New research reveals governments are taxing safer nicotine products like cigarettes, sabotaging tobacco harm reduction and blocking smokers from switching. Correcting these policies could accelerate global declines in smoking.
Featuring:
GIORGI MZHAVANADZE
Economist, K•A•C
Giorgi on LinkedIn (click)
Transcription:
00:10 - 01:12
[Brent Stafford]
Hi, I'm Brent Stafford and welcome to another edition of RegWatch on GFN.TV. Excise taxes and other forms of tobacco taxation are the crown jewels in tobacco control's toolkit. For decades, punitive taxes on combustible cigarettes have been one of the few interventions public health can point to as a success. They do, after all, drive down smoking. But what happens when people who smoke can't quit? Or when they do quit by switching to safer nicotine products, they come to find public health lobbying lawmakers to tax vaping the same as smoking. That's not just bad policy, it's bad economics. Joining us today to unpack the economics behind tobacco taxation and harm reduction is Giorgi Mzhavanadze, a PhD candidate in economics at Tbilisi State University in Georgia and an economist with KAC, Knowledge Action Change. Gheorghi, thanks for coming on the show.
01:13 - 01:14
[Giorgi Mzhavanadze]
Thanks for having me, Brent.
01:15 - 01:44
[Brent Stafford]
So let's start with kind of a big picture. You're the sole author of a new briefing paper just released by the Global State of Tobacco Harm Reduction titled Safer Nicotine Product Taxation and Optimal Strategies for Public Health, produced as part of the broader Global State of Tobacco Harm Reduction 2024 Situation Report. So here's the question. Are safer nicotine products being taxed more than combustible cigarettes?
01:45 - 02:32
[Giorgi Mzhavanadze]
The simple answer is, unfortunately, yes. In many countries, safer nicotine products are being taxed at the same rate or even higher than combustible cigarettes. Our analysis found that in roughly one third of countries with excise taxes on S&P, the tax burden is either equivalent or greater than for cigarettes. This is deeply concerning from a public health perspective because These products are significantly less harmful than smoking and taxing them like cigarettes decreases economic incentives for smokers to switch to safer products and it essentially penalizes people for choosing a safer alternative.
02:33 - 02:45
[Brent Stafford]
Well, before we dig deeper into the economics, let's get a better sense of where you're from. You're based in Georgia, formerly part of the Soviet bloc. How big of a problem is smoking in Georgia today?
02:45 - 03:35
[Giorgi Mzhavanadze]
Smoking actually in Georgia remains a significant public health concern. According to the most recent national survey data, around 29% of the total adult population smokes in Georgia, with male smoking rates exceeding 50%, five zero. So this puts Georgia in the top five in the world by smoking rates and the highest in the WHO European region. Still, Georgia has implemented a range of tobacco control measures over the past decade, but smoking rates have declined only marginally. And this is partly because of cessation services remain limited and harm reduction is not yet integrated into the national tobacco control strategy at all.
03:35 - 03:40
[Brent Stafford]
Now, what about the availability of safer nicotine products? Are they at least available?
03:41 - 04:32
[Giorgi Mzhavanadze]
Yes, safer nicotine products actually are all legally available. Heated tobacco products and nicotine vapes, snus and nicotine pouches, they are all available and existed on the market. But the popularity is low. However, it's growing rapidly during the recent pandemic. years. Whey pink as a heat tobacco products are the most popular types of safer nicotine product, but still according to the latest data from 2022, their current use past 30 days use was only at about 3% level while daily use rates were at 1% level only. Wow.
04:33 - 04:36
[Brent Stafford]
So heated tobacco then does have a big presence there.
04:37 - 05:19
[Giorgi Mzhavanadze]
Heated tobacco is most popular according to the data and according to my personal observation during last couple of years. And because the industry is heavily marketing and the presence and the power of the industry on the market is quite huge and heated tobacco products are heavily marketed as a safer products here. However, we should mention that The price strategy and marketing strategy makes them appealing only to a niche consumer base and only to upper income consumers in Georgia.
05:20 - 05:29
[Brent Stafford]
Georgi, let me ask you about how vaping is viewed in Georgia. Are authorities and the media hostile towards vaping and tobacco harm reduction in general?
05:31 - 06:40
[Giorgi Mzhavanadze]
Yeah, there is a lot of skepticism and hostility towards vaping and tobacco harm reduction overall. Authorities tend to lump all nicotine products together in Georgia without recognizing any differences in health risks. Media coverage often echoes global fears about use uptake and unproven health risks, which creates a climate of fear rather than informed debate among policymaker or academics. And all public messages focus on absolute risks rather than relative risks. Unfortunately, this probably discourages smokers from exploring less harmful alternatives and they are mostly skeptical towards e-cigarettes specifically. viewing them as more dangerous than tobacco smoking, often saying that how some liquids containing chemicals and made in China can be safer than purely agricultural products as tobacco leaf.
06:42 - 06:52
[Brent Stafford]
Let's go back to the report you analyzed dozens of countries. In how many cases are safer nicotine products taxed at the same rate or even higher than cigarettes?
06:53 - 08:07
[Giorgi Mzhavanadze]
When comparing nicotine vapes to cigarettes, we use the metric as excise tax burden, which is defined as the share of retail price attributable to excise tax. This is a common metric. And our analysis shows that in 15 out of 50 countries, the excise tax burden on liquids for electronic cigarettes is higher than that on cigarettes. For heated tobacco products, the burden exceeds that of cigarettes in seven countries and is equal in another six out of sample of 65 countries. This means that in approximately one-third of countries where S&P taxation is in place, and we, in our brief, talk about electronic cigarettes and heated tobacco product because these products are with most available data nowadays. Safer alternatives are not given a clear fiscal advantage over combustible tobacco. This directly contracted the logic of risk proportionate taxation and makes it hard for tobacco harm reduction to move forward.
08:08 - 08:28
[Brent Stafford]
Considering that, as I mentioned in the lead, it's well established that probably the most effective tool tobacco control has ever used is taxes. So if you're applying those kinds of taxes to safer nicotine products, you, I mean, obviously are going to be damaging uptick or the ability for people to be able to afford to stay using them.
08:30 - 10:54
[Giorgi Mzhavanadze]
Yeah, for sure. When we're talking about taxes, it's a very important policy tool which affects prices. Prices also consist and depend not only on taxes, there are a lot of components, including costs and pricing strategies. But in terms of tobacco and nicotine products, excise taxes is a very important component. And when we're talking about the taxes, it's not just a metric. It's what affects the consumer prices, retail prices, and that affects then the consumer behavior. And the literature shows that, for example, a study from 2017 shows that single use disposable electronic cigarettes were more than three times more expensive than cigarettes in low and middle income countries. When we talk about the electronic liquids for electronic cigarettes, liquids alone, they were about 30 percent more expensive compared to the equivalent number of cigarettes. When you add the cost of rechargeable web devices, it's another financial barrier for consumers. For heated tobacco products, the situation was similar. And a study from 2019 showed that out of 34 countries, HTP were more expensive than cigarettes in half of the markets, despite being actually taxed at a lower rate. By 2023, our data analysis shows that, yes, it's true that heated tobacco products were generally cheaper, but only compared to the premium cigarettes. And in a lot of countries, in 17 countries actually, the price difference was only about 10% in favor of heated tobacco countries. In countries like Poland, for example, or South Korea or Uzbekistan, Heated tobacco products were still more expensive than premium cigarettes. And this is without pricing in the heating device cost. And when compared to the cheaper brand of cigarettes, the situation gets much worse, making these products as a safer alternative only for richer population of smokers.
10:54 - 11:04
[Brent Stafford]
You note in your report that even when safer nicotine products are taxed less than cigarettes, they're still often more expensive. Why is that?
11:06 - 12:37
[Giorgi Mzhavanadze]
Yes, actually, and this is a very important issue we need to emphasize. There can be several reasons to that. First, it can be the huge research and development expenses the industry made previously when they entered the markets of heated tobacco products, for example, or nicotine wipes or nicotine pouches. Also, the probable cause of this can be not very effective distributional channels. But literature suggests that key reason why the tax savings are often not passed on to consumers are laying in pricing strategies major tobacco companies use. Literature suggests that companies frequently position safer nicotine products, like heated tobacco products, for example, as a premium alternative to high-end cigarettes, even when they are taxless. And this is deliberate pricing strategy, rather than lowering price to encourage switching. They keep prices high to protect and increase their profit margins. In fact, in many markets, our data analysis shows that difference in tax between cigarettes and heated tobacco product is larger than the difference in retail prices, meaning the benefit of lower taxation is mostly captured by the industry and not the consumers.
12:38 - 12:42
[Brent Stafford]
So there's some profit taking going on amongst the system then?
12:43 - 13:11
[Giorgi Mzhavanadze]
Yes, sure. And data suggests that. And we see that mostly in heated tobacco product category, because first, the data is mostly available for these products. We can't say this for the snus and nicotine pouches. However, to some degree, we can say the same for nicotine vapes.
13:12 - 13:21
[Brent Stafford]
One of the most striking insights in your report is how excise taxes hit low-income people hardest. In practical terms, what does that look like?
13:22 - 15:01
[Giorgi Mzhavanadze]
Yeah, the situation is quite nuanced in this regard. So when it comes to cigarettes, combustible cigarettes, taxes actually have a progressive effect, which means, according to the literature, low-income individuals are more price sensitive. to the price changes, their demand is more sensitive to price changes. So tax driven price increases can lead to higher quit rates in this group. But for safer nicotine products, it is totally different story. Even with lower taxes, SNPs are often more expensive than cigarettes, especially when factoring in device costs. And that makes them less accessible to low-income users who might want to switch but simply cannot afford the upfront or ongoing cost of consuming these products. And in low- and middle-income countries, the situation is even more challenging because cigarette taxes in those countries are often low. keeping smoking combustibles relatively affordable. And in this environment, it becomes very difficult to create meaningful financial incentives for switching, particularly for the groups most in need of safer alternatives. While taxation helps reduce smoking, high prices on SNPs, regardless of tax level, but in most of the countries we see that taxes on safer nicotine products are quite high, create a barrier for those most in need of harm reduction options. And without deliberate price advantages, we risk making safer products a choice only available to wealthier smokers.
15:01 - 15:19
[Brent Stafford]
Now, is there any way that this result could be by accident? It's not what tobacco control intends when they advocate for these higher taxes on safer nicotine products? Or is this exactly what they're hoping for, to discourage people from switching?
15:22 - 16:55
[Giorgi Mzhavanadze]
Well, I think there can be two possible answers and two possible reasons to that question. First, from the fiscal perspectives and ministries of finance, governments, they try to maximize their tax collection and tax incomes. And in some countries where we can see the tobacco harm reduction works and smoking rates are going down rapidly and we see rapid substitution of combustibles with new emerging products. Nicotine waves, heated tobacco products, other safer nicotine products became a real thing and a real threat to the cigarette markets. The government tried to find the ways to receive the same amount or increasing amount of tax revenues. from the consumers. This is one case, I think, one reason why countries taxes new products. And the second possible reason is just mindset and ideological reason and disbelief that these products are safer. And this often come in developing countries from WHO narrative and they follow WHO guidance, and the guidance is to tax safer nicotine products at the same level as cigarettes, unfortunately.
16:56 - 17:03
[Brent Stafford]
Now, what about the elastic and inelastic nature of vapes? Did you already handle that? I think you just did.
17:03 - 18:58
[Giorgi Mzhavanadze]
Yeah, that's a quite interesting area of economic research nowadays. First of all, we need to mention that economic evidence shows that these products, for example, vapes and combustible cigarettes or heated tobacco products and combustible cigarettes, they are economic substitutes. This means that price increase on one product increases the demand for another product. And also, while economic literature suggests that price sensitivity is low for combustible cigarettes and estimates are around 0.4, which means that, for example, 10% increase in cigarette prices will will be translated in 4% decrease in cigarette consumption. In case of vapes, for example, this demand is at least twice as sensitive. So vapes are more sensitive to price changes. And also this literature suggests that increasing prices on vapes might backfire and create unintended consequences. Experimental studies show that if prices increase on cigarettes only, while electronic cigarettes prices are maintained constant, it increases the probability of quitting. smoking and consuming all nicotine products, and also it increases the probability of switching from combustibles to vaping. However, increasing prices on electronic cigarettes does not affect significantly the chances and probability of quitting, but it translates into consumers going back to smoking.
18:59 - 19:01
[Brent Stafford]
Which is the worst possible thing.
19:02 - 20:18
[Giorgi Mzhavanadze]
Yeah, yeah, sure. Sure, and when we're talking about taxation, of course, taxation is a very important tool, but I think the first area of regulation is prohibitions of the products. When we talk about taxes, we said that in a lot of countries, taxes are higher on newly emerged safer nicotine products than cigarettes. But there are a lot of countries where these products are totally banned. Their sale, importation, distribution, and production is not legally allowed. And our GSTHR report shows that In only 27 countries, all four major types of safer nicotine products, which are electronic cigarettes, heated tobacco, snus, and nicotine pouches, only in 27 countries, all these products are available. However, we know that the most harmful and deadliest nicotine delivery product, which is combustible cigarettes. They are available in all of the countries and to all population of the world, which is quite cruel thing, I think.
20:20 - 20:32
[Brent Stafford]
Georg, you also conducted a discrete choice experiment in Georgia. What did you learn from asking smokers to choose between cigarettes, vaping and heated tobacco products?
20:33 - 21:46
[Giorgi Mzhavanadze]
Yes, as you mentioned, it was a semi-experimental design when consumers, smokers, were choosing from five choices, actually, four products of tobacco and nicotine products, the most popular on the Georgian market nowadays, and fifth choice was to quit using them all. And we see that where the persons have alternatives on the market, First, sensitivity to price changes increase for all products. It means that price increase on one product leads to increase in probabilities of choosing the other alternatives and quitting rates. And we see that all these products are substitutes. prices are important determinant of choices and the best policy solutions here will be increasing prices of traditional combustible products and maintain on even lower prices on safer nicotine products and this will be translated into higher quit rates and higher substitution.
21:46 - 21:53
[Brent Stafford]
Georgi, where do all of the taxes go? Are they being used to fund tobacco control programs in these countries?
21:54 - 23:53
[Giorgi Mzhavanadze]
Well, to be honest, I did not conduct the detailed analysis of the data in this regard, but the common knowledge is that cessation services, for example, in almost all countries, almost all developing countries, especially, are on the zero level and in most cases it's only a hot free quit line which effectiveness is quite low there is no subsidies in most of the countries for nrt or other uh costly cessation services so we can say that money taken out from the smokers does not come back to them and does not help them And probably it goes to the infrastructural projects, pensions, social spending, and just maintaining bureaucratic apparatus of the government. However, we should say that tobacco companies and the industry have a high influence and power still despite the regulatory approaches to contradict it and to maintain it under the control due to the high impact and high role of excise taxes from tobacco sales. And in countries like Georgia, for example, with high smoking prevalence, relatively low incomes and financial resources, the share of tobacco taxes in total government revenues is from 6% to 8%, which is huge and which makes it difficult for government officials to take drastic steps in fight against smoking and, for example, promoting tobacco harm reduction.
23:54 - 24:06
[Brent Stafford]
So let me ask you, what can governments do to help make this situation better? Are there any policy tools that can ensure lower taxes actually lead to lower prices for consumers?
24:06 - 26:42
[Giorgi Mzhavanadze]
Yes, actually, we mentioned three main policy tools which can be used in order to benefit consumers and not industry when we are talking about incentivizing price incentives for switching from uh cigarettes to safer alternatives uh and uh the the two uh the tool first tool can be uh price ceilings or profit margin ceilings for safer nicotine products however it should be said that it's not conventional uh tool and it's mostly used in the pharmaceuticals markets in order to control the prices on pharmaceuticals, but economists do not like such kind of tool because they create supply problems, they create incentives for illegal market and in general they create inefficiencies on the markets. The second tool can be used in this regard is tax breaks or tax benefits conditional on the prices. For example, tax benefits can be given to the product, to the safer nicotine product, if it is only only if it's much cheaper than combustible tobacco. However, this is only a theoretical solution and it will be quite hard to monitor and will need huge administrative effort, resources and financial and human resources. And I think that the best possible solution here is to promote competition on this market, to lower the barriers for companies to enter the safer nicotine products, to allow all types of safer nicotine products, which, according to economic theory, will increase competition, decrease profit margins on these products, and decrease prices, which will make tax benefit, not tax benefits, but favorable taxation for safer nicotine product translate into lower prices and benefits the final consumer.
26:43 - 26:50
[Brent Stafford]
Now, in the end, how important is it for tax policy to be based on relative harm?
26:52 - 30:07
[Giorgi Mzhavanadze]
This is a cornerstone of our policy brief. So the idea of taxing safer nicotine products is quite simple. So in the economic term, we know that we tax combustibles because they create market inefficiencies, market failures. have negative externalities and internalities. So they're more costly than society and then the consumers perceive. So we are trying to increase their pricing in order to decrease their consumption level. But in terms of safer nicotine products, The situation is vice versa because they create positive externalities. So we can look at them as, for example, as NRTs. So they are pro-public health. They are decreasing the harms of smoking. So in that regard, the least government should do is tax proportionate to their relative harm, which means roughly 5-10% of the taxes on cigarettes. However, in some countries and mostly in developing countries, taxing them at the five or 10% of the level of cigarettes can result in administrative losses because in those countries, the collection of these taxes monitoring can be costlier than taxes collected from this 5% or 10%. So in this policy brief, we support the idea that accepting safer nicotine products from excise taxes at all at this level and continuing continuing increase excise taxes on combustibles in order to create huge incentives, financial incentives for smokers to switch from expensive combustibles to much affordable, safer nicotine products will create the most profit, the most efficient market solution to the current problems. I think we should still remember that, yes, in some countries, mostly developed countries, smoking and public health problems from smoking are decreasing due to safer nicotine products or due to tax policies as well and regulations as well, which were in place for 30 or 40 years. But There are a lot of countries, which I think it's most countries in the world at the moment, which are still 20, 30 years behind in terms of regulations, taxes, and smoking rates are drastically high. Like in my country, Georgia, for example, and still we need to go combat smoking by different measures and taxation is one of them. So increasing taxes on cigarettes, maintaining low or lowering to zero levels of taxes on SNPs is probably the best solution in this regard.
30:08 - 30:36
[Brent Stafford]
Georgi, I know that you'll be attending the 12th edition of the Global Forum on Nicotine, the annual conference on safer nicotine products, which takes place again this year in Warsaw, Poland, from June 19 to 21, 2025. The conference theme is challenging perceptions. In your mind, what are some solutions to address the misunderstandings, misconceptions and mischaracterizations that are holding back progress for safer nicotine products?
30:37 - 32:36
[Giorgi Mzhavanadze]
This is such an important theme because perception shapes both policy and behavior. And right now, the dominant perception of S&P in many countries is misinformed, fearful, and often outright wrong. And I think there are a few solutions to shift this narrative. One can be evidence based messaging, can and should be evidence based messaging. We need coordinated public education campaigns that clearly communicate relative risks and not absolute risk. The second can be empowering health care providers, doctors, pharmacists and smoking cessation counselors are often the most trusted voices for smokers and yet many are either unaware of the evidence or unsure how to talk about sfp and training and guidance for healthcare professional professionals i think is a key to changing their perception also uh fighting the stigma with nicotine much of misunderstanding stems from conflicting conflicting nicotine with smoking. We must clarify that nicotine, which is addictive, of course, is not the primary cause of smoking related disease. And there is a lot of misinformation about that in a lot of countries. And this distinction opens the door to more nuanced discussion around harm reduction and policy changes towards it. And I think changing perceptions is not a side issue. It's as relevant and as important as taxation and pricing issues regarding harm reduction.