Revenue warned: Tax hike may drive smokers to illegal sales

INCREASING tax on cigarettes may not bring in the extra funds expected, the Revenue Commissioners warned in the run-up to the last budget.

In fact they may drive smokers to buy cigarettes abroad or illegally.

A pre-budget submission for Finance Minister Michael Noonan said the 50c rise would yield an extra €65.2m. But a note of caution was sounded that prices may be at the point at which consumers will stop buying cigarettes legally and within Ireland.

The submission said: ‘It should be noted that the Revenue Commissioners have expressed concerns that increases in excise may not lead to increased yields, as consumers are further incentivised to exit the tobacco products market in Ireland.’

Over the previous two years, the sale of illicit cigarettes rose from 11% to 12% according to Revenue surveys. Another 6% bought their cigarettes abroad while on holidays or on short shopping trips.

Ireland imposes the second highest tax on tobacco in the EU, after only the UK. Total excise on 1,000 cigarettes in Ireland is €316.49, according to the documents, as compared to just €82.32 in Bulgaria where the rate is lowest. The submission also highlighted a remarkable fall-off in the numbers of people smoking, from 28.3% of the population in 2003 to 19.2% last year.

The department said in a statement: ‘The minister is aware that increases in excise duty on tobacco have been testing the boundaries of diminishing returns.

However, to date, the revenues from tobacco have been holding up and the increases provided for in recent years … have been realised, and the projections for 2016 point to a similar outcome.’