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Monday 11 December 2023 Dublin: 7°C

Does raising tax on cigarettes actually work?

Is the increasing price of tobacco as good for our fiscal and physical health as it might appear?


Updated 14.30

WITH THE BUDGET looming, James Reilly earlier this week called for the price of a pack of cigarettes to go up by 50 cents.

The Children’s Minister, who was architect of last year’s plain packaging law, claimed the tax hike would bring in an extra €63 million, and encourage more smokers to quit.

But is this true?

Does raising taxes on cigarettes and tobacco actually give the government the extra money they predict every year, and reduce the number of smokers in Ireland?

And is it the best way to achieve those goals?

Show me the money

Despite Dr Reilly’s claims, sharp increases in tobacco excise have been far from the money-spinner the Fine Gael/Labour government has been predicting, a new analysis by shows.

When it comes to the Tobacco Products Tax (TPT), Finance Minister Michael Noonan’s first three budgets have led to a cumulative budget shortfall of almost a quarter of a billion euro.

TPTshortfall Image: PA Image: PA

In the 2012 budget, he predicted a €41 million yield from adding 25 cents to a pack of 20, among other measures. In reality, there was a €94 million shortfall.

The following year, a €25 million gain was budgeted for, after a 10-cent increase, but a €33 million shortfall transpired.

In the 2014 budget, Noonan predicted a €15 million gain, but another 10-cent hike was followed by a €95 million drop – leaving a cumulative shortfall of €223 million in the lifetime of the government.


Figures for 2015 are not complete yet, obviously, but provisional Revenue numbers given to indicate a likely clawback of some of that shortfall.

Revenue from the TPT is on course to exceed expectations by €32 million, by the end of this year, after a 40 cent increase in the price of a pack of 20 cigarettes.

The previous Fianna Fáil/Green coalition government also ran a budget shortfall on tobacco, which came to €175 million between 2007 and 2010.

What this means is that, over the past eight budgets and two governments, much-vaunted tax increases on tobacco have, in reality, left Ireland with a budget gap of €367 million.

90358851 / Michael Noonan's Budget 2015 announcement. / /

In the UK, predicted tobacco tax yields are calculated using an analysis of smoking trends (numbers who quit, move to electronic cigarettes and other alternatives), and the new excise rate is applied to that.

So budget gaps are somewhat accounted for, and used retroactively to estimate the level of tobacco smuggling each year.

In Ireland, by contrast, tobacco tax yields appear to be based on “assuming no change in consumer behaviour,” as Michael Noonan outlined in response to a PQ from Michael McGrath.

The Fianna Fáil Finance spokesperson asked in July what the yield would be from a 25 and 50 cent price increase, and Noonan replied:

I am informed by the Revenue Commissioners that the estimated yield that could be raised in a full year through increasing the tax on cigarettes by 25 cent and 50 cent, with a pro rata increase in duty on other tobacco products, is in the region of €30m and €60m respectively, assuming no change in consumer behaviour. asked the Department of Finance to explain how it estimates tobacco excise yields, whether it adjusts its expectations based on the previous year’s figures, and to account for the budget gap since 2011.

We did not receive a response to those detailed questions.

But what if the real purpose of raising tobacco tax is not extra revenue, but rather forcing smokers to quit? Does that work?

Public health warning

00157409 Ministers Howlin and Noonan, after last year's Budget announcement.

“It’s a public health measure,” Michael Noonan told a caller on Today With Seán O’Rourke, the day after last year’s budget.

I could have done my end of the budget yesterday without increasing excise on cigarettes. The increase wasn’t done for tax-raising reasons.
The increase was to provide another disincentive to smoking, especially for young people. And all the advice is that price increases are the biggest disincentive to smoking.

Let’s set aside rolling tobacco and cigars for a moment, and look at the numbers for cigarette consumption, which accounts for 95% of tobacco use in Ireland.

Roughly 50 billion cigarettes have been bought and sold legally, with tax paid, in Ireland since 2004.

Their retail value amounted to €19.7 billion, and 59% of that (€11.6 billion) went into state coffers in the form of the Tobacco Products Tax (not to mention VAT).

As shown in the chart below, tax-paid cigarette sales have significantly dropped in the last decade, from a high of 5.65 billion in 2006, to 3.2 billion in 2014.


But the effect of tax increases on smoking prevalence is one of the most hotly-contested issues when it comes to tobacco and public health.

International research varies on the extent to which making smokes more expensive forces people to quit, and prevents ex-smokers from starting again, or whether it’s the best strategy for reducing smoking levels.

The World Health Organisation, for example, claims that a 10% increase in the price of a pack of cigarettes decreases smoking by 4% in high-income countries (like Ireland).

And in Ireland, groups such as the Irish Cancer Society and ASH have long called for progressively increasing tax hikes on tobacco products.

In Ireland, the Tobacco Products Tax is composed of a “specific rate” – a tax per 1,000 cigarettes or per kilogramme of loose tobacco – and an ad valorem rate – a fixed percentage of the retail price of a pack of cigarettes.

In the 2013 Budget, Michael Noonan sharply increased the specific rate (from €192.44 to €237.69 per 1,000 cigarettes), and lowered the ad valorem rate (from 18.03% to 8.83%).

He also introduced a “minimum excise rate” to “avoid a downward leveraging of the price.”

This means the government’s policy is explicitly designed to prevent manufacturers from lowering the cost of cigarettes and tobacco for the consuer, on the understanding that higher prices force smokers to quit.

So let’s take the average price per pack in Ireland over the last decade, and plot it against the number of cigarettes sold.


As shown in the chart above, there does at least appear to be a correlation, if not a causal link, between increasing prices, and decreasing cigarette consumption.

As one goes up, the other goes down.

In 2004, the average pack of 20 smokes cost €6.25 and 5.4 billion cigarettes were sold. By 2014, the price had risen to €10, while sales fell to 3.2 billion.

However, the claim that higher taxes force smokers to quit has been met with scepticism in some quarters.

And at the heart of the issue is something not shown in the last chart…

The Black Market

Contraband cigarettes seizure Niall Carson / PA Niall Carson / PA / PA

As the price of a pack of cigarettes has risen over the past decade or so, tobacco smuggling and non-Irish duty paid cigarettes – sometimes sold at half the retail price – have undergone something of an explosion.

In 2007, the percentage of cigarettes coming from untaxed trade was 6.7%, according to market research company Euromonitor International.

Over the next two years, successive tax hikes increased the price of a pack by 50 cents, 30 cents, and 75 cents.

And the untaxed share of the market rocketed to 19.8% by 2009. In 2014, it was just over 23%.

As shown in this chart, there again appears to be a clear correlation – as the price goes up, the prevalence of untaxed, cheaper cigarettes also goes up.


In December 2009, Finance Minister Brian Lenihan ended the trend of tax increases and explicitly blamed them for the rise in illicit trade.

I have decided not to make any changes to excise on tobacco in this Budget because I believe the high price is now giving rise to massive cigarette smuggling.

And in a 2013 Budget debate, Michael Noonan himself discussed the difficulty of drawing a straight line between tax and price increases, and smoking rates.

Many issues arise with regard to the tobacco and cigarette business, for example, smuggling.
I am not sure about the statistic that every €1 increase in the price of a packet of cigarettes reduces smoking.
It is possible that what appears to be a reduction in consumption is simply a transfer of consumption to smuggled cigarettes.

In February 2011, just before Fine Gael and Labour came into office, Revenue itself issued a major report on the “Economics of Tobacco” in Ireland.

Their conclusion?

Further tax (price) rises will reduce smoking somewhat but they will also greatly encourage more untaxed consumption.
Increasing the taxation of cigarettes in Ireland no longer carries the combined benefits of better public health and higher revenue for the public finances that would have arisen from such increases in the past.
At the very least, these benefits are severely weakened by the substitution of untaxed for taxed consumption.
This suggests that taxation increases are no longer the optimum tool for reducing smoking in Ireland.

So what other “tools” are being used by the government to help smokers quit, as part of their stated mission of making Ireland a “tobacco-free society” by the year 2025?

Help is coming?


The government’s main initiative to bring down smoking levels is in the form of QUIT – a HSE support service that involves a freephone service and website offering advice and resources for smokers trying to kick the habit.

For those who find it too difficult to quit cold turkey, the HSE does provide free nicotine replacement therapy (NRT) such as gum, inhalers and the patch, to anyone with a medical card.

Overall, figures provided to show that the HSE has spent over €37 million on smoking cessation efforts since 2011.

Some 86% of that went towards providing nicotine replacement therapy, and the rest was spent on staff costs, and running the Quitline.

hsequitspend HSE HSE

However, none of the money raised by increasing taxes on tobacco – the purpose of which is, according to Minister Noonan, to bring down smoking prevalence – is ring-fenced to actually help smokers quit.

According to Revenue numbers, taxes raised from tobacco – the tobacco products tax and VAT – amounted to €5.54 billion from 2011 to 2014.

In the same period, the HSE’s total smoking cessation program cost €33.7 million.

So to cover what the government spends helping smokers quit, it would have required ring-fencing just 0.61% of what it makes by taxing them, as shown in the graphic below.

And ring-fencing five percent of tobacco taxes would have freed up €277 million to provide effective help, and aggressive publicising of that help, to the estimated 705,000 smokers in Ireland.

According to a study published in the Irish Medical Journal, 47,147 people availed of free NRT in 2002, the first year it was introduced.

But using OECD smoking data, and CSO population figures, we know there were roughly 834,000 smokers in the country at that time.

This leaves huge ground to cover in the government’s stated mission of helping smokers quit.

NRTtax Image: PA Image: PA

The Irish Heart Foundation and Irish Cancer Society, in a joint pre-budget submission this year, have called for a levy on tobacco industry profits, part of which they say should go towards making NRT free for everyone, and not just medical card holders.

Simply levying ‘sin taxes’ on products that are addictive will not achieve the desired outcome. Users also need help to quit.
That is why we are asking the Minister for Finance to ring‐fence revenue from a tobacco profits levy on the tobacco industry for supports to help people quit.

By their estimation, a 25% levy on tobacco manufacturers in 2010, for example, would have raised €37.9 million – enough to cover the cost of the HSE’s entire smoking cessation programme for the following five years.

We’ll find out on Tuesday, whether any of these changes come to pass.

Originally published 7.30am

Read: Here’s what the economic crisis did for illegal cigarettes in Ireland>

Read: Vaping is about 95% less harmful than smoking>

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