Nicotine Pouch Tax | EU Tobacco Tax Policy

As a part of the Tobacco Excise Directive (TED), the European Commission (EC) is proposing to set a minimum taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. on nicotine pouches of 143 EUR/kg or 50 percent of the purchase price. The TED provides a common framework for Member States’ tobacco tax policy.

The proposed revision, released in an update last year, includes an increase to the minimum price of cigarettes and a substantial expansion of the products covered under TED. The new policy would add taxes to liquids for heated tobacco, e-cigarettes, nicotine pouches, and other nicotine products.

Member States are obligated to meet the minimum rates required by the TED, but they are empowered to levy higher rates should they choose to do so. This attempts to balance the harmonization efforts across the EU with a minimum rate to reduce cross-border arbitrage, while respecting the sovereignty of Member States to determine their own tax rates.

A recently drafted resolution would impose a less extreme tax rate, while also allowing longer implementation periods for Member States to reach the proposed minimum rates. Even at a lower rate, however, bloc-wide taxes on alternative nicotine products would substantially impact many of the countries that already levy an excise on nicotine pouches.

Why Tax These Products in the First Place?

Excise taxes have long played a central role in tax systems around the world. Policymakers rely on them not only to raise revenue, but also to influence behavior by encouraging consumers and producers to shift toward less harmful activities.

When structured carefully, these taxes can both fund public priorities and improve economic outcomes. When designed poorly, however, they risk distorting behavior in counterproductive ways, leaving society worse off than if no intervention had been adopted.

The intellectual foundation for taxing products associated with externalities is familiar from basic economics. The concept of a Pigouvian taxA Pigouvian tax, named after 1920 British economist Arthur C. Pigou, is a tax on a market transaction that creates a negative externality, or an additional cost, borne by individuals not directly involved in the transaction. Examples include tobacco taxes, sugar taxes, and carbon taxes.—named after economist Arthur Pigou—holds that markets can be steered toward more efficient outcomes by pricing in external costs or benefits. If a good imposes costs on others, a tax equal to that cost can reduce consumption to a more socially optimal level. Conversely, subsidies can encourage activities that generate positive spillovers. In theory, aligning private decisions with social costs or benefits leads to better overall outcomes.

For excise taxes aimed at harmful products, when the tax directly targets the element responsible for external costs, individuals and firms are better able to factor those costs into their decisions. Carbon taxes illustrate this principle by attaching a price to emissions, thereby incorporating environmental damages into production and consumption choices.

Similarly, excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections. policy for nicotine products should reflect meaningful differences in risk. Although long-term evidence on newer nicotine products continues to develop, the existing body of research consistently finds that they are substantially less harmful than combustible cigarettes. Even under conservative assumptions, large net public health gains would occur if a relatively small share of smokers switched to lower-risk alternatives.

Current global usage patterns reinforce this point: the number of smokers still far exceeds the number of users of alternative products. If that balance were to reverse, the policy conversation around taxing alternatives might shift—but such a transition would also imply significant reductions in smoking-related disease and healthcare costs.

It follows that tax structures ought to create clear price gaps between combustible cigarettes and lower-risk alternatives. From a public health perspective, the case for taxing alternative tobacco products (ATPs) at high levels is limited, especially given that these products generate little to no external harm to others.

How Should Alternative Tobacco Products Be Taxed?

If governments do choose to tax ATPs, the structure should account for differences in risk across products. A sensible approach is to tie tax rates to relative harm, using combustible cigarettes as the benchmark.

In principle, one could imagine a system in which each product is assigned a precise tax rate based on scientifically established measures of risk.

In practice, however, achieving that level of precision and consensus is unlikely. A more workable solution is to group products into categories, allowing for differentiated tax rates without requiring exact measurements.

Under this framework, reduced-risk products can be divided into several tiers, each taxed at a fraction of the cigarette rate. Products closer in risk to cigarettes would face higher relative rates, while those with substantially lower risk would be taxed lightly—or not at all. For example, one could envision a system in which the highest-risk alternatives are taxed at half the cigarette rate, followed by progressively lower tiers (e.g., one-quarter, one-tenth, and ultimately zero for the lowest-risk category).

Placement within these categories would depend on three key considerations. First is the degree of harm associated with the product: higher-risk products warrant higher taxes, while lower-risk products should face lighter burdens.

Second is substitutability—how effectively the product serves as an alternative to combustible cigarettes. Products that more readily replace smoking should be taxed less heavily, encouraging switching behavior; this can be informed by empirical estimates such as cross-price elasticities.

Third is the ease of high-volume consumption. Products that enable rapid or excessive use may justify relatively higher rates within the reduced-risk spectrum.

Taken together, a tiered system grounded in these principles can better align tax policy with public health objectives by encouraging movement away from the most harmful forms of nicotine consumption.

Alternative Tobacco Product Tax Rates to Optimize Harm Reduction

Source: Author’s calculations.

ATPs should be taxed in line with this approach in the new TED. Unlike traditional combustible tobacco, these products do not produce the same level—or type—of external costs, and they may even yield net public health benefits if they displace smoking.

Generating Optimal Tax Revenues Rarely Involves Levying the Highest Rates Possible

Setting exorbitant rates on ATPs also risks failing to maximize tax revenues and failing to meet the EU’s health policy objectives.

Look no further than the rapid rise of illicit cigarettes and vaping products. Allowing illicit operators to offer massive price discounts to customers simply by skirting tax laws is a recipe to fuel illicit markets.

Recent estimates put the price of cigarette smuggling in the EU at €14.9 billion of forgone tax revenue. As market demand grows for nicotine pouches, so too will the potential for illicit market operators to undercut legal markets.

The Tax BaseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. Can Be as Important as the Tax Rate

In the context of harm-based excise taxation, quantity-based taxes tend to align more closely with policy goals than value-based alternatives. Measures tied to physical consumption—such as the number of cigarettes, the volume of vapor products consumed, or the number of nicotine pouches used—provide a more direct connection to potential harm than retail prices. But since nicotine itself is not the driver of external harm, there is no logic to tying a Pigouvian tax to the amount of nicotine contained in these products.

Quantity-based excise taxes are also generally easier to administer than ad valorem taxes, since they rely on observable quantities rather than estimated values. They are, therefore, preferable from a practical standpoint as well as from the perspective of levying Pigouvian taxes.

Proposed Tax Structure for Alternative Nicotine Products

Excise Taxes Should Reinforce, Not Undermine, Broader Public Health Goals

A well-functioning excise tax system should reinforce, not undermine, broader public health goals.

Academic research has continually found that making alternative nicotine products to cigarettes more expensive results in fewer smokers switching to less harmful products. The proposed revisions to the TED, therefore, risk moving policy in the opposite direction by narrowing price differences between combustible cigarettes and demonstrably lower-risk alternatives.

When tax policy fails to reflect meaningful differences in harm, it weakens incentives for smokers to transition away from the most dangerous products and instead preserves the status quo. This runs counter to the EC’s stated objective of achieving a tobacco-free generation by 2040.

If the European Union is serious about achieving a tobacco-free generation, excise tax policy must support that objective. That means preserving strong incentives to move away from combustible cigarettes, maintaining clear price differentials based on risk, and avoiding tax structures that inadvertently discourage harm-reducing behavior.

The one EU Member State that has successfully reduced smoking rates below the desired threshold, well ahead of the 2040 goal, has been Sweden. It did so by embracing harm reduction.

Thoughtful design—not simply higher rates—will determine whether excise taxes serve as an effective tool for improving health outcomes.