On October 18, the Sejm passed an amendment to the law raising the excise tax on tobacco products, breaking previous agreements with businesses and leading to a loss of trust in the government among entrepreneurs. The Ministry of Finance cites the government’s “concern for the health of Poles” without mentioning the growing budget deficit that these increases will help to address partially. Instead of repeatedly causing tax uncertainty, the government should perhaps focus on reducing budget spending.
Changes introduced
The excise increase introduced in the amendment significantly exceeds what was planned back in 2022. According to the law, in 2025, the excise rate on cigarettes will rise by 25 percent, 20 percent in 2026, and 15 percent in 2027. An even more significant increase applies to tobacco for hand-rolled cigarettes, which will go up by 38 percent in 2025, then by 30 percent in 2026, and another 22 percent in 2027.
However, the most significant impact will be on innovative nicotine products, such as e-cigarette liquids. For them, the excise rate is set to rise by 75 percent next year, 50 percent in 2026, and 25 percent in 2027.
Broken promises and business trust in the government
The situation is problematic not only due to the scale of the increases but also due to the breach of previous agreements. In 2022, the then-government presented an “excise map” to ensure stability and predictability in excise tax changes over the long term. The excise map had planned for annual excise tax increases on tobacco and alcohol, set at 10 percent per year. Entrepreneurs were surprised at how quickly the authorities broke their coalition agreement. Article 10 promised to restore predictability to the tax system. This predictability, already established in this area, was ruthlessly overturned by the Ministry of Finance, whose announcement of changes came with little notice. Furthermore, the principle of vacatio legis for tax laws, which the current government was supposed to uphold, was also violated. This principle was meant to ensure stability in tax law changes, requiring that any law introducing changes be published with a six-month notice.
When the Ministry of Finance announced the planned changes, there was still no draft of the law, and the changes were set to take effect from January 1, 2025, giving less than the promised six months. The amendment passed in October, with changes to take effect in March of the following year, again falling short of the six-month period. Introducing uncertainty into tax regulations, breaking previous commitments, and coalition agreements only makes entrepreneurs lose even more trust in the government.
The government’s health-based argument
To justify the excise increase, Finance Minister Andrzej Domański cites health-related arguments. According to the minister, the health risk cited was the economic accessibility of cigarettes. “We know that the economic accessibility of cigarettes has increased significantly since 2015 – at that time, the average wage could buy 290 packs, and now it can buy 490 packs of cigarettes,” Mr. Domański said.
This raises the question of whether the government truly cares about the health of its citizens or is simply trying to cover an expanding budget deficit. The budget deficit planned for 2024 was already a record 184 billion PLN. By the end of June, the budget gap had reached 70 billion PLN and continues to grow.
Sin taxes?
The health-based rationale for tax increases is based on attempts to reduce the average citizen’s consumption of tobacco products. In short, higher prices are intended to discourage consumers from buying cigarettes or e-cigarettes while increasing excise tax revenue. Such tax hikes are often referred to as a “sin tax,” applying to various “pleasures” like cigarettes, alcohol, or junk food.
The issue is significant increases tend to expand the gray market, where consumers will simply opt for cheaper cigarettes. This could harm everyone, as smokers -already hit by inflation- will pay a 25 percent higher excise for the same cigarettes next year, and those looking for cheaper options may end up buying counterfeit cigarettes coming from organized crime. Retailers may also feel a drain of consumers to the gray market, and ultimately, the government may lose out if more tobacco consumption exits the taxable market.
Of particular concern is how the steep 75 percent tax increase on vaping products could affect public health outcomes. Many former smokers who successfully quit through vaping might find these products becoming prohibitively expensive. This dramatic price increase could force them to return to smoking traditional cigarettes, which are widely considered more harmful to health. Such an unintended consequence would directly contradict the public health goals behind these tax measures.
If health were indeed the goal
If, as the ministry claims, the changes aimed to improve public health, other solutions could be considered. According to the Effective Anti-Smoking Policies Global Index, Poland ranks 18th, with room for improvement. On the other hand, Sweden provides an interesting example: it reduced cigarette consumption by 60 percent between 2006 and 2020, the most significant drop among EU countries. Research by We Are Innovation and Ipsos identified three main reasons smokers successfully quit:
- Availability of alternative nicotine products, such as snus, which serve as healthier substitutes for smoking.
- Variety of flavors in alternative nicotine products, which encourages consumers to try alternatives.
- Affordable prices for innovative nicotine products, rather than pushing smokers to the gray market, encourage them to switch to safer options like nicotine pouches, snus, or vaping.
The current fiscal situation presents challenges that the government is addressing through various revenue measures, including adjustments to cigarettes and alternative nicotine products taxation. While these tax increases may help address immediate budgetary needs, a broader discussion about balancing revenue generation and expenditure management could benefit long-term fiscal planning.
* Błażej Szkudlarek is a financial sector professional specializing in investment and risk analysis, with degrees in Economics and Economic Analysis from the University of Economics in Krakow, where he was awarded a Mises Institute scholarship. As a committed libertarian, he serves as the National Coordinator for Students For Liberty Poland and leads the Clubs of the Austrian School of Economics, working to advance free-market principles and economic education among Polish students.
Source: We Are Innovation
