Widening the price gap: the effect of the Netherlands' 2020 tax increase on tobacco prices

Introduction: The public health impact of a tobacco tax increase depends on the extent to which the industry passes the increase onto consumers, also known as tax-pass through. In 2020, the Netherlands announced tax increases aimed to increase the retail price by €1 per 20 factory-made cigarettes and €2.50 per 50 grams of roll-your-own tobacco. This study examines the pass-through rate after the tax increase, and whether this differed by type of tobacco and brand segment.

Methods: Self-reported prices of 117 tobacco brand varieties (cigarettes=72, roll-your-own=45) pre- and post-tax increase were extracted from the 2020 International Tobacco Control (ITC) Netherlands Surveys (n=2959 respondents). We calculated the tax pass-through rate per variant, examining differences between type of tobacco and brand segments.

Results: On average, cigarette prices increased by €1.12 (SD=0.49) (112% of €1) and roll-your-own prices by €2.53 (SD=0.60) (101% of €2.50). Evidence of differential shifting across segments was found, with evidence of overshifting in non-discount varieties. The average price of discount varieties increased with €0.20 less than non-discount varieties. Similarly, the net-of-tax price decreased in discount varieties (cigarettes=-€0.02; roll-your-own=-€0.05), but increased in non-discount varieties (cigarettes= +€0.14; roll-your-own= +€0.20).

Conclusions: Despite the large tax increase, the industry increased prices in line or above the required level. Through differential shifting, the price gap between discount and non-discount varieties has widened, which may reduce the public health impact of the tax increase. Measures aimed at reducing price variability should be strengthened in taxation policy, such as the European Tobacco Tax Directive.

Implications: We found that the industry used differential shifting after a significant tobacco tax increase in the Netherlands. Prices increased more than required in higher-priced products, but not in lower-priced products. This pattern was found both for factory-made cigarettes and roll-your-own tobacco. Through differential shifting, the industry undermines the potential public health impact of tobacco tax increases, by offering a relatively cheaper alternative, which discourages people to quit or reduce consumption. The revision of the European Tobacco Tax Directive (TTD) provides an opportunity to address the widening price gap - both between and within product segments - across the European Union.