The effectiveness of tax increases in reducing tobacco consumption relies on the tobacco retailers and producers passing on increases to consumers (tax pass-through). Previous UK research on supermarkets found heterogeneous levels of tax pass-through across the market segments and price distribution of tobacco products. This study uses data from small retailers across the UK to assess whether recent tax changes have been passed on to consumers and if this varies across the price distribution, between countries of the UK and by neighbourhood deprivation.
We use panel data quantile regression analysis of tobacco sales in small retailers in the UK from March 2017 to December 2021 combined with UK tax rates and store-level index of multiple deprivation (IMD). We calculated the rate of tax pass-through for factory-made cigarettes (FM) and roll-your-own tobacco (RYO).
Following increases in the duty payable on tobacco, we find evidence of overshifting across the entire price distribution for FM and RYO. For England, Scotland and Wales, the rate of the overshift in tax increased with product price. For Scotland, we find that stores in the least deprived IMD pass-through taxes at a higher rate.
Our evidence shows heterogeneous levels of tax pass-through by price, region and level of deprivation. The findings emphasise the importance of understanding the pricing strategies of the tobacco industry (TI) and how these vary across the UK to develop robust approaches to mitigate the pricing strategies of the TI.
