BACKGROUND: Despite considerable increases to cigarette excise duty in recent past, the Slovak Government has last year opted to raise taxes on cigarettes again, this time as a part of overall fiscal consolidation. Such step opens a question whether further tax increases can still produce sufficient public budget revenue. The study investigates this question, while providing additional attention to the structure of cigarette demand by income.
METHODS: Utilizing the Household Budget Survey microdata for 2020-2022, a two-part model (2PM) and quadratic almost ideal demand system (QUAIDS) were estimated for three income groups. Resulting own-price and total expenditure elasticities were subsequently employed in stochastic simulations of cigarette demand in Slovakia to illustrate public budget revenues from cigarette taxation with increasing excise duty rates.
RESULTS: The simulations indicate that highest tobacco taxation revenues could have been gained in 2022 at specific duty raises of 30% (2PM) and 86 % (QUAIDS), respectively. This would imply average increase in price per pack in range of 0.76-2.14 EUR. Differences in the smokers’ expected reactions (across income groups) are stemming from elasticity estimates, which are mainly driven by price sensitivity of medium income group households. From the perspective of budget revenues, the potential increase in tobacco taxation can generate additional income ranging between 5-20%.
CONCLUSIONS: In terms of international comparison, the estimated expenditure elasticities are relatively high for all income groups of households. Regarding the price elasticity estimates, its size is relatively high for both utilized approaches only in case of the medium income households. Results suggest that contribution of tobacco taxation to fiscal consolidation of public budget should be utilized more boldly compared to the past decade in which maximal raise in specific duty reached 16.4%.