BACKGROUND-AIM:
Despite the lack of evidence that Heated Tobacco Products (HTP) are less harmful than combustible tobacco products, many countries tax HTP at lower rates than manufactured cigarettes (MC). This creates substantial excise tax gaps and allows the industry to secure large profit margins from HTP sales. This study aims to provide insight into the dynamics of HTP prices, sales, and taxation, and to assess how the tobacco industry shapes HTP and MC pricing strategies in response to tobacco tax policy in Serbia.

METHODS:
The response of tobacco product prices to changes in taxation is typically assessed by measuring the pass-through effect, which indicates how much the retail price of the product increases following a one-unit increase in its taxation. To estimate the extent to which excise taxes on HTP (direct pass-through) and cigarettes (indirect pass-through effect) are reflected in retail prices, a fixed-effects panel regression modeling is applied, using the monthly data on HTP/MC prices and excises for the period 2018-2025. Descriptive statistics are used to illustrate stylized facts on the HTP market developments and to evaluate consumption trends and patterns, affordability and taxation policy.

RESULTS:
Since the introduction of HTP to the Serbian market in 2018, their consumption has been steadily increasing, reaching 6.25% of all tobacco packs sold in 2023. Empirical analysis shows that excise taxes on HTPs have increased substantially, but HTP prices have not followed at the same pace, lowering their tax burden relative to cigarettes. The estimated direct pass-through effect of a 1 RSD increase in the HTP excise tax on the HTP retail price is 0.26, though statistically insignificant. This indicates a weak and imprecise relationship between changes in HTP excise taxes and corresponding changes in retail prices. Taken together, results indicate that the industry absorbed a substantial portion of the rise in HTP taxation, consistent with pricing strategy of tax undershifting. Despite recent increase in tax rates on HTP, excise taxes account for just 13.4% of the retail price of the most sold HTP brand, compared with 61.4% for the leading cigarette brand, underscoring how lower HTP taxation limits government revenue.

CONCLUSIONS:
Although research shows that HTP are harmful even in the short term and that their long-term effects remain uncertain, most European governments still tax them at lower effective rates. Serbia follows this trend, applying substantially lower taxes to HTPs than to manufactured cigarettes. As a result, industry profit margins on HTP remain far higher than on medium-priced cigarettes. Consequently, the industry promotes HTPs as “less harmful” alternatives and encourages smokers to switch by maintaining HTP prices at levels comparable to the most popular medium-segment cigarette brands. To curb these practices, the tax burden on HTPs should be aligned with that on cigarettes, which would improve public health and generate additional public revenue.