Increased Excise Duties on Tobacco are a Fiscal Mine of 400 Million Euros

The Croatian tobacco industry is strategically important and uniquely vertically integrated – from final production in Istria to cultivation in Slavonia and Podravina. It employs around 10,000 people, exports reach 400 million euros, and about three hundred farmers produce six percent of European tobacco with guaranteed purchase and decent profit. Therefore, this industry cannot be treated as it is across the EU, writes HUP’s chief economist Hrvoje Stojić in this week’s publication Focus of the Week.

The European Commission (EC) has proposed a Directive on Excise Duties on Tobacco and Related Products (TED) with a significant increase in minimum excise duties – from 124.2 to 215 euros per thousand cigarettes. This would mean an increase in the excise tax burden of 73 percent, but also double the excise tax burden on cigarettes and all nicotine products compared to neighboring non-EU countries. Such a large increase and difference compared to neighbors would put the Croatian tobacco industry in an extremely difficult position.

Analyses show that the demand for these products in Croatia is significantly more sensitive to price changes than the EC assumes. The elasticity of demand is estimated at -1.3, while the EC uses -0.54, which means that the planned increase in excise duties would lead to a decline, not an increase, in tax revenues. Accordingly, the Croatian budget could lose about 240 million euros annually, which is almost 24 percent of current revenues from excise duties on tobacco products. The market that is lost would not disappear but would flow into the illegal market, encouraging criminal networks in the country and the region.

The EU already loses 17 billion euros annually from 52 billion illegal cigarettes, while the market for illegal nicotine products is estimated at 10 billion euros. Increased excise duties would further strengthen the gray market and smuggling, with no benefit to public health. In October 2024, the average excise duty in Croatia was 128 euros per thousand cigarettes, just 14 percent below the EU average when accounting for differences in prices and income, which clearly shows that there is no room for a sudden increase as stated in the EC proposal.

TEDOR Mechanism

The EC also proposes a tax mechanism TEDOR – redirecting 15 percent of national excise revenue to the EU budget, which would cost Croatia 152 million euros annually. This does not bring new revenues to the state but redistributes existing ones and pours them into the EU – contrary to the fundamental principle of EU own revenues.

Even worse, TEDOR relies on a shrinking base, the consumption of tobacco products, making it unsustainable in the long term. The proposed measures would limit the fiscal autonomy of EU member states, especially in the south and southeast of the EU, where purchasing power is below the EU average, including Croatia. The total estimated annual loss to the state budget from the context of TED and TEDOR is around 400 million.

Additional tax pressure thus comes through TEDOR and the mentioned CORE tax, which would flow directly into the EU budget. This would significantly increase the operating costs of many medium and large Croatian companies, worsen competitiveness, and reduce the country’s attractiveness for investment. There is also a real danger of relocating businesses to countries with more favorable tax regimes, which would mean a loss of jobs, capital, and tax revenues in Croatia.

The tax treatment of innovative tobacco and nicotine products of reduced harm should be shaped to encourage adult smokers to switch to less harmful alternatives, Stojić notes. Therefore, a more appropriate approach, along with a moderated and gradual increase in excise duties on cigarettes, would be the introduction of a minimum excise duty on THP (heated tobacco products) of 110 euros per kilogram, on e-liquids up to 0.25 euros per milliliter, and excise duties on nicotine pouches of 25 euros per kilogram.

This would preserve the flexibility of EU member states and mitigate the negative impact on the market. According to the EC’s calculations, excessively high minimum rates on reduced-risk products, such as e-liquids or nicotine pouches, could almost destroy the market for these products in the EU. Namely, the proposed minimum rate of 143 euros per kilogram for nicotine pouches, according to the EC’s calculations, would reduce their sales by as much as 86 percent. This would discourage smokers from switching from cigarettes to alternatives and disrupt market competition. More moderate rates, tailored to the conditions of each member state, would allow for innovation, fiscal stability, and a more effective fight against illegal trade.

HUP therefore proposes:

• Phased and moderate adjustment of excise duties to avoid tax shocks and the growth of the gray market
• More favorable tax treatment of reduced-risk products (THP 110 euros per kilogram, e-liquids ≤0.25 euros per milliliter, nicotine pouches 25 euros per kilogram), which encourages adult smokers to switch to less harmful alternatives
• Preservation of fiscal sovereignty and rejection of TEDOR, as it redistributes national revenues and jeopardizes the stability of member states’ budgets
• Rejection of the CORE tax, which further burdens companies and reduces the competitiveness of a large number of medium and large Croatian companies
• Coordination of Croatia with regional countries for a stronger negotiating position with the EC
• Active cooperation between the industry and the Ministry of Finance in finding sustainable solutions that protect fiscal and economic interests