Disappointment on new spanish tobacco taxes
On 30rd of March spanish government announces an increase on tobacco taxes. On factory-made cigarettes, the specific tax is increasing to EUR19.0 per mille from EUR12.7 per mille, but the ad valorem element of the duty is being reduced to 55% from 57%. Duty on pipe tobacco is being normalized with Fine Cut Tobacco and there are no changes proposed on the duty rate or structure on either Fine Cut or cigars.
As for my assessment, it's a rather dissapointing reform from the point of view of tobacco control. It's impact will be felt mostly on premium brands (i.e. brands for which the existing minimum tax of 116,9 € per 1000 cigarettes is not binding). Essentially this forces the less expensive brands in the premium tier to converge towards the more expensive brands within the tier (i.e Marlboro). This is reflected in a recent report from Morgan Stanley estimating that "all major brands will now retail for €4.00 or more compared with the prior situation where PM’s Marlboro was the only major brand selling for more than €4.00".
In my view cheap cigarette brands will not be necessarily affected, since the 116,9 € per 1000 minimum tax has not been changed. Most importantly, no changes have been introduced to fine cut tobacco, so RYO remains as a cheap alternative for price sensitive consumers.
This reform is completely driven by industry lobbying. In December, a BAT executive called for a reform that reduced the ad valorem component and increased the specific component (leaving the rest of parameters unchanged) for cigarettes. This is exactly what the government has done. In a budget that seeks to restore public finances balance, it's very odd that the government has not raised the minimum tax on fine cut tobacco (taking now more than 5% of total tobacco sales). I think that the industry may have been effective in raising the ghost of smuggling fears (not by chance El Pais printed a long report on the smuggling activities around Gibraltar on the 23rd of March, days before the budget was announced).
Finnally the most popular cigarette brands increases their final price only 5% on average ( about 20 - 25 cents). So we´re afraid that the recommendations from the Spanish Tobtaxy group have not been taken into account.
