Examining cigarette, heated tobacco, and e-cigarette market pricing and tax pass-through in Ukraine during the 2019-2022 tax reforms

Introduction: This study offers a comprehensive examination of the pricing strategies/dynamics used by the tobacco/nicotine industry in response to tax increases using Ukraine as a case study during the 2019-2022 tax reforms. This period saw the introduction of new tax categories for heated tobacco products (HTPs) and electronic cigarettes (e-cigs) with concomitant tax increases. This is the first systematic consideration of taxation on these products. The primary objectives are to examine how tax changes influence product pricing and how HTPs are priced vis-a-vis cigarettes, particularly in the context of harmonisedspecific tax rates. Methodology: NielsenIQ monthly price and sales data for cigarettes, HTPs, and e-cigs, along with official tax data, were used. Tax pass-through analysis was conducted to examine the relationship between tax increases and retail prices by market segment, with net revenue calculations used to evaluate impacts. Results: The industry usually overshifted taxes on cigarettes (mid-price and premium), HTPs, and e-cigs while undershifting on economy cigarettes during the study period. However, a big HTP tax increase in 2021 was not overshifted to a great extent. The industry also employed a price-smoothing strategy where initial price increases following tax increases were kept moderate, with further increases introduced gradually throughout the year. Conclusion: The study shows that the industry has used tax increases on HTPs and e-cigs as an opportunity to raise prices but with lower net revenue per stick. The findings suggest that fully harmonising HTP taxes with those on traditional cigarettes could limit the industry's pricing strategies and hence help reduce consumption and generate additional government revenue.