How much do cigarettes cost? The “cobra effect” of excise taxes
Policymakers in Ukraine seem to suffer from chronic short-sightedness. Momentary profit always triumphs over optimal long-term outcomes in their mind, and future generations will no doubt be stuck with the bill for legislators’ lack of judgment.
Excise tax policy over the course of the last five years has certainly been no exception to the rule. During the financial crisis of 2008, officials were forced to offset substantial losses in budget revenue by significantly raising excise taxes. However, this aggressive policy was quickly drawn into question as more and more unexpected repercussions emerged; in particular, it was revealed in 2013 that at least 8.8% of the tobacco market became contraband as a result of the new tax. Such ramifications to a seemingly simple policy fix are known as the “cobra effect” of excise tax policy.
To this end, it would certainly serve the interest of both the government and the Ukrainian populace to draw upon the experience of their European neighbors and orient such tax hikes around the growth rate of average personal income, thus accommodating the average citizen’s disposable income and minimizing unexpected side effects of a rise in the price of goods that are subject to excise tax. For more information on excise taxes and the “cobra effect, please see CASE Ukraine’s “How much do cigarettes cost or something about excise “cobra effect” (in Ukrainian).