The Differential Pass-Through of Taxes to Prices: A cross-country analysis of cigarettes and novel nicotine products

Abstract Despite global declines in tobacco use, novel and emerging nicotine and tobacco products (NENTPs), such as heated tobacco products (HTPs) and e-cigarettes, are attracting new users, threatening global progress in reducing tobacco consumption. Many governments use taxation to regulate the demand for these products, but NENTPs often face lower taxes than cigarettes due to their perceived “reduced-risk” status, classification issues, or policies encouraging cigarette smokers to switch. The effectiveness of tax policies in reducing nicotine use depends on how taxes translate into retail price changes. This study is the first to simultaneously estimate tax pass-through to prices for cigarettes, HTPs, and e-cigarettes in countries where all three of these products are sold. Using two-way fixed effects models and seemingly unrelated regressions on a unique dataset of taxes and prices across over 60 countries from 2014 to 2023, we analyze tax pass-through overall, in high-income countries (HICs), and in low- and middle-income countries (LMICs). Results show that cigarette and e-cigarette taxes are generally over-shifted to prices, while HTP taxes are under-shifted. However, pass-through varies by country income level: cigarette and e-liquid taxes are over-shifted in HICs but under-shifted in LMICs, while HTP taxes are under-shifted in HICs and over-shifted in LMICs. Evidence of cross-tax effects between products suggests that governments should implement simultaneous tax measures across all nicotine products to effectively reduce overall consumption. These findings highlight the need for tailored, comprehensive tax strategies to address the evolving nicotine market.