Higher Tobacco Tax Proposal May Increase Illicit Trade, Harm SMEs

A federal government plan to increase the special tax on production and services (IEPS) for tobacco is projected to cause a surge in informal sales, fueled by contraband and piracy. Industry groups warn that the move would negatively impact 1.2 million convenience and grocery stores and could lead to greater consumer health deterioration.

The proposal, which was introduced on President Claudia Sheinbaum’s Economic Package 2026 and is currently being debated in the Chamber of Deputies and scheduled for discussion and vote in the Senate starting Oct. 20, aims to raise the ad valorem rate (based on the value of a transaction) from 160% to 200%. It also includes gradual increases to the specific quota through 2030, starting with a hike from the current MX$0.61 (US$0.033) per cigarette to MX$0.85 per cigarette in 2026, reaching MX$1.15 per cigarette by 2030. The Ministry of Finance and Public Credit (SHCP) stated the goal is to discourage consumption and channel public funds toward preventing and treating smoking-related diseases.

Gerardo López, President, Council for the Development of Small Trade and Family Business, explained that if approved, a pack of legal cigarettes would cost around MX$100, while a contraband pack sells for approximately MX$20 in street commerce. Cuauhtémoc Rivera, President, National Association of Small Traders (ANPEC), noted that counterfeit cigarette packs are sold for MX$25, compared to recognized brands at up to MX$85, which generates a 70% profit margin for illicit sellers.

Impact on Legal Commerce and Health

López emphasized that this price gap negatively affects established commerce, favors street vendors, and reduces competition for 1.2 million commercial establishments, such as grocery stores and mini-markets. These businesses are the primary income source for over 5 million people, many of whom are family members who own the establishments.

The Confederation of Industrial Chambers (CONCAMIN) reported that illicit trade in the tobacco market grew from 2% in 2010 to 16.6% in 2013, an 800% increase. Current estimates suggest illicit trade accounts for up to half of the total market. Rivera indicated that two out of every 10 cigarettes sold in the country are counterfeit, with one produced locally and the other imported. ANPEC identified mobile illegal cigarette factories in the states of Campeche, Jalisco, and State of Mexico, using their mobility to evade authorities.

CONCAMIN estimates that fiscal evasion from this phenomenon causes annual losses of between MX$13 and MX$15 billion to the public treasury. The National Council of the Tobacco Industry (CONAINTA), which includes Philip Morris Mexico, British American Tobacco, and Japan Tobacco International, argued that historically, tax increases have failed to reduce the number of smokers and have not guaranteed greater tax revenue. ANPEC also challenged the two premises supporting the tax hike, citing evidence from the last 11 years. ANPEC stated that consumption did not decrease, the collected funds were not earmarked for health but instead went to operating expenses, and chronic diseases were not contained, as previously reported by MBN.

SHCP figures show continuous annual drops in tobacco tax collection since 2019. By the end of 2024, collections fell 6.9% in real terms compared to 2023, and the tax only generated 0.8% of total state revenue.