Tobacco Excise Directive: Trade-Offs for the Harmonization Vision

The European Union’s revised Tobacco Excise Directive (TED) is the latest proposal from Brussels that raises questions about the role that the EU plays in relation to the Member States. Harmonized policy in pursuit of a low-friction, Single Market is a worthy goal, but over-exporting policy decisions to Brussels will harm many Member States.

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. policy is a clear expression of national sovereignty. Governments decide whom to tax, how much to tax them, and how to use the resulting revenue. Those decisions reflect the preferences of voters and the economic conditions in each jurisdiction.

The EU has an important role to play when differences in national tax systems create appreciable distortions of competition in the Single Market.

But there is a meaningful difference between harmonizing tax rules to facilitate commerce and harmonizing tax rates to pursue a particular social policy. If differences in tax systems meaningfully distort cross-border commerce, then that can lead to EU intervention. But, in some areas, tax harmonization could constrain Member States’ ability to pursue different public health strategies. In such a case, the justification for EU-level intervention becomes considerably weaker.

The suggested revision of the TED illustrates that distinction.

The European Commission (EC) proposed a comprehensive update in July 2025, arguing that the existing framework no longer reflects tobacco and nicotine markets that have experienced remarkable innovation since the TED’s last update. The proposal would expand EU minimum taxation to products including e-cigarette liquids, heated tobacco, nicotine pouches, and other nicotine products.

TED Update: Single Market or Health Protection?

The EU can act only within the competences that its Member States have attributed to it. Famously, taxation is not among them. However, since divergent tax policies can create obstacles to the Single Market or distortions of competition, the EU can issue directives that substitute the national divergent tax laws that create such obstacles or differences.

On the other hand, EU treaties are somewhat ambiguous when it comes to the EU’s powers in terms of health protection. All relevant EU acts need to ensure a high level of health protection. The EU can harmonize national laws in some areas, but notably, not in tobacco-related areas. This prohibition, however, has not prevented the EU from introducing a directive regulating tobacco advertising.

In the context of the TED recast proposal, a question may be asked whether the pendulum swings more toward health protection or protection of the Single Market, as it establishes new minimum excise duty rates for the products it covers, and adds new ones.

Taxation Is Closely Connected to National Sovereignty

Taxation is inseparable from national budgets and political accountability. The EC acknowledges this and says that Member States retain responsibility for tax collection and tax policy within their countries.

This doesn’t mean every national tax policy deserves protection from European coordination. But it does mean that the EU should be cautious about replacing national policy choices with centralized rules when the underlying policy problem is fundamentally domestic.

Tobacco taxation is a good example. Member States have different smoking rates, income levels, health systems, consumer preferences, and enforcement capabilities. A tax rate that might be appropriate in France does not necessarily make sense in Bulgaria. A rate that is enforceable in Germany may be considerably more difficult to administer in a country with a larger informal economy or a different geographic relationship to lower-tax neighboring countries.

These differences are evidence that Member States face different policy environments and may need different policy tools to use in their specific countries.

Is the Goal of TED Focused on Health Outcomes?

The EC argues that greater harmonization is needed to protect the Single Market and advance public health. However, most Member States have excise rates that are way beyond the current directive’s minimum rates. The divergent rates in place across the EU deprive the directive of its harmonization goal. Similarly, due to the outdated nature of the current directive, some new products, such as e-cigarettes, heated tobacco, and nicotine pouches, are subject to excise duties in some Member States and not in others.

Increasing taxes on less harmful nicotine products would run against the EU’s health protection goal.

Public Health England has found that e-cigarettes are 95 percent less harmful than cigarettes. And economic research suggests taxes on alternative tobacco products decrease switching away from combustible cigarettes.

This is most evident when it comes to the new minimum excise taxes on nicotine pouches and other nicotine products. The latest Council proposal would introduce a minimum tax rate of 10 percent of retail selling price or €30 per kilogram in 2028-2029 (whichever is greater), and transition to a 25 percent minimum or €50 per kilogram in 2030-2031, before ultimately reaching 50 percent or €80 per kilogram.

The latest Council proposal would also increase the minimum cigarette 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. to 60 percent of the weighted average retail selling price or €200 per 1,000 cigarettes, with transitional provisions.

These rates represent more than an effort to prevent tax arbitrage. They establish a European-wide judgment about how heavily consumers should be taxed on select products.

If Member States conclude that maintaining a substantial price difference between cigarettes and lower-risk nicotine products helps move smokers away from combustible tobacco, then those governments should retain meaningful authority to pursue that strategy. The EU should not inadvertently (or intentionally) make such substitution more difficult in the name of tax harmonization.

Harmonization in service of a policy that goes against the evidence-based policies adopted at the Member State level looks more like a justification for paternalism. Centralized decision-making threatens Member States’ ability to use effective policy tools to raise revenue and reduce harm.

The EC’s proposal recognizes that Member States have developed different national approaches to products that substitute for combustible tobacco. Its justification for the new and higher taxes is that these differences “distort competition” and undermine the Single Market.

Further, the EC should remember that harmonization goes both ways. Perhaps the problem isn’t that some countries maintain low and more equitable taxes. Maybe the problem is that some countries have gone too far with tax rates that are beyond the established EU norms.

France has a serious problem with illicit cigarettes. Nearly 4 in 10 packs of cigarettes consumed in France aren’t purchased legally in the country.

This leads to the obvious question of whether the problem observed in France is because cigarette tax rates are too low in the rest of the EU or too high in France. If tax-induced smuggling fuels illicit markets and harms public health, it would surely be valid for other Member States to demand that limits be placed on how high tax rates are set.

Sweden Offers Important Policy Alternatives

Perhaps the biggest problem with an increasingly centralized approach to tobacco taxation is that it risks treating all nicotine products, and taxation of those products, as though they have identical policy implications.

This is particularly problematic because the preferred policy blueprint from Brussels isn’t the one that would most quickly reduce smoking rates.

Consider Sweden. Sweden’s tobacco experience is markedly different from that of most other European countries. Sweden has the lowest smoking rate of any EU Member State. Sweden’s Public Health Agency reported that only 5.4 percent of adults aged 16-84 smoked daily in 2024, down from roughly 14 percent in 2006. This outcome alone should have countries around the world trying to emulate the Swedish Experience. But EU policymakers are pushing the opposite policy approach.

Sweden has a long history of producing and consuming snus, a smokeless oral tobacco product.

Partly due to its long history of snus consumption and production, Swedish companies led the innovation to produce smokeless, modern oral pouches. These modern oral pouches have experienced a rapid increase in global demand and have contributed to the decline in many countries like Sweden.

Despite the incredible opportunity for harm reduction, nicotine pouches are banned in several EU countries, including France, Belgium, and the Netherlands. Public filings show that nicotine pouches are remarkably safer for consumers than combustible cigarettes. The seemingly obvious policy question should be: why doesn’t the EU copy Sweden’s tobacco policy, requiring legal sales of less harmful products across the bloc?

At the very least, the EU should not ignore successful policies that reduce smoking.

The goal of the TED should be a functioning Single Market, not a single European tobacco policy.

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