By Timothy S. Donahue
Top Takeaways:
- Policy shift: The IMF advocates for risk-based taxation, supporting lower taxes on reduced-risk nicotine products.
- Harm reduction signal: The paper states that newer products “reduce exposure to toxicants,” supporting different tax treatment.
- Global tension: The stance opposes policies like the WHO’s push for uniform taxation on all nicotine products.
The International Monetary Fund is weighing in on nicotine policy, urging governments to align taxes with the relative risk of the product—a stance that could have major effects on the global nicotine market.
In a paper published earlier this month, IMF economists argue that taxes on nicotine products “should better align with the harm they cause,” highlighting the growing disconnect between policy frameworks and evolving product categories.
“Nicotine products present a particular challenge,” the authors wrote, pointing to the rapid emergence of alternatives such as vapes and nicotine pouches.
“The good news is that many of these new products, while still harmful, reduce exposure to toxicants,” the paper states. “It therefore makes sense to tax them at a lower rate, which can be adjusted as research becomes available and revenue needs evolve.”
The IMF’s stance contrasts with policies in several markets, where governments have adopted equal or higher taxes on non-combustible products.
“To achieve health goals, policymakers must keep up with these developments … Combining tax and health data makes this job easier,” the authors added.
The paper also highlights the differences in risk across nicotine categories, noting that smoke-free alternatives like pouches, vapes, and heated tobacco products are much less harmful than combustible cigarettes.
Industry and harm reduction advocates have taken the IMF’s stance as confirmation of long-standing arguments supporting risk-based taxation.
“Ensuring cigarettes are far more expensive than low-risk alternatives has been shown to have a dramatic effect in reducing cigarette smoking,” said David Sweanor, chair of the advisory board at the University of Ottawa’s Centre for Health Law, Policy and Ethics.
“The IMF’s experts implicitly challenge the economic and policy illiteracy of the World Health Organization, which supports equal taxation on all nicotine products, regardless of their risk,” he added.
Clive Bates of Counterfactual Consulting said the IMF’s influence could carry significant weight with policymakers.
“The International Monetary Fund is the leading governmental agency overseeing macroeconomic policy,” Bates said. “It is taken extremely seriously by finance ministries and policymakers concerned with managing a stable, prosperous society.”
The IMF paper highlights New Zealand as a case study, where increasing the tax gap between cigarettes and lower-risk alternatives correlated with a drop in smoking rates from 18% in 2012 to 8% in 2024, along with a rise in e-cigarette use.
“Taxation is more than a fiscal instrument; it is a powerful lever for shaping healthier societies,” the authors concluded. “Linking excise taxes to relative health risks can reduce preventable diseases.”
The report contributes to the expanding global discussion on how governments should tax next-generation nicotine products, especially as regulators weigh public health objectives, revenue requirements, and harm reduction’s part in decreasing smoking rates.
