The World Health Organization (WHO) recommends that taxes should account for at least 75% of the retail price of cigarettes, a benchmark widely cited for tobacco taxation policy. However, this report argues that the 75% tax incidence target is flawed and ineffective for several reasons.
The origins of the recommendation are rooted in convention rather than evidence. The benchmark was derived from tax shares observed in a small number of countries, rather than analysis demonstrating that a particular tax incidence rate maximizes public health outcomes, government revenues, or economic welfare. The WHO's 2010 Technical Manual on Tobacco Tax Administration initially recommended a 70% excise tax share, based on the experience of a handful of countries with high excise tax shares. This was later revised to a 75% total tax share in the 2021 Technical Manual, including excise duty, VAT or sales taxes, import duties, and other indirect taxes.
Relatively few countries met the 75% incidence rate target in 2024. Only 39 out of 178 countries (22%) achieved this level, and these countries were heavily concentrated among wealthier economies, with 25 classified as high-income by the World Bank and 20 as members of the European Union. Low- and middle-income countries generally had significantly lower tax incidence rates, with only 12% achieving the 75% target.
The central weakness of the WHO's approach is that governments do not directly control tax incidence. While governments determine the nominal amount of tax levied on a pack of cigarettes, market participants determine how much of the tax burden is absorbed by producers and how much is passed on to consumers. The correlation between tax yield and retail prices is extremely strong (91%), while the correlation between tax incidence rate and retail price is far weaker (49%). This suggests that high tax incidence rates do not necessarily translate into high retail prices.
Furthermore, there is little evidence that higher tax incidence rates achieve the intended policy outcomes. The correlation between tax incidence and affordability is weak (-30%), and the correlation between tax incidence and smoking prevalence is positive rather than negative. This indicates that countries with higher tax incidence rates do not necessarily exhibit lower smoking prevalence.
The experience of the European Union supports these findings. The European Commission concluded that relying on a minimum percentage tax rule had failed to achieve greater convergence in cigarette prices. The World Bank's 2017 guidance on tobacco tax reform argues that the exact magnitude of excise tax rate increases should be determined on a country-by-country basis, taking into account each country's health and tobacco-market profile, the composition of the smoking population, and the income and price elasticities.
The report concludes that tobacco tax policy should be tailored to national circumstances and guided by externalities, not arbitrary tax incidence targets. A more coherent policy framework would focus directly on the variables governments can influence, such as the tax burden on a packet of cigarettes, rather than relying on an intermediate ratio that is heavily shaped by market behaviour and pricing dynamics.
