Excise taxes on tobacco constitute a relevant component of fiscal revenue in Georgia. In the context of the current fiscal consolidation efforts, the risks of revenue shortages associated with the elimination of taxes on reinvested profits “have been minimized by a sharp increase in excise tax rates on fuel and tobacco starting in 2017” (World Bank 2018).

Table 2. Main changes introduced in the 2017 reform on tobacco-control

|Interventions|Former policy|2017 Tobacco control legislation|
|---|---|---|
|Raise cigarette taxes<br>(FCTC Art. 6)|Excise taxes of 54 percent of retail<br>prices of the most sold brand.|12 percent excise tax increase in 2017.|
|Smoke-free policies<br>(FCTC Art. 8)|Ban on smoking in all public<br>places, but lack of enforcement in<br>cafes,bars, pubs.|Ban on smoking in all closed areas, other than<br>private homes, penitentiaries and mental<br>health institutions.|
|Labelling and packaging<br>(FCTC Art. 13)|Health warnings required to cover<br>30 percent of packaging. No<br>pictograms allowed.|Increased size of health warning and<br>pictograms introduced.|
|Advertisement ban<br>(FCTC Art. 11)|Ban on advertising on TV and<br>radio.|Ban on all forms of tobacco promotion.|

_Source:_ UNDP et al. 2018. _Note:_ Taxes are regulated by the Tax Code and not included in tobacco-control legislation.

# III. Literature review

The health and economic costs of tobacco A large body of cumulative evidence has shown the causal impact of smoking on illness and premature deaths (Jha and Peto 2014). Tobacco use is responsible for the premature death of one-third to one-half of people who smoke (Peto et al. 1996). It is estimated that 8 million people die globally from tobacco use every year (WHO 2019). Close to 10 percent of those deaths result from exposure of nonsmokers to secondhand smoke.

Across the world, smoking-related illnesses cost billions of dollars each year, imposing heavy economic tolls on households and countries (NCI and WHO 2016; Xu et al. 2015). Tobacco-related diseases are estimated to result in 6 percent of total global spending on health. And the total economic cost of smoking—including productivity losses from deaths and disability—are calculated at 1.8 percent of the world’s annual gross domestic product (GDP) (Goodchild, Nargis, and Tursan d’Espaignet 2018). Nearly 80 percent of the world’s smokers live in low- and middle-income countries (WHO 2015a). These countries are already burdened by 40 percent of the global economic costs of smoking (Goodchild, Nargis, and Tursan d’Espaignet 2018).

The mechanisms of taxing tobacco on household welfare Smoking cessation is effective and quick in reducing tobacco-related mortality. People who quit by age 40 get back nearly the full decade of life they would have lost from continued smoking (Jha and Peto 2014). Among tobacco-control policies, tobacco taxes are considered the most efficient policy intervention to reduce tobacco consumption (World Bank 1999; NCI and WHO 2016).

Taxes encourage current smokers to quit and discourage potential consumers to initiate, by increasing prices and reducing the affordability of tobacco products. <u>Figure 1</u> was adapted from the work by Postolovska, Lavado, Tarr and Verguet (2017), to summarize the different channels through which increasing tobacco taxes can affect household incomes. After a tax increase, smokers who continue to purchase the same amount of tobacco will face a negative budget shock, as the tax-induced higher price of 5