Incentives matter: cigarettes tax file

From Reuters we learn:

(Reuters) - Cash-strapped Bulgaria and Romania hoped taxing cigarettes would be an easy way to raise money but the hikes are driving smokers to a growing black market instead.

Criminal gangs and impoverished Roma communities near borders with countries where prices are lower -- Serbia, Macedonia, Moldova and Ukraine -- have taken to smuggling which has wiped out gains from higher excise duties.

Bulgaria increased taxes by nearly half this year and stepped up customs controls and police checks at shops and markets. Customs office data, however, shows tax revenues from cigarette sales so far in 2010 have fallen by nearly a third.

and

Overall losses from smuggling will probably outweigh tax gains as Bulgaria struggle to fight the growing black market, which has risen to over 30 percent of all cigarette sales and could cost 500 million levs in lost revenues this year, said Bezlov at the Center for the Study of Democracy.

While the government expected higher income from taxes in 2010 it has already revised that to the same level as last year. "However, this (too) looks unlikely at present," Bezlov added.

and

Romania's top three cigarette makers -- units of British American Tobacco, Japan Tobacco International and Philip Morris -- contributed roughly 2 billion euros to the budget in taxes in 2009, or just under 2 percent of GDP.

They estimate about a third of cigarettes in Romania are smuggled and say this could cost the state over 1 billion euros.

And what's the bet that the tax rise has had little or no effect on the amount of smoking? Smokers just substitute illegally obtained cigarettes for legal ones.