In fighting against smoking Europe and Latvia must choose the most effective strategy – disproportionate bans undermine legal business, promote illegal trade and uncontrolled release of harmful products, while smart and nuanced regulation can improve public health, increase tax revenues, protect jobs and limit illegal trade. This was concluded by researchers and experts from various sectors at the expert seminar “Ban or Regulation: Non-Smoking Sector in the Context of the State Budget”, which took place in Riga on October 15.
As part of the expert discussion, a large-scale latest SKDS study on public attitudes towards the use of various tobacco and nicotine products was presented, while a representative of the European Policy Innovation Council (EPIC) presented the tobacco and nicotine industry economic impact indicators.
Changing the approach can achieve higher tax revenues
According to EPIC calculations, the total amount of excise and VAT tax revenues from tobacco and nicotine products in the Latvian state budget reaches 379 million euros (2023 data). Taking into account the losses caused by smuggling, it can be concluded that the lost revenue accounts for up to 20% of the sector’s excise and VAT tax revenues. Total tax revenues from the tobacco and nicotine industry account for 32% of government defense spending (1.2 billion).
The total contribution of the industry’ s value chain to Latvia’s gross domestic product is 711 million euros ( 1.8% of GDP), which, for comparison, is more than the telecommunications and insurance industries combined (702 million euros, respectively). It is estimated that in Latvia, the tobacco and nicotine industry and related industries (in the economic value chain) provide around 14,200 jobs, or 1.7% of the total number of employees in the country.
A dilemma is emerging – in the context of state budget revenues, in the coming years (in the perspective of 2026-2028), it is planned to increase state budget revenues raising excise duty on tobacco and nicotine products by 15%, while at the same time banning a number of innovative tobacco products,whereas the World Health Organization is talking about banning cigarettes with filters, which will generally lead to a dramatic jump in illegal trade and at the same time have a negative impact on the health of the population.
According to experts, such an approach is not correct and economically sustainable – controlled legal business is being destroyed, the illegal market volumes will increase significantly in both traditional and new tobacco and nicotine product segments, while state excise revenue from excise duty on tobacco and nicotine products will decrease significantly.
Sandra Kārkliņa-Ādmine, Deputy Director of the SRS Customs Administration: “Any policy must be proportionate, because any restrictions create risks for the shadow economy. Speaking of the legal market in the segment of e-liquids and tobacco substitute products, we see that volumes have dropped significantly in the first 8 months of this year. E-liquids released for legal consumption have dropped by 46% and in the area of tobacco substitute products the drop is 51%. In the area of excise tax revenue, we have collected 3.9 million euros less. If by 2024 we ensured an increase in excise tax with a proportionate tax policy, then in 2025 this curve has fallen sharply. The data shows that the illegal market is not decreasing, but rather increasing and we are losing control over what products reach consumers. In essence, the opposite effect has been achieved to the initially supposedly noble goal of taking care of the health of young people and reducing the risks of addiction.
Therefore, I call on decision-makers to rely more on data in the future and listen to the opinion of industry experts. We, as the tax administration, have always warned that inadequate bans and restrictions will always promote the shadow economy and will never achieve the desired result. Politics must always think about legal business, along with safety and health – what will happen to it after the introduction of any bans or restrictions. For our part, we can safely say that the more bans, the more work we have, but we do not always think about the appropriate capabilities to control it all. For example, the ban on flavors we cannot actually control, especially what happens outside our jurisdiction in online stores, as well as when purchasing products from friends and acquaintances.”
If the state wants to reasonably limit the consumption of tobacco and nicotine products and improve overall public health, while obtaining predictable and stable income for the state budget from excise taxes on tobacco and nicotine products and reducing illegal trade, the most effective way is to thoughtfully implement prohibitions and tax policies and incorporate a harm reduction approach into state policy. This means that excise taxes are raised more rapidly on the most harmful tobacco product – cigarettes, while lower taxes are applied to lower-risk products, so that consumers of the most harmful products choose lower-risk alternatives.
Riga Technical University Professor Māris Jurušs: “We have a predominantly punitive policy in the field of tobacco and nicotine products. We like to ban, restrict rather than help people. This old approach should be changed, we should focus more on helping people and healthcare, applying a nuanced and differentiated approach to tobacco and nicotine products, both in terms of restrictions and taxation. And when adopting the current changes, we should not think narrowly only about potential tax revenues, but also about whether and how it will be possible to ensure control of these changes.”
SKDS research shows that 32% of Latvian residents aged 20 to 75 use some form of tobacco or nicotine products (24% use regularly, while 8% use occasionally), and the most popular tobacco and nicotine product is regular cigarettes – the most harmful of the tobacco and nicotine products. They are smoked by 71% of those who indicated in the survey that they use any tobacco or nicotine products. The second most popular product is e-cigarettes (38%), the third – heated tobacco (23%), followed by smoking or rolling tobacco (18%), cigarillos (15%), cigars (13%) and tobacco-free nicotine pads (9%).
The study also reveals that the trend regarding the first tobacco or nicotine product used remains unchanged – the overwhelming majority of consumers, or 90%, still started this harmful habit with cigarettes, while 9% of respondents choose alternative smokeless products.
It is important that a significant part of the public purchases contraband tobacco and nicotine products – this is acknowledged by 6% of respondents, while 18% indicate that their friends or acquaintances buy contraband cigarettes. These figures are consistent with the independent annual study on the illegal cigarette trade in Latvia by the international auditing company “KPMG” – in 2024, the illegal cigarette market has already reached 18% of total consumption, causing losses to the state budget of at least 67 million euros due to uncollected taxes.
Positive results for a proportionate policy
According to EPIC data and calculations, the annual contribution of the tobacco and nicotine products industry to the total gross domestic product of the European Union is 224 billion euros, which is ~ 1.1% of the EU gross domestic product – in comparison, this is 10.9% more than the contribution of the telecommunications and textile industries combined (130.3 billion euros and 71.5 billion euros, respectively). The sector contributes 1.4% of the total annual revenue of EU governments.
uropean Policy Innovation Council (EPIC) expert Dr. Antonios Nestoras: “Millions of people continue to smoke despite various restrictions and bans. Smoking rates in Europe are not increasing, but they are not decreasing either. Why is smoking prevalence not decreasing? Because we are focusing too much on bans and punishing smokers instead of helping them change their habits. I am convinced that Europe can end smoking by supporting innovation, as well as by implementing scientifically sound and evidence-based harm reduction policies. This cannot be achieved with bans and disproportionate taxes, as people will simply switch to buying products on the illegal market. Our study shows that by offering smokers the opportunity to switch to less harmful alternatives, it is possible to achieve a significant reduction in smoking prevalence in the EU without experiencing a reduction in tax revenues. This is confirmed by successful examples in countries such as Sweden, the United Kingdom, the Czech Republic and Greece, where we can observe a significant decrease in the number of cigarette smokers. On the other hand, those countries that apply disproportionate restrictions and taxation policies experience the collapse of legal trade. This has happened, for example, in France and Ireland.”
The tobacco and nicotine sector employs 2.1 million workers in the European Union, which is 1.1% of the total number of workers in the EU, and the average salary of those working in this sector is 5% higher than the average salary of an employee in the EU..
The tobacco and nicotine sector pays around 113 billion euros in excise and value added tax in the European Union every year, of which 83.3 billion euros are excise duties and 29.6 billion euros are VAT. This revenue covers 55.4% of the EU’s total defence expenditure. In turn, illegal trade and smuggling have caused losses of 11.6 billion euros to the budgets of the European Union countries – this amount would, for example, help national governments increase spending on medical research by 52.5%.
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