To ensure stable tax revenues to the state budget, fiscal policy aimed at increasing excise tax rates on tobacco products should take into account economic realities in the country, in particular the growth rate of real incomes of the population and the affordability of tobacco products, the tax burden on different categories of tobacco products, as well as effective mechanisms to control illicit trade in tobacco products.

One of the goals of the excise policy is also to decrease the affordability of tobacco products by raising prices and, as a result, to reduce tobacco consumption. This goal can be achieved if the rise in prices for tobacco products is higher than the rise in real incomes of the population, and if smokers have no alternative ways to cut the cost of consumption, for example by switching towards a more affordable category of tobacco products or illegal products.

In recent years, excise rates in Moldova and, as a result, prices of tobacco products have grown faster than inflation and real incomes of the population. For instance, in 2021, the affordability of cigarettes for a consumer in Moldova is 25% of the average income. For comparison, in advanced countries this indicator is 15%. At the same time, a substitution effect is observed in Moldova, that is the flow of smokers to the low price segment, represented by cigarillos and filtered cigarettes below cost. A significant excise burden on legal producers and consumers creates an economic opportunity for unscrupulous economic agents, which reduces the effectiveness of tax regulation of the tobacco market and distorts market conditions.

As part of the fiscal policy for 2022, the government proposed to increase excise rates on filtered and unfiltered cigarettes by 15%, to introduce a minimum effective rate on cigarillos, which will be equil to the level of cigarettes, and also to introduce an excise duty on electronic cigarettes. For a more comprehensive assessment of this initiative, a SWOT analysis of the increase in excise tax rates on tobacco products in Moldova has been carried out. The study also analyzes the experience of Ukraine in the fiscal policy of tobacco products in the regional context.

Moldova has a balanced structure of excise taxes for filtered and unfiltered cigarettes with a minimum effective rate, which ensures the fulfillment of a significant part of the excise collection target. The proposed increase in the minimum effective rate of excise tax on filtered and unfiltered cigarettes by 15%, which is twice the inflation rate, is in line with the goals of public health.

The proposed introduction of a minimum effective rate of excise tax on cigarillos, which is equil to the level of filtered and unfiltered cigarettes, as well as excise duty on electronic cigarettes, eliminates tax benefits for these products, which is supposed to provide additional revenues to the state budget and eliminate some structural market distortions.

In addition to this, the Moldovan government should pay attention to the risks associated with undervaluation by cigarette manufacturers in order to increase their competitiveness in the tobacco market. To eliminate this structural deformation of the market, it is reasonable to use the mechanism of the minimum retail sale price of cigarettes and cigarillos, at least for a certain transition period. This measure helps collect VAT and profit tax in full, and also meets the goals of public health, since it raises retail sale prices of tobacco products (over the past two years in Moldova, despite the annual increase in excise, prices of products of a low price segment have not changed).

In further increasing excise rates, the Moldovan government should consider such risks as the possibility of substitution of tobacco products with a high level of excise taxation for cheaper alternatives, for example, roll-ups, which may not meet state standards; new forms of sales of illegal products, including e-commerce; illicit traffic in tobacco products caused by different approaches to excise taxation in certain jurisdictions, in particular in the Transnistrian region.

The moderate indicator of the shadow market of tobacco products in Moldova in modern conditions should not inspire the authorities with calm. The experience of the countries of the Balkan region, the Baltic States and Ukraine shows the risks of a sharp increase in illegal products on the market with a disproportionate growth of excise rates in comparison with a rise in household income. When there is such an increase in excise rates, that is, an “excise shock”, consumers often choose illegal products, which are much cheaper. In addition to developing the institutional environment in the field of combating and countering the illegal production and circulation of tobacco products, it is important to eliminate the fundamental reasons for the emergence of this market, which are not only economic.

In the regional context, it is necessary to pay attention to the experience of Ukraine in raising the excise rates on tobacco products. It should be noted that the experience of Ukraine is not the best example to follow for many reasons. One of the main ones is that the tax system of Ukraine per se has serious structural imbalances, which cause such negative phenomena as tax evasion, a large shadow sector of the economy, etc. State tax policy in Ukraine, the essence of which is that “the average and honest payer will pay for everything” cannot be an example to follow and a basis for a long-term stable inclusive economic growth in any country.