Public Finances and Tobacco Taxation with Product Variety: Theory and Application to Senegal and Nigeria

The use of excise taxes – ad valorem and specific – as a means to control cigarettes consumption is a relatively new toolkit in many developing countries. There is a long and documented history throughout the world of governments implementing such tax schemes to generate revenues. In many instances, tobacco taxation has also been highlighted as an efficient means of mobilizing domestic resources to finance health and other important development programmes. The recent settings of the Addis Ababa Action Agenda and the 2030 United Nations’ Agenda for Sustainable Development have further heightened the ever-growing interest in tobacco taxation. More specifically, the latest Agenda intends to strengthen the country-level implementation of the World Health Organization’s (WHO’s) Framework Convention on Tobacco Control (FCTC). Article 6 of the FCTC recognizes price and tax measures as effective means to reduce the demand for tobacco, and the guidelines for Article 6’s implementation encourage the use of taxation in comprehensive strategies for tobacco control. Relying primarily on the World Health Organization’s Global Adult Tobacco Survey (GATS) and other additional sources of data as well as on the results derived from a previous study, this research intends to: (i) determine which category of excise taxes is more appropriate to the market of cigarettes in Senegal and in Nigeria; (ii) analyze the impact on prices, demand and fiscal revenues, of an increase of excise taxes for the two aforementioned countries. To do so, we first propose a theoretical model of taxation followed by an empirical analysis of the cigarette market in Senegal and in Nigeria in order to understand which category of excise taxes – ad valorem or specific – fits best to the local context. This policy brief reports on the key findings of this study.