Tobacco Tax Increases Can Also Benefit States

This Policy Brief was written by the Centro de Investigación en Alimentación y Desarrollo (CIAD) in Mexico. The policy brief assesses the effect of introducing a 4.5% ad valorem state-level tobacco tax on consumption, tax revenue, and poverty in Mexican states. This reform would reduce consumption most in the states with the highest levels of poverty and chronic poverty such as Chiapas, Hidalgo, Guerrero, Oaxaca, and Tlaxcala. It would also raise an additional 885 million pesos in revenue. On a subnational level, tax revenue collection would be more significant in the State of Mexico, Mexico City, Nuevo León, and Jalisco, as these states have the largest economies and populations. The authors also estimate the effect of introducing this state-level tax paired with an increase in the federal excise tax to 1.50 pesos per stick. In this scenario, an additional 1.112 billion pesos would be distributed to Mexican states in addition to the 885 million from the state-level tax. This would translate to 287 million pesos, 201 million pesos, 189 million pesos, and 167 million pesos in additional revenue in the State of Mexico, Jalisco, Mexico City, and Nuevo León, respectively. Importantly, these tax reform options would not result in an increase in poverty. The policy brief concludes with recommendations for policy makers to raise revenues and reduce consumption.

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The corresponding Working Paper can be found here.