Tobacco taxes for improving welfare and distributional outcomes: the case of Georgia

Abstract

Background Georgia has one of the highest smoking prevalence and tobacco-related morbidity and mortality rates in Europe and Central Asia. Nonetheless, tax increases on tobacco products are often opposed due to concerns of regressive fiscal effects. This article provides evidence on the long-term welfare and distributional impacts of increasing cigarette taxes in Georgia. Methods An Extended Cost-Benefit Analysis is used to simulate the distributional effect of raising taxes on cigarettes. It weighs short-term losses due to higher tobacco prices with long-term benefits related to reduced medical expenses and additional earnings associated with extended life expectancy. Household expenditure data are used to estimate decile-specific price elasticities of demand for cigarettes, accounting for heterogeneous behavioral responses by income-group. Results Consistent with previous literature, cigarettes price elasticity decreases with income. A simulated 50% cigarette price increase would yield positive net gains for the lowest three deciles; increase the available income of the poorest 10% of the population by an average of 1% and, as a result, lift up to 7000 people out-of-poverty in 2017. The effects would be highly progressive. Conclusions As lower-income households tend to be more responsive to price changes on cigarettes, they stand to benefit most from the health and economic consequences of taxing tobacco. This article shows that in addition to boosting fiscal revenues, increasing cigarette prices would lead to progressive and positive net gains for the poorest households in Georgia.