Tobacco tax incidence in Mexico

Abstract

Tobacco products in Mexico are levied with the excise and value added taxes. The former has and ad-valorem component at 160%, and a per unit component at $0.35 per cigarette. One of the objectives of tobacco taxes is to reduce its consumption, so that tobacco related diseases are also reduced. That depends, however, of how the tax is shifted into the price paid by the consumers. Using monthly data from January 1994 to June 2017, in this paper, we estimate the incidence of the excise tobacco tax. We find that both, the ad-valorem and the specific components of the excise tax have a positive and statistically significant relationship to the tobacco price index, but the tax is not shifted to the consumers. Price changes are explained by increases in production costs faced by tobacco producers. This result diminishes the effectiveness of fiscal policy aimed to reduce tobacco consumption.