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Accelerating Progress on Tobacco Taxes in Low-and-Middle Income Countries: Research on Economics of Tobacco and Tobacco Taxation - National Study: CROATIA

In 2017 economic situation in Croatia was stable with increased economic activity supported by favorable EU and global economic environment. The Croatian tobacco market is oligopolistic - controlled by a few global companies dictating market conditions. Domestic producer Tvornica duhana Rovinj (TDR) was the leading independent cigarette manufacturer in Central Europe with a market leading position in Croatia and a position of scale in Bosnia and Serbia over the decade, until September 2015, when it was acquired from Adris Grupa by British American Tobacco (BAT). After the takeover, the BAT became the market leader in Croatia with a share of around 58.5 percent and together with Philip Morris International that held 34.5 percent of market share in 2015, they could significantly affect the market conditions. Smoking and consequently the demand for tobacco products have been slowly declining in popularity in Croatia due to continuously more restrictive tobacco regulations. Croatia became a Party to the WHO Framework Convention on Tobacco Control (WHO FCTC) on October 12, 2008. Furthermore, by joining EU in 2013, Croatia adopted EU regulations so the Directive 2014/40/EU was incorporated in the national acts. Tobacco and related products are covered under several laws and regulations and Croatian government through Ministry of Finance - Customs Administration provides the framework for the effective tobacco taxation which is an important element of tobacco control. The prevalence of smoking in Croatia measured by number of smokers has stabilized over time and shows a slight decline in recent years. With regard to the consumption of tobacco products by category, sales of cigarettes still accounts for more than 95 percent of overall annual volume sales. While total cigarettes volume sales continue to decline, value sales are rising at the same time due to increased prices. Although public opinion on smoking in Croatia has changed over time, with a growing number of smokers considering to quit and decreasing social acceptance of smoking, the smoking rates of about 30 percent or one-third of the total adult population are still quite high. The results of the research carried out within this project indicate that in Croatia the demand for tobacco is price-sensitive. The aggregate time-series analysis suggests that a 10 percent increase in prices would result in the average reduction in long-term demand for cigarettes of 6.1 percent. The income elasticity is also negative, suggesting that a 10 percent increase in income would lead from 3.9 to 9.1 percent decrease in the long run cigarette consumption. However, since time series analysis is strongly limited by the number of available annual observations these estimations should be taken with a great caution. Therefore, cigarette price elasticity and income elasticity are also estimated using household budget survey (HBS) data. Results of HBS analysis are considered to be more reliable because the amount of data so provided is much greater (i.e. thousands of observations) than from time series (i.e. eighteen years). Estimated results of analysis based on Deaton’s (1988) model indicate that a 10 percent increase in cigarette price would lead to a 10.7 percent decrease in cigarette consumption. Furthermore, a 10 percent income increase would raise cigarette consumption by 9.1 percent. For example, the annual consumption of cigarettes in Croatia in 2017 was estimated to be 309 million cigarette packs and the weighted average price of a pack of cigarettes was 3.60 EUR. Specific excise was 26 percent of the average retail price, ad valorem excise 34 percent and VAT 20 percent of retail price. Accordingly, if we assume that in the next year Croatian GDP will increase by 2.8 percent and cigarette prices will stay unchanged, then we can expect an increase in cigarette consumption by 2.55 percent and the same percentage of increase of tax revenues. However, according to our model estimations if specific excise increases by 10 percent, this would lead to 0.51 percent decrease in cigarette consumption but total tax revenues would increase by 3.2 percent (total excise revenues growth of 3.50 percent and VAT revenues growth of 2.34 percent). Based on the evidence from our research cigarette price policy could be used as a very effective government tool for reducing tobacco use Croatia. The government should increase taxes on tobacco and related products, especially in the part of specific excise duties in order to raise their price, so tobacco products will become less affordable over time. Moreover, increased excise duties should result in increased budget tax revenues, healthcare savings, and improving the health of the population. Collected budget funds should be target located to the healthcare system and education system to compensate negative effects and costs caused by smoking. Also, a commitment to regional harmonization of fiscal policies is needed to limit incentives for cross-border transactions, both with European Union countries as well as with western Balkan countries, because Croatia is highly threatened by illicit trade and illicit import of tobacco and related products due to its geo-communication position.

tobacco taxation ; Croatia ; price elasticity ; policy dialogue ; regulatory framework

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