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In this paper we analyse the evolution of cigarette excise duties policy in the Western Balkans Countries (WBCs) from 2007 to 2017 and estimate respective fiscal and smoking prevalence outcomes. We also identify key expected changes in the future required to align with the EU directives. Driven by fiscal motives, all WBCs have been increasing the cigarette excise duties rates from 2007 to 2017, which is why the average excise yield soared by 4.1 times, from 15.3 to 58.8 Euro/1,000 pieces of cigarettes. This resulted in nominal rise of cigarette excise duties revenues by 2.5 times. Over the same period, smoking incidence in the WBCs declined on average by approx. 7%. These results suggest that increase in cigarette excise duties in the WBCs had some fiscal effects, while the health effects were mild. In most WBC countries, surge in excise yield was not fully reflected into rise in tax revenues, only part of that underperformance being explained by decline in smoking incidence, while a part of underperformance could potentially be attributed to a widening illicit market. In the most WBCs, except in Albania, structure of cigarette excise duties scheme is aligned with the EU directives, while in all WBCs excise yield being considerably below the EU minimum threshold. Therefore, full harmonisation with the EU directives would imply strong rise in cigarette excise tax burden in the WBCs, on average by 76%. The required increase in excise yield (comparing to 2017) would range from 14% in BIH, 49% in Montenegro, 54% in Serbia, 117% in Albania, to 145% in Macedonia. Lessons learned in the past 10 years suggest that gradual harmonisation of excise duties rates with the EU directives in the WBCs must be accompanied by significant improvement of tax enforcement efficiency. Otherwise, tax harmonisation may fail to meet its economic and health objectives and contribute to further widening of the shadow economy.

Cigarette excise tax policy in the Western Balkans: Trends, effects and challenges