New cigarette taxes in Malaysia – will they work?

So, big news for tobacco control last week! The Malaysian government announced a tax hike on cigarettes – the first in 10 years.

This is a policy reform I'd been working on (with a local think tank), so it's cool to see progress.

The existing excise tax is RM0.40 per stick (RM8 per pack). Starting November 2025, the tax rate be RM0.42 per stick. (Besides excise tax, there's also sales tax and import tax.)

Why tax tobacco? Reduce smoking

Well, many Malaysians (around 1 in 5) still smoke (not good!). So reduce smoking, one thing we can do is keep cigarette prices high. And the way to do this? Tax cigarettes.

Additionally – to stop cigarettes becoming affordable – taxes needs to keep up with inflation and rising income.

That's the idea. But will it work?

What about illicit cigarettes?

Some ask "Would people just switch to cheaper alternatives? Or illicit untaxed cigarettes?"

A reasonable question, especially in Malaysia where illicit cigarettes supposedly make up over half of smoking volume.

(A caveat on illicit trade data: only data generated by the tobacco industry is regularly available and updated. Obviously a concern; however independent estimates also do suggest illicit cigarettes are a big problem in Malaysia.)

So will the new tax work? Three considerations

Well, it's hard to say for sure. But here are three considerations that give us some idea:

(1) An obvious place to start: Malaysian historical data.

Before 2015, Malaysia's cigarette excise tax had steadily increased. What actually happened as a result?

• Firstly, consumption continued to decline (though not necessarily entirely due to higher taxes) (see Figure 1 ).

• Next – despite this declining consumption – tobacco tax revenues increased (see Figure 2). Between 2016-2019, when taxes were stagnant, tax revenues decreased.

• And lastly, illicit cigarette volume did increase – especially between 2008-2009 and between 2015-2016 (see the chart here ).

Let's park these observations for now.

(2) Second consideration: the research on illicit trade in Malaysia.

There are studies / models examining how tobacco tax (or prices) affects smoking consumption and tax revenues – and how illicit trade interacts. What are some key insights?

• Firstly, higher taxes do reduce smoking. This is somewhat obvious, and confirmed by various studies (like this review of Southeast Asia evidence ).

• Next, higher taxes also generate higher tax revenue – even though people will smoke less. This is due to price inelasticity.

• And lastly, the main driver of illicit cigarettes is not taxes – instead it is corruption. This study shows many countries have tobacco taxes/prices higher than Malaysia, but do not have high levels of illicit trade. In other words, higher taxes won't lead to more illicit trade – as long as government improves enforcement. (Good news: this is exactly what the Malaysian government has been doing in the past couple years – strengthening enforcement)

Let's keep this in mind, and look at a third consideration.

(3) The new tax hike is not that large.

The actual policy decision is fairly modest. An additional 2 sen/stick would probably lead to a roughly ~2-3% price increase.

As such, whatever effect the tax will have – on smoking reduction, switching to illicit trade, and tax revenues – will probably be modest as well.

Conclusion? A prediction.

With all these points in mind, I think a reasonable prediction would be:

(a) Illicit trade will continue to decline. This is due to increasingly strong enforcement, and because the new tax is too modest to incentive switching to (cheaper) illicit cigarettes.

(b) Smoking prevalence will continue to decline steadily – but not necessarily total smoking. The downward trend of smoking prevalence (the percentage of people smoking) will continue, due to various factors (including that fewer youths are taking up smoking). However, total smoking (the absolute number of smokers) may not reduce much, as the modest tax hike will have some – but limited – cessation impact.

(c) Tax revenue will increase slightly. If we assume little change to smoking habits, that means a similar number of cigarettes will be purchased, but with an additional tax paid. This translates to around ~RM100 million/year (we'll save the math for another post) in extra revenue – not a huge some, but not negligible either.

What next?

So will the tax work? Well, at least it'll work at the margins. And additionally, it could be a good first step – toward regular increments in the coming years.

Would be interesting to see the data, as it becomes available.