Quantile regression of tobacco tax pass-through in the UK 2013-2019. How have manufacturers passed through tax changes for different tobacco products?

BACKGROUND

The effectiveness of tax increases relies heavily on the tobacco industry passing on such increases to smokers (also referred to as 'pass-through'). Previous research has found heterogeneous levels of tax pass-through across the market segments of tobacco products available to smokers. This study uses retail sales data to assess the extent to which recent tax changes have been passed on to smokers and whether this varies across the price distribution.

METHODS

We use panel data quantile regression analysis on Nielsen commercial data of tobacco price and sales in the UK from January 2013 to March 2019 combined with official UK tax rates and inflation to calculate the rate of tax pass-through for factory made (FM) cigarettes and roll your own (RYO) tobacco.

RESULTS

Following increases in the specific tax payable on tobacco, we find evidence of overshifting across the price distribution for both FM and RYO. The rate of the overshift in tax increased the more expensive the products were. This was consistent for FM and RYO. Additionally, our findings suggest that the introduction of standardised packaging was not followed by changes in how the tobacco industry responded to tax increases.

CONCLUSIONS

Following the repeated introduction of increases in specific tobacco tax as well as standardised packaging, we show that the tobacco industry applies techniques to keep the cheapest tobacco cheaper relative to the more expensive products when passing on tax increases to smokers.