October 22, 2020
Authors: Konstantin Krasovsky
Tobacco Prevention and Cessation
Tobacco taxation is an effective policy to decrease tobacco consumption and increase revenue. In July 2017, Montenegro adopted an ambitious plan of tobacco excise increases (from August 2017 and January 2018), but in early 2018 tobacco excise revenue declined, and from September 2018 the tobacco excise rates were reduced.
To investigate tobacco industry actions aimed at reducing the excise rates in Montenegro.
Data on tobacco excise rates, revenues and prices were taken from official Montenegro sites. Local media reports were also studied.
In response to the tax hikes, the industry developed and implemented a plan with the following components: 1) Price over-shifting – after the tax hike, the industry substantially increased the net-of-tax part of the price to increase profits. The increased cigarette retail price encouraged both the reduction in tobacco consumption and cigarette smuggling; 2) Forestalling – the industry increased the cigarette supply in late 2017 to pay lower taxes. It kept the taxed cigarettes in stocks and sold them after the tax increase in 2018. The excise revenue increased in late 2017 but decreased in early 2018. 3) Smuggling over-estimating – claims on changes in cigarette smuggling were not based on any rigorous evidence. The volumes of smuggled cigarettes in early 2018 were substantially overstated by the tobacco industry and its allies, and the decline in cigarette sales at that time was caused not by ‘high smuggling’ but by forestalling. Since September 2018, when the excise rate was decreased, most of the assumed ‘smugglers’ apparently stopped their activities, as legal sales sharply increased.
The industry responded to tax hikes in Montenegro with a series of hidden actions that temporarily reduced tobacco excise revenue and persuaded the government to reduce the excise rates. Governments that plan tax hikes should be aware of such industry actions and develop effective countermeasures.