According to the World Health Organization (WHO, 2025), one way for low-income countries to address the health finance crunch is to increase the prices of tobacco, alcohol, and sugary drinks by 50% by the year 2035. The push for health taxes is not new; there is renewed momentum in the aftermath of foreign aid cuts. The WHO identifies health taxes as among the most efficient tools, noting their dual role in reducing the consumption of harmful products and enhancing government revenue at the same time. As per their assessment, a one-time 50% price increase for all three products could prevent 50 million premature deaths by 2050 and raise US$1 trillion by 2035.
The World Bank (2025) echoes this, urging the health sector to lead on health tax implementation — for the same reasons: more revenue, and less strain from non-communicable diseases driven by tobacco, alcohol, and sugary drinks. The report presents recent estimates suggesting that raising health taxes could generate between US$260-US$420 billion annually in LMICs, boosting public health spending by up to 40% if invested in the health sector.
Over the years, several LMICs have indeed adopted health taxes – even if at levels that are below those recommended by the WHO. We examine the evidence on their experiences: the impact on consumer behavior and revenue generation, as well as challenges in the form of illicit trade, concerns around regressivity, and industry opposition to such measures.
The potential
Higher prices can change consumer behavior
The translation of higher prices of unhealthy products into improved public health hinges upon a change in consumer behavior, that is, consumers need to reduce their demand for the unhealthy product in response to the higher price. Researchers have sought to study the consumption impact in the context of various LMICs, finding the intended effect, which strengthens over time – as may be expected for habit-forming items (Becker and Murphy 1988).
In 2014, the Mexican government enacted an excise tax of 1 peso per liter on all non-alcoholic beverages with added sugar. On average, there was complete pass-through of the tax to prices in urban areas, with no significant change in the prices of untaxed beverages. The result was a 6% decline in the purchase of taxed beverages and a 4% increase in the purchase of untaxed beverages (Colchero et al. 2016). The impact on purchases sustained through 2015, with bigger effects in the second year of the tax (Colchero et al. 2017). Further, the purchase of taxed beverages reduced across socioeconomic groups, but more so among the lower categories.
Even the announcement of an intention of levying such a tax can be impactful. In 2016, South Africa declared an intention to levy a tax on sugar-sweetened beverages (SSB), following which a tax of about 10% was implemented in 2018 linked to the sugar levels of beverages. Both the announcement and introduction of the levy contributed to a reduction in the purchase of taxable beverages, and possibly, a decline in the intake of sugar, calories, and volume from taxable beverages (Stacey et al. 2021). Since the changes began after the announcement itself, it is likely that consumer behavior was influenced by the discussions on the harms of sugary drinks as well as by anticipatory response from the industry. Similar to the Mexico study, there are stronger effects in less well-off households1. Given that prior to the announcement, these households purchased considerably larger volumes of SSBs, the authors contend that the levy may be progressive for health.
Turning to tobacco, van Walbeek (2005) measures the impact of excise tax hikes on cigarette consumption in South Africa. The country began raising the tax in 1994, with a total tax burden (inclusive of value added tax) of 50% during 1997-2003 and 52% after 2004, of the average retail selling price. This aggressive tax policy translated into substantial increases in the real price of cigarettes. Together with measures such as advertising bans and prohibition of smoking in public places, which were implemented in 2001, the outcome was a 46% decrease in the per capita consumption of cigarettes. However, it is possible that cigarette consumption would have declined to some extent over time even without these interventions, in which case, the impact of the interventions is being overstated. To address this issue, Chelwa et al. (2017) create a counterfactual – a synthetic South Africa, as a weighted average of similar countries2 that did not undertake large-scale interventions in tobacco use in the period 1990-2004. They find that by 2004, per capita cigarette consumption was 36% lower than it would have been in the absence of the tax-led measures. The researchers conclude that significant public health dividends can be obtained by consistently increasing the real tax on cigarettes.
The benefits of a tobacco tax can extend beyond health, improving other aspects of sustainable development. This broader approach was adopted by Maldonado et al. (2022) in their study of Colombia, where a cigarette tax hike was being discussed by policymakers. They use a ‘complex systems’ methodology called microsimulation wherein they build an artificial society that mimics the observed characteristics of Colombia’s population, and simulate the behavioral responses to a tax hike and the subsequent effects on sustainable development. They find a fall in the number of smokers (from 4.51 million to 3.45 million) and in smoking intensity. The authors posit that such a change can positively impact premature mortality, health, income, healthcare expenditures, poverty, gender equality, and domestic resource mobilization – even in the presence of illicit cigarettes.
Seeking to gather evidence across Latin America and the Caribbean more broadly, Guindon et al. (2025) conduct a systematic review and meta-analysis to examine the association between prices and taxes and the use of tobacco products in the region. They consistently find that higher cigarette prices are associated with lower cigarette smoking participation, consumption, and initiation, with meaningful effect sizes. Unlike the SSB tax studies discussed above, price responsiveness was unaffected by socioeconomic status, and by other characteristics such as age, sex, rurality, or geographic regions.
The relatively ‘inelastic’ nature of the demand for tobacco implies that along with lowering tobacco use, taxes that raise tobacco prices have the potential to boost tax revenue as well.
Health taxes and government revenue
To examine the potential for tobacco tax to contribute towards the goal of generating tax revenue, alongside reducing tobacco use, Goodchild et al. (2016) developed a model of the global cigarette market in 2014 based on data from 181 countries. They find that raising cigarette excise in each country by one international dollar per 20-cigarette pack would lift the average retail price by 42%, cut daily smoking prevalence by 9%, and raise cigarette tax revenue by 47%. Directing that additional revenue to health budgets could increase global public health expenditure by 4%. Maldonado et al. (2016) confirm this dual effect in Colombia, and note that as incomes and purchasing power rise, taxes should rise too — both to discourage consumption and to capture the added revenue opportunity.”
In Ukraine, by contrast, only the revenue goal was achieved in the short run, with the public health gains taking longer to materialize.
Between 2005 and 2008, the Ukrainian government raised excise taxes on cigarettes four times, mainly for fiscal reasons. This was accompanied by advertising bans, prohibition of smoking in workplaces and public spaces, and prevention and cessation programs. However, a successful lobbying effort by the tobacco industry kept cigarette price increases modest – with the rate of increase even falling short of inflation. Rising disposable incomes during the period led to rising affordability of cigarettes, and sales went up. Government revenue from cigarette taxes increased by 28% in real terms (Ross et al. 2012), and a budget crisis motivated further tobacco tax hikes in the following years.
The period 2008-2010 saw larger tax increases and manufacturers did raise prices to maintain profitability as consumption fell – so prices went up more than they would have due to taxes alone. Ross et al. (2012) estimated that a 10% increase in the real price of cigarettes decreased demand by 2.8%. They argue that in the short run, the effect was dampened by factors such as stockpiling, industry price strategy, and the addictive nature of smoking. Even in the long run, the relatively low price responsiveness may be due to the wide range of prices available in the market and the high social acceptability of smoking in the country. The authors infer that there is scope for further increase in tobacco taxes in Ukraine, as it aspires to EU rates. This is reflected in the government enacting another hike in 2011. They stress the need for taxes to keep pace with inflation and income growth such that affordability remains constant or declines. Besides, policy ought to be designed in a way that substitution among cigarette brands and with other tobacco products is discouraged, to generate additional tax revenue.
The challenges
Do these taxes hurt lower-income households more?
Concerns about the regressive nature of health taxes have held back reforms. The reasoning is that the taxes will burden lower-income households to a greater extent, given that a larger share of their household budgets is spent on the taxed products. Fuchs and Pierola (2022) argue that this may be true in some cases in the short term if only direct costs are taken into account, that is, the immediate effect on household spending capacity if consumption patterns are not altered. However, if we also consider behavioral responses to higher prices, indirect savings associated with disease prevention, and additional income due to extra years of productive life gained, the outcome becomes progressive in most circumstances.3
Focusing on SSB taxes in Kazakhstan, Fuchs et al. (2020) undertake an extended cost-benefit analysis considering household expenditures, out-of-pocket medical expenses, and productivity. They document that the long-term net income effect of an increase in such taxes is progressive, with lower-income households benefiting more than higher-income ones. One factor is that less well-off consumers respond more strongly to price changes.
Does illicit trade undercut the gains?
Illicit tobacco trade (ITT) – the supply, distribution, and sale of smuggled genuine or counterfeit tobacco products – leads to greater availability of lower-priced products and threatens efforts to reduce tobacco consumption, especially among young and poor populations. ITT is common in LMICs, with estimated share in total production ranging from 11.8% to 16.8% (Joossens et al. 2010), causing governments to lose an estimated US$40 billion annually in tax revenue (Joossens and Raw 2012).
Based on a study of 160 countries, Ulep et al. (2021) show that while the capacity to address IIT varies greatly across countries, LMICs appear to be less capable, on average – in terms of institutional and structural factors such as general governance, tobacco control policies, and trade and custom practices. The study uncovers a negative relationship between GNI (gross national income) per capita and the share of ITT in total tobacco consumption, implying that the revenue loss is skewed towards poorer countries. An element of the Framework Convention on Tobacco Control Protocol of the WHO that the authors recommend in particular for LMICs is large and simple tax rates for tobacco.
The role of the tax structure is demonstrated by the case of Indonesia.
Ahsan et al. (2014) put forth that one factor that fuels illicit trade in Indonesia is the complex tax system wherein the excise tax levied depends on the type of cigarette, scale of the producing company, method of production, and retail price range of the final product. Lower rates for smaller producers, labour-intensive production, and cheaper products have led to the proliferation of small producers – many of whom go unregistered. Since it is more expensive to effectively monitor a large number of producers, illicit activity may take place with less risk of detection. Tax losses attributable to illicit consumption amounted to 4% to 13% of tobacco excise revenue in 2011 and 2013.4 Recent policy changes have reduced the favorable terms for small producers, and the government has facilitated exit from the industry for many of them.
Some of the same factors reversed the gains in South Africa. While revenue increased and smoking declined during 1994-2009, the period after 2010 saw the emergence of an illicit market for tobacco – driven by institutional failures, entry of small local tobacco companies, and underhanded tactics by the industry (van Walbeek and Filby 2025). Since 2010, over half of all cigarettes sold in the country are illicit. The authors contend that the sustained success of any taxation policy required strong enforcement of tax compliance, transparent supply-chain regulation, and political insulation from industry interference. They also highlight the need for close monitoring of industry pricing strategies and the flexibility to adapt when market conditions change.
The experience was different in Colombia – a country where the shadow economy represents nearly half of GDP (gross domestic product), and relatively low cigarette prices allow space for further tax increases. Gallego et al. (2020) assess the impact of a twofold increase in the excise tax on tobacco in 2016, on the consumption of illicit cigarettes in the country. Prior to the tax increase, the penetration of low-priced illicit cigarettes was about 5%. The year-to-year variation after the tax reform was very small and insignificant. Thus, the researchers conclude that illicit cigarette trade does not seem to be an obstacle for the implementation of tobacco taxes to achieve public health goals. Maldonado et al. (2020) agree that overall illicit cigarette trade remained low after the tax hike. Based on differences across cities, they conclude that tobacco taxes and prices are not the main determinants of illicit cigarette trade. There is an important role for independent tracking and tracing systems, actions to strengthen local institutions to control illicit trade especially in border regions, and development of activities that do not rely on illicit trade of goods. Evidence from several other countries (for example, Kenya) also shows that by improving the effectiveness of tobacco tax administration, it is possible to both reduce illicit tobacco trade and increase tobacco taxes (World Bank, 2019).
Industry pushes back—and keeps pushing
Taxes may be viewed as detrimental to the economic interests of industries involved in the value chains and hence any related policies tend to be opposed by industries in a coordinated manner. The range of arguments vary from curtailment of freedom of choice, emphasis on self-regulation, ineffectiveness in achieving health outcomes, to harmful effects on small businesses and employment, and regressivity. Karim et al. (2020) study the case of South Africa – the first country in the African region to introduce an SSB tax based on sugar content in 2016. While the initial proposal was for a 20% levy, the final tax after extensive public consultations was 11% – with the industry opposition mainly related to potential job losses. The researchers observe that contextual factors such as high unemployment and a historically prominent sugar production industry shaped the industry response in South Africa. They stress that LMIC governments need to articulate clear policy priorities and context-specific evidence to justify SSB taxation, and to ensure coherence between health and economic development objectives so that opponents of the tax cannot exploit any perceived tension between the two.
A similar dynamic shows up with regard to tobacco taxation in Uganda. Applying a political economy lens to the barriers to implementing WHO’s recommended tobacco tax rates, Zakumumpa et al. (2025) document an entrenched notion among the policy elite that raising taxes will bring economic harm such as “killing off” the tobacco industry and consequently pull down government revenue. The tobacco industry adopts soft tactics in the form of sustained lobbying as well as hard tactics via litigation. The authors advocate for non-industry funded research on the effects of raising tobacco taxes and strengthening civil society advocacy to counterbalance the industry and sustain the momentum on raising taxes.
Crucially, industry opposition does not end once a tax becomes a law. The SSB tax implemented in Mexico in 2014 – among the first in the world – was met with strong opposition from transnational food and beverage corporations. Pedoroza-Tobias et al. (2021) revealed that affected trade organizations and front groups paid scientists to produce research suggesting that the tax failed to achieve health benefits while harming the economy. This shows that industry resistance can persist well after new policies have become law as vested interests seek to roll back legislation, and to stall or prevent policy diffusion. Nevertheless, independent and peer-reviewed studies later came out, demonstrating the effectiveness of Mexico’s soda tax.
The evidence from LMICs makes a strong case that health taxes deliver on both fronts they promise: reducing consumption of unhealthy products, and generating substantial government revenue. Concerns that these taxes are regressive are largely overstated once the full picture is considered. Illicit trade and industry opposition are real risks, albeit not insurmountable.
In the next blog, we will focus on the mental health burden in LMICs – its gendered aspects, chronic underfunding, and what a realistic health system response may look like.
FOOTNOTES
1The poorest 5-10% of the population was not included in the study.
2 The countries are matched with pre-intervention South Africa on the basis of variables like per capita cigarette consumption, real price of cigarettes, per capita real GDP, per capita alcohol consumption, and proportion of adults in total population.
3 This is based on World Bank evidence across countries, for example, tobacco tax in Bangladesh and alcohol tax in Brazil, among others.
4 Illicit domestic production is likely the most important source for illicit cigarettes, with smuggling playing only a minor role. This is because Kreteks dominate the market and it is primarily produced in Indonesia.
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