<mark>demand for tobacco. Hence, they can benefit from the highest relative benefits in reduced medical bills and years of productive life lost, that work to offset potential welfare losses from increased tax liabilities. In sum, the net distributional effect of increasing taxes on tobacco in Georgia is not regressive, but rather progressive. Accounting for both costs and extended benefits, there are net positive income gains for the bottom 20 percent of the Georgian population, under all tax scenarios considered. Under the more</mark> ambitious tax increase, half of the population could potentially receive net income benefits.

<mark>Two characteristics of the distribution of price-elasticities contribute to these results in Georgia. First, the price-elasticities of tobacco are particularly high among lower-income households. Second, higher-income smokers are expected to change their tobacco consumption patterns only marginally. The price-elasticity for decile ten is close to zero. While this contributes to the observed progressive incidence of the tobacco tax, it also raises public health and financial concerns. There is urgent need to further understand the driving forces reflected in these patterns, and to introduce complementing policy responses to target these non-responsive consumers.</mark> Another interesting discussion arises on the highly progressive effect of _specific_ excise taxes (relative to an _ad valorem_ equivalent). Implementing a _specific_ tax increase can yield highly progressive net effects, as smokers of low-priced tobacco (assumed to be those with lower incomes) face higher price shocks. Overall, the results suggest that there is little to lose and much to gain from increasing taxes on tobacco in Georgia. In addition to progressive tax incidence, the net benefits of taxing cigarettes are positive for large sectors of the population. In 2017, those positive income gains could have reduced poverty for 4 to 7 thousand Georgians in 2017, under the analyzed policy scenarios. These results are a lower-bound estimate, as they consider out-of-pocket medical expenses only, and leave out other possibilities to reduce poverty through enhanced fiscal revenues and reduced public outlays on tobacco-related diseases.

However, the theoretical framework and decomposition of the ECBA also warn about possible short-term negative consequences on some poor and vulnerable smokers, who may be overburdened by a disproportionate price increase on their budgets, while they manage to reduce smoking. For example, some households who live out of poverty—but close to the poverty line—could still be vulnerable to income fluctuations and to fiscal impoverishment if taxes on tobacco are raised but smokers do not adjust their consumption behavior. Policy should accompany tax increases with complementing interventions to facilitate behavioral adjustments—to induce and assist smokers to quit tobacco—and to cushion temporary income shocks. As smokers quit and price elasticities increase in the medium- to long-term, the health and economic benefits of tobacco taxes expressed in the ECBA can be expected to offset those transitional income losses.

<mark>There are possible improvements to this empirical application of the ECBA in Georgia. First, it is often argued that the calculation of price-elasticities of demand from household survey data—which generally, as in the case of Georgia, omit price information—fails to account for quality shredding and substitution effects. This would be a source of concern to the extent that smokers in Georgia switch consumption to lower-price tobacco when faced by a price increase. The estimations of own-price elasticities of filtered cigarettes adapting the Deaton methodology (Deaton 1990; 2018) show a negative correlation of household incomes and their sensitivity to price changes in tobacco. Despite some potential quality shredding, consumers reduce overall cigarette consumption when faced with higher prices. Moreover, lower-income groups of the population are systematically more responsive to price changes in cigarettes. Smokers from poorer households in Georgia are more likely to adjust consumption, and to benefit most from the medium- and long-term benefits of reduced smoking. On the other hand, results from the application of the Deaton method are sensitive to model specifications, and better data and further analysis is required to better understand substitution and cross-elasticities of demand with other types of tobacco</mark> 24