Why are cigarettes so expensive?

cigarettes high taxation

To be visiting our online guide and reading our posts then most probably you are a smoker who is looking to buy cigarettes for a cheaper price than what you are called to cough up in your local brick and mortar store down the road. We don’t blame you and fully understand why searching for good quality but affordable cigarettes online has become a regular pastime for most smokers; simply because the price of cigarettes is ridiculously expensive in most locations, especially in the Western world, Europe, North America, Australia etc. Indeed, the price has no real correlation to the actual product because it is in no way representative of the production cost involved in producing a pack of cigarettes. It is true that the industry is highly regulated and manufacturers have to comply with several rules and regulations not only in making the cigarettes but in terms of packaging and marketing them as well and this does increase the production and other costs thus driving the price up. The obligations of cigarette’s manufacturers will increase greatly once the new EU directive comes into full effect next year, at least for those that trade their tobacco products in the EU countries, but this a big topic that we will revisit in a separate post.

So, the regulation of the industry is one reason that cigarette prices are so steep, but what is the main reason in reality? This is not a piece of fancy financial analysis but rather a post in layman’s terms that everyone can understand: so let us spell it out, loud and clear…cigarettes are so expensive to buy due to….TAXATION, imposed by the national or sometimes even the local authorities in each location. Indeed, this is very well illustrated in the case of the USA, where each state charges a different tax percentage, leading to huge price variations across the country. This is also another topic that merits a separate analysis, but for the purpose of our argument here, we should mention that a new campaign has been launched in the State of Missouri, which currently has the lowest sales tax on cigarettes in the entire USA, standing at 17 cents per pack, aiming to increase that to 67 cents in order to fund educational programs for children.

Therefore, when it comes to the tobacco industry the success of a manufacturer or a brand, especially in attracting customers through implementing a specific pricing policy differs from other economy sectors and it is not based exclusively on the relationship between the producer of the product and the consumer, due to the intervention of the government in that process. Why do governments impose high taxes on cigarettes? Well, to put it plainly, because they can!

In an attempt to increase revenues, which is always a goal, taxing cigarettes and through them smokers is perhaps a “safe” and even politically correct method that goes down well with the public opinion. It is seen as a targeted, fair measure because it only affects a specific portion of the population, those who insist on smoking. Far from being considered a personal choice, a right or liberty, smoking is equated to a sick addiction or at least a filthy habit and those not prepared to kick it should be forced to pay a high price for that choice.

Besides being a “punishment” for smokers, high taxation is also perceived as a deterrent that would prevent new “victims”, especially the younger or more vulnerable segments of the population to fall into the trap of becoming addicted to nicotine. Moreover, since smoking seriously damages one’s health, leading to higher associated costs for medical care and treatment being spent on the health of smokers, then high taxation is one way of the smokers footing the bill for costing the health system more.

Although all these might be valid arguments that tend to justify the imposition of high taxation on cigarettes, governments and authorities across the globe seem to be missing an important point. Yes, most smokers are addicted and will continue to want to buy tobacco products, irrespective of the price they have to pay because they need to satisfy their graving. This however does not mean that they are a secure source of revenue and that the tax can keep rising as they will happily empty their pockets.

What happens in reality, and it is evident globally, is that implementing a policy of excessive taxation on cigarettes and tobacco products is in fact shrinking the size of the legal market for such products, resulting in a dramatic increase in smuggling. The figures are there and are very telling, painting a very bleak picture. Let us see just a few examples, of recent data on this matter. According to the CEO of the Greek tobacco products manufacturer Karelia, in Greece 20% of the cigarettes being smoked are smuggled.

The same is true in Turkey, where the business community has strongly opposed the latest tax increase on cigarettes arguing that the rise in prices will result in turning the share of smuggled cigarettes that had already jumped to 20.3% by the end of the last quarter of 2014 to 25% in no time. Furthermore, according to a study conducted by the Center for the Study of Democracy, a Sofia-based NGO, 2.8 billion cigarettes were illegally sold in 2014, increasing the market share of illicit trading in cigarettes in Bulgaria to 20%.

Besides being a severe blow to the sales volumes and thus the revenues of the tobacco manufacturers, the increase in illicit, smuggled cigarettes also mean decreased revenues for the state as well. For example, it is calculated that smuggled cigarettes have cost the Turkish economy 18 billion liras over the last five years, while in the case of Bulgaria, the illicit sales of cigarettes for 2014 alone translate into about half a billion levs (EUR 250 M) in lost government revenue from taxes and excise duty.

Therefore, it would perhaps be wisest for governments to rethink their taxing policy on cigarettes and tobacco, as the illicit, smuggled smoking products are attractive for smokers, since they are cheaper, but they are most probably of an inferior quality and even very dangerous for one’s health since they are not made under controlled conditions, while they also affect the wellbeing of tobacco manufactures by intervening with healthy competition and also mean lost revenue for state coffers.