# I. Introduction

Georgia faces high economic and social costs of health. Health spending as a share of GDP was 8.9 percent in 2016, like countries with higher income levels (OECD 2018). Consumption of tobacco is among the leading causes of disease and deaths in Georgia. Smoking prevalence in the Georgian population is among the highest in the European region, and it has continued to increase over the last decade (NCDCPH et al. 2016). Consumption of tobacco is estimated to account for 7,000 to 11,000 annual deaths in Georgia (The Tobacco Atlas 2019; UNDP et al. 2018).

Efforts by the Government of Georgia (GoG) to control tobacco have received international recognition. Recently introduced legislation has been called “one of the strongest single comprehensive tobacco control laws in the world” (The Tobacco Atlas 2018). Despite these efforts, meeting the target reductions in smoking rates poses a challenging policy goal. Taxes are recognized as an effective measure to reduce tobacco consumption among smokers, and to dissuade initiation (World Bank 1999). However, concerns over potentially regressive effects are raised in opposition to higher taxes on tobacco. It is often argued that poorer households suffer the most from a tax increase, as tobacco products represent higher shares of the budgets.

This paper addresses the policy concern of the welfare and distributional impact of increasing taxes on cigarettes. It seeks to determine whether the claims of the regressive effects of tobacco tax policies have empirical validity in the case of Georgia. An Extended Cost Benefit Analysis (ECBA) is performed to account for the negative effects on household budgets as cigarette prices increase, as well as the indirect welfare benefits derived from the health benefits of reducing smoking. Decile-specific price elasticities of demand for cigarettes are used to incorporate heterogenous behavioral responses by different income groups of the population.

The estimates of price-elasticities suggest that -when faced with higher cigarette prices- poorer households in Georgia tend to reduce their consumption more intensely than higher-income peers. The magnitudes (under the base-scenario) of those elasticities are higher than similar exercises in other country settings. The ECBA is simulated on household expenditure data from the Household Income and Expenditure Survey (HIES, formerly the Integrated Household Survey, IHS). The findings suggest that the net distributional effect of increasing taxes on cigarettes in Georgia is not regressive, but instead highly progressive. Increasing prices of tobacco dissuades smoking and allows households to free up resources for other consumption goods. Incorporating the indirect benefits of reducing smoking—reductions in tobaccorelated medical expenses and additional earning from avoiding premature deaths—further offsets the negative price shock from the tax increase on household budgets. In the long-run, the net effects are positive across the population, with poorer households receiving the highest benefits, relative to their incomes.

The next section provides a background on the consumption patterns, control measures and taxation policies of tobacco products in Georgia. Section III. reviews the previous literature on the health and economic consequences of tobacco consumption and surveys existing research in Georgia. The fourth section outlines the components and theoretical assumptions of the ECBA methodology. Section V. presents an overview of the data sources and basic descriptive statistics. Simulation results for each component of the model, as well as the net distributional income effects are reported in Section VI. The results are then used to simulate the potential changes in poverty, and the number of lives saved from the tax increase. The final section discusses the likely implications of these results for the policy and research agendas in Georgia.

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