Tobacco tax hikes: A costly gamble for Europe’s health and fiscal stability

A leaked internal report from the European Commission has raised significant concerns about the Union’s plans to drastically increase tobacco taxes. Although the reforms are officially intended to improve public health and generate additional revenue, the Commission’s own analysis warns of potentially unintended — and even counterproductive — consequences.

At first glance, the aim seems noble: hike taxes sharply, drive down smoking, and boost public health. But beneath the surface, a different narrative is unfolding—one of unintended consequences, economic disruption, and policy blind spots.

On 12 June 2025, German newspaper Bild first reported the leak, which revealed the Commission’s impact assessment of a proposed update to the Tobacco Excise Directive (TED). According to the document, the EC is proposing a sweeping increase in excise duties: 139% on cigarettes, 258% on rolling tobacco, and a staggering 1,092% on cigars. Vaping and heated tobacco products, currently untaxed at the EU level, are also slated for inclusion. The preferred scenario could bring in an additional €15.1 billion per year in tax revenue, at least on paper.

But here’s the catch: the Commission’s own analysts acknowledge the risks. The report doesn’t pull punches. It warns that excessive tax increases could backfire, driving smokers toward illegal markets and cheaper, unregulated alternatives.

When price differences between member states become too large, consumers are more likely to make cross-border purchases or engage in smuggling. This has long been a challenge for the EU, with previous EC reports going back as far as 2020 already flagging the growth of illegal tobacco markets.

The internal report also calls into question the effectiveness of high taxes in reducing smoking rates. Although taxation has historically been used to discourage tobacco use, its impact appears limited in countries that already have high tax rates. Data suggests that further increases yield only marginal improvements, especially if consumers can easily access cheaper, untaxed alternatives.

A dangerous disconnect between policy and reality

The policy logic seems clear: make smoking more expensive, and fewer people will smoke. But this textbook approach oversimplifies the complex social, economic, and behavioural landscape of nicotine consumption.

The problem? The EU is not a single, harmonised tax space. Wide disparities in national excise rates have long encouraged smuggling and cross-border shopping, with billions lost to fraud annually. Adding more fuel to that fire could undermine the very public health objectives the directive seeks to achieve.

In southern and eastern Europe—where tobacco farming and manufacturing remain key economic pillars—the shock could be especially severe. Countries like Greece, Italy, and Romania are understandably wary. They argue that smoking rates are already falling, and that new taxes may do more harm than good.

Commissioner Hoekstra’s tightrope walk

For Tax Commissioner Wopke Hoekstra, the challenge is Herculean: deliver a directive that curbs tobacco use, includes modern nicotine alternatives, ensures tax fairness, and avoids creating a thriving black market. All this while contending with inflationary pressures, economic recovery concerns, and diverging national interests.

Fifteen member states, including the Netherlands and France - the EU’s champion of tobacco illicit trade – are reportedly backing the proposal. They point to the dual benefits of public health gains and recouped cross-border losses. But support is not unanimous, and political consensus across the bloc remains fragile.

Even so, France's revenue losses from illicit trade were estimated at €9.4 billion last year, according to a KPMG report. The Netherlands, which also has high national tobacco taxes and is pushing for higher EU-wide ones, was estimated to have lost almost €900 million.

What the leak tells us

Perhaps the most revealing aspect of the leaked report is its tone: cautious, self-critical, and unusually candid. It acknowledges that taxation, while a powerful tool, is not a panacea. If poorly calibrated, it risks creating perverse incentives, especially in a market already rife with alternatives and loopholes.

In short, the Commission appears to be caught in a policy paradox: push too hard and risk destabilising both legal markets and national economies; push too little and lose credibility on health.

The leak has prompted a rapid response from both public health campaigners and the tobacco industry. Anti-smoking campaigners have welcomed the proposals in principle, arguing that higher prices are an effective way of deterring people from smoking, particularly young people. The World Health Organisation (WHO) has long supported taxation as a key measure in reducing tobacco use.

Conversely, industry groups and retail associations have warned that the proposed measures could have damaging ripple effects. The European Tobacco Growers Association (UNITAB), for example, has argued that such abrupt increases could cripple small producers and lead to widespread job losses in rural communities. Retailers, especially those in border regions, are bracing themselves for a potential surge in cross-border shopping and black-market activity.

From a legal perspective, implementing the new directive requires unanimity from all 27 EU member states, which is a significant challenge given the current divisions. Some member states, including Sweden and Hungary, have already expressed reluctance, favouring national autonomy over excise policy. Also countries like Greece, Italy, Romania and Luxembourg are objecting to expanding and increasing tobacco-related excise duties.

According to Dr. Karl Fagerström, associate professor and researcher in the field of tobacco and nicotine, the EU should focus on the Swedish experience. “In Sweden, where the men have used snus and enjoy the by far lowest tobacco-attributable death rate of all men in the European Union, the taxation was last year modestly increased on cigarettes but decreased for snus. The supposedly least harmful nicotine-containing product – the nicotine pouches – is taxed the least.”

According to Dr. Anders Milton, former Chair of the World Medical Association and former President of the Swedish Red Cross, "snus does not cause cancer, smoking does. Sweden, although roughly the same percentage of the men use tobacco or nicotine daily, has the lowest incidence of lung cancer within the EU." 

"All use of snus is illegal in the other EU-members. Is that the way to apply the fact that Sweden has the lowest amount of lung cancers in the EU due to the way we use tobacco or just nicotine? From a health perspective I would not accept that. Sweden has shown that using tobacco or nicotine in a different way than smoking saves lives and helps some people to endure life’s difficulties", he added.

Yet, any proposal to reform the TED includes a risk of trouble if consumers turn to the black market for cheap smokes. Europol’s strategic assessment highlights the black market for tobacco as a rapidly expanding and increasingly sophisticated form of organized crime. According to the 2025 report, criminal networks are not just importing counterfeit tobacco—they're now setting up production facilities inside the EU, closer to high-demand markets in Western Europe. The EU's law enforcement agency indicates that countries applying high excise and VAT rates “are more vulnerable to the illicit sale of excise products.

The path forward: Pragmatism over politics

The leaked document should serve as a wake-up call—not just to policymakers, but to public health advocates, economists, and industry stakeholders. Ambition is essential. But so is realism. Taxation alone cannot solve the problem of smoking. Nor can it account for the resilience of illicit trade networks that are nimble, adaptive, and transnational.

Europe needs a nuanced, evidence-driven approach—one that combines moderate, targeted taxation with investment in cessation programmes, public education, and cross-border enforcement. Blunt fiscal instruments may deliver headlines but rarely deliver results.

As the revised Tobacco Excise Directive heads toward the legislative spotlight, one thing is clear: Brussels must tread carefully. Because when it comes to tobacco, the road to better health should not be paved with fiscal miscalculations.

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