The Welfare Effects of Consumption Tax on Cigarette Included in the Budget Bill and the Role of Demographic Variables in Urban Areas of Iran

The spread of tobacco consumption at the retail level has changed the composition and share of goods groups in the household consumption basket, and as a result, the demand for essential and valuable items has decreased. Due to the low tax rate on tobacco and its ineffectiveness in the amount of consumption during the past years, according to the approved budget bill, from the beginning of 2023, a tax  will be considered on each cigarette stick, contrary to previous years. Therefore, in the present study, using the EASI demand system model and deriving price and income elasticities, the impact of implementing the mentioned policy on the welfare of households in urban areas of Iran is examined based on the information from the years 2019-2020, along with simulating this information in the year 2022 and taking into account certain demographic variables in individual and social dimensions. The results show that both domestic and imported cigarettes are in aspect of  price, are  low elastic items, and the use of price policies (such as taxes) does not have high effect on reducing consumption; on the other hand, their income elasticity is less than one, categorizing them as essential household items and  implementing the mentioned policy by increasing the cost of tobacco leads to a decrease in household welfare by 1,448,939 rials. Also, variables such as the presence of adolescents in the family, the number of adults, gender, marital status, and widowhood/being divorced of the head of household have a significant and positive impact and variables such as the presence of children in the family, employment and head of the household’s income, and the years of education of both the head of household and his/her spouse have a negative impact on the demand for domestic and imported cigarettes.