better comparisons at EU level, given that 26 out of 28 EU Member States are currently using WAP as point of refence for excise.
The European Commission has criticised MPPC as a basis for calculation on excise, considering it outdated vs the new market conditions. More specifically, the Commission stated that “the MPPC is a concept that was introduced 30 years ago. At that time, the national cigarette markets were typically dominated by one brand” and that it “tends to fluctuate due to changes in consumption patterns, which makes government tax revenues volatile”. The European Commission also took the view that “using the MPPC as a benchmark for minimum rates is not in line with Internal Market objectives. Moreover, abolishing the MPPC would significantly simplify the arrangements, improve transparency and underscore health objectives”.
A major trend in the Irish cigarette market in recent years has been an increase of pack sizes larger than 20 which makes the Most Popular Price Category (MPPC) a non-representative benchmark for excise modelling.