<u>Figure A7.1</u> in the Annex presents similar results, accounting for the reduction in total tobacco-related medical expenses (including out-of-pocket, as well as public and other private expenses). The long-term value (upper-bound scenario) of increasing the price of cigarettes by 50 percent can exceed 2 percent of income for the bottom 10 percent of the population.

Heterogenous effect of increasing the specific excise The two major types of special taxes that countries impose on tobacco are _specific_ (quantity-based) and _ad valorem_ (value-based) excise taxes. While both schemes have strengths and drawbacks, the literature and international experiences suggest that a _specific_ excise tax is often “technically superior” (Marquez and Moreno-Dodson 2017). Implementing a _specific_ excise can lower administrative burdens, the risks of noncompliance, and the incentives for the tobacco industry to keep consumer prices low (Ibidem).

Additionally, raising the specific tax may bring further distributional considerations. If poor households consume lower-priced cigarettes, augmenting the price of all cigarettes by a specific amount will translate to a higher price shock for poor households. To test this scenario in the case of Georgia, consumption prices are analyzed for different brands in the tobacco market. The available tobacco price data for 2014 suggest that a pack of 20 cigarettes was 3.2 GEL for the premium brand, and 2.2 for the most sold brand. However, the cheapest brand was only 80 tetri per pack (WHO 2015). A hypothetical price shock is simulated, assuming that those price ratios are held, and that smokers in the 20 poorest percent of the population purchase the cheapest brand only, while smokers in the two wealthiest deciles consume premium brands only. The rest of the population is assumed to smoke the most sold brand. The simulated price shock is also calibrated to achieve comparability to a 50 percent price shock. Hence, it is assumed that deciles I and II face a 100 percent price shock, deciles III through VIII are affected by a 36 percent price increase, and deciles IX and X observe a 25 percent price rise in cigarettes. The average price shock across all deciles is 47 percent.

As Figure 7 shows, the implementation of a _specific_ tax increase results in a much more progressive distribution of the benefits of tobacco taxes in Georgia, relative to a similar _ad valorem_ increase. The bottom 20 percent of the population can increase their average income by 3 percent in the medium- and long-term, thanks to the extended benefits of tobacco taxes.

Figure 7. Net income effect under specific excise increase <!-- Start of picture text --> 1 2 3 4 5 6 7 8 9 10<br>Decile<br>Medium-bound Elasticity Lower-bound Elasticity<br>Upper-bound Elasticity<br>6<br>4<br>2<br>Inconme Gains (%) 0<br>-2<br><!-- End of picture text --> _Source:_ Author estimations, based on the IHS (2012-2016) and HIES (2017). Data on smoking-attributable death events is taken from the GBD (2017), and tobacco-related medical expenses adapted from Goodchild et al. (2018) and WDI. _Notes:_ Estimation using a price shock of 100% for deciles 1 to 2, 36% for deciles 3 to 8, and 25% for deciles 9 and 10. Deciles are created based on per capita household total consumption. Only out-of-pocket medical expenses are considered.

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