Assessing Fiscal Risk: Hidden Structures of Illicit Tobacco Trade Across the European Union

Abstract

This paper investigates the risk determinants and spatial patterns of tax revenue loss due to illicit tobacco consumption across the 27 EU Member States from 2017 to 2022. Using a panel dataset covering economic, demographic, social, political, and behavioral dimensions, we apply principal component analysis to identify key factors associated with revenue loss, and hierarchical clustering to group countries with similar risk profiles. Geographic Information Systems visualize the spatial heterogeneity of fiscal vulnerabilities. Findings reveal that institutional and economic stability, international trade and market share, socio-economic inequality and tax burdens, health and well-being, demographic aging and social dynamics, tobacco taxation policy, and labor dynamics and shadow consumption structure the patterns of tax loss risk. Findings also highlight significant differences among Member States, emphasizing the multidimensional nature of fiscal risks.

1. Introduction

Illicit tobacco consumption causes significant challenges to fiscal stability, public health, and governance in the EU. Excise duties on tobacco are among the most important sources of indirect taxation, providing significant revenue streams for governments in the European Member States. The expansion of shadow markets and the uptake of untaxed tobacco products threaten these sources of revenues, resulting in fiscal vulnerability and deepening socioeconomic inequalities. Understanding fiscal risks’ determinants and spatial patterns is critical for implementing effective measures to combat illicit trade countermeasures and optimizing taxation systems.

Estimates of tax revenue losses due to the shadow consumption of tobacco products are reported at the EU level by KPMG, commissioned by the tobacco industry, and occasionally cross-referenced with Eurobarometer or OECD data. These estimates are presented here only for descriptive contextualization of the fiscal magnitude of the problem, without being used as analytical variables in the statistical model.

Consumption of illicit tobacco products is shaped by multiple factors, including economic, demographic, social, and political factors. On the economic side, revenue loss vulnerability is strongly related to fiscal pressures, reliance on excise taxation, and trade. Social determinants, including income inequality and labor dynamics, are linked to a higher propensity for low-cost, non-taxed options more appealing. Demographic transitions of aging and migration also affect consumption patterns, while the quality of institutions, corruption, and governance effectiveness shape member states’ capacity to restrain illegal vices. Health perceptions, culture, and attitudes toward tobacco use are the behavioral aspects that complicate the risk of public revenue loss.

Although this is critically important, a few comprehensive, data-based studies that engage these diverse components and draw a picture of fiscal risks induced by illicit tobacco are highly limited and demanding. Previous research has emphasized specific determinants of the risk, such as economic impacts or trade dynamics, while neglecting cross-determinant interactions or spatial heterogeneity across Member States.

This study fills the gap by providing a solid methodological background that integrates principal component analysis, hierarchical clustering, and geographic information systems. The analysis employs an analytically robust panel dataset covering the period 2017–2022 across all 27 EU Member States. By utilizing this dataset, we aim to explore the main patterns and correlates of fiscal risks, cluster countries into groups with similar risk profiles, and visualize the spatial patterns of revenue loss risk.

This study aims to examine the structure and spatial patterns of factors influencing the risk of tax revenue loss due to illicit tobacco consumption in European Union countries. Specifically, it aims to:

(a)

identify the socioeconomic, institutional, and demographic dimensions of the phenomenon.

(b)

detect common spatial patterns across member states through multivariate analysis techniques.

(c)

classify countries with similar risk profiles to facilitate the understanding and targeting of prevention and control policies.

This research contributes to existing literature by offering an integrative approach to analyzing illicit tobacco consumption’s determinants and spatial patterns. The findings stress the multidimensional nature of fiscal risks and underscore the importance of tailored, evidence-based policy responses that account for the specific economic, social, and institutional contexts of each Member State.

Given the exploratory nature of the analysis, the article does not examine causal relationships but seeks to highlight correlations and patterns that can serve as a basis for further research.

2. Literature Review

In 2022, consumption taxes, which accounted for 29.6% of total tax revenues in OECD countries, made a significant contribution of 9.9% to their GDP. Two-thirds of this share came from general consumption taxes and the remainder from taxes on specific goods and services. Between 2020 and 2022, the ratio of consumption taxes to GDP showed the most significant decreases in Norway and Denmark, while Greece, recorded the most significant increases (OECD, 2024).

Between 2010 and 2016, despite the gradual decline in total tobacco consumption (OECD, 2016), excise duty revenues continued to increase. Specifically, tobacco revenues totaled €82.3 billion in 2016, representing 59% of the total tobacco market, increased by 0.7% annually between 2010 and 2016 (European Commission, 2020). The European Commission records stable tax revenues from tobacco of €80–83 billion per year over the period 2016–2019. Subsequent data confirm the stability of revenues despite changes in demand, which is attributed to the increase in tax rates and retail prices (Tax Foundation, 2023).

At the same time, the trend of increasing tobacco taxes, in the context of the EU strategy for public health and sustainable financing, is expected to continue, with an estimated increase in revenues of 6.4% to 8.5% in the period 2025–2028, despite a small further decrease in overall consumption (López-Nicolás, 2023). The average excise duty per pack of cigarettes (20 pcs.) in the EU in 2025 was €3.99 (64.3% of the final price). VAT was €1.1 (21.8% of the final price), resulting in a total burden of more than 80% of the final retail selling price (Hoffer & Macumber-Rosin, 2025; European Commission Taxation and Customs, 2025b).

The tax burdens on tobacco products vary considerably between Member States (European Commission Taxation and Customs, 2025a). The EU legislative framework (European Parliament and the Council of the European Union, 2011) allows for a minimum excise duty of €1.80 per pack and a minimum total excise duty of 60% of the retail price, excluding VAT, as stipulated in the Tobacco Excise Directive. Crucially, there is no upper limit, allowing Member States to apply higher taxes for reasons specific to their national context.

The members of the European Union show notable differences in the tax burden on tobacco products. For example, the excise duty per pack (20 cigarettes) ranges from around €2.02—as is the case in countries with lower rates, such as Bulgaria—to €10.71 in Ireland, which imposes one of the highest levels of taxation in the EU. Furthermore, the total tax burden, when combined with VAT, varies from around 69% in Germany to 110% in The Netherlands, where the burden can exceed 100% of the average price (Tax Foundation, 2024).

The structure of tax revenues in OECD (2020) countries highlights the important position of consumption taxes as a tax policy tool and source of public revenue, in a context of differentiated individual trends that reflect the course of the economies and the consumption taxation policies in each country.

The link between a country’s standard of living/income and its tobacco tax policy is supported by findings showing that countries with higher per capita income and lower levels of corruption tend to impose significantly higher excise taxes compared to lower-income countries (Prieger & Kulick, 2018).

It is observed that the structure of the excise tax functions as a tool of a broader fiscal and social strategy, reflecting national priorities and levels of economic development. Countries with a high standard of living apply higher taxation through fixed excise, as they are less sensitive to the purchasing power of citizens and pursue public health. In contrast, countries with more limited resources have high domestic production and choose proportional taxes to protect domestic products and reduce smuggling (Primorac & Vlah Jerić, 2017).

In the context of strengthening public health, excise duty is considered one of the most effective tools to reduce the consumption of tobacco products. The World Health Organization systematically supports increasing taxation on products directly associated with increased health risks, such as tobacco, recognizing it as a critical prevention (U.S. National Cancer Institute & World Health Organization, 2016). However, despite tax increases and control policies, the wide variation in prices per pack between countries creates a strong lever for cross-border purchases and smuggling (Stoklosa, 2020). This phenomenon is heightened by the fact that, despite the single EU regulatory framework, customs and tax legislation is not fully harmonised, allowing Member States to maintain different tax rates and structures (European Commission Taxation and Customs, 2025a).

Criminals were quick to adapt when the pandemic led to tighter border controls and rules that blocked traditional locations and routes (OECD & EUIPO, 2024). As restrictions put in place by governments disrupted and limited the supply chains of legitimate businesses, illegal operators stepped in. Contraband cigarette smuggling is an attractive crime with high financial rewards for comparatively low risks (Sinn, 2018). Most contraband cigarettes originate from countries where prices are lower and regulatory systems are weaker (Remeikienė et al., 2020). Countries with ongoing armed conflicts or political crises show remarkable resilience with criminal networks adjusting their modus operandi (Krylova, 2024; GLOBSEC, 2022).

Access to infrastructure hubs is essential for criminal networks organizing global freight (Global Initiative Against Transnational Organized Crime, 2021). Europol flags corruption as the primary enabler to infiltrate ports and logistic chains, as only a low percentage of containers handled in EU ports can be physically inspected (Europol, 2022; Ireland, 2023).

The type, characteristics, and extent of illicit trade in tobacco products vary significantly between member states. Tax rates, geographical location, and the levels of control and enforcement influence the extent of revenue losses and the effectiveness of policies to address it (Valiente et al., 2024).

International experience shows that sudden and significant increases in tobacco tax may increase consumers’ propensity to turn to illegal sources of supply, partially undermining the effectiveness of tax policy (Chaloupka, 2017). Tax increases, although necessary, are not sufficient on their own to curb illicit trade.

The extensive loss of public revenue due to the illegal trafficking of tobacco products demonstrates the necessity of serious institutional interventions to strengthen the effectiveness of control mechanisms and ensure the prevention of tax evasion phenomena that undermine fiscal stability (Lencucha & Callard, 2011). The development of a parallel, unregulated market reduces the effectiveness of tax policies aimed at reducing consumption. Effectively tackling organized crime linked to tobacco illicit trade requires a multifaceted approach, which includes the use of reliable and transparent data for market monitoring, investment in traceability technologies, strengthening control mechanisms, cooperation with customs and developing international partnerships (Valiente et al., 2024; Ireland, 2023). The fight against financial crime requires strong EU anti-money laundering policies and coordinated financial investigations.

Measuring the illicit trade in tobacco products is a challenge, as estimates of its extent and characteristics vary significantly across countries and influence the design of tax and health policies. Severe methodological difficulties accompany methods for calculating illicit cigarette consumption, as it is an activity that escapes official recording and for which the available data are often fragmentary or confidential, due to the involvement of law enforcement authorities and the nature of illegality. Measurement can be conducted through various approaches, such as gap analysis between recorded sales and estimated consumption, as well as through sample checks on tobacco product packages to identify untaxed or counterfeit products (Stoklosa et al., 2020). Moreover, consumer behavior surveys are essential as they ask users to identify the sources from which they obtain their products, revealing the prevalence of illegal distribution networks (Joossens, 2011).

In the international literature, the issue of lost tax revenue from the illicit tobacco trade has been approached from different perspectives. Some research focuses on tax policy and its relationship with the size of the illicit market, attempting to measure the effects of tax burden on tobacco consumption (Chaloupka, 2017). This approach has highlighted the importance of pricing and tax stability, but often disregards social or institutional factors that influence consumer behavior. Other studies have adopted a more socioeconomic orientation, investigating the contribution of income, age or education to the illicit product market (Prieger & Kulick, 2018). The findings of these studies enrich the understanding of consumer motivations, but are mainly limited to national case studies and do not allow for generalizations at the European level. At the same time, more recent works with a spatial or institutional focus have attempted to identify geographical patterns and institutional differentiations (Ross & Blecher, 2019), without systematically examining the interaction of economic, social and demographic variables. Thus, despite the wealth of individual approaches, the literature remains fragmentary and incomplete in terms of its multifactorial and comparative dimension. The present study seeks to address this gap by synthesizing economic, institutional and population indicators in a single analytical framework and applying multivariate analysis techniques to capture the spatial patterns of tax revenue loss risk in the countries of the European Union.

3. Materials and Methods

3.1. Data Sources

Given the aim of assessing the extent and variation of illicit tobacco trade across EU Member States, the present analysis relies on secondary data from national authorities and international reports. This study draws on a large dataset covering 2017–2022 across all 27 EU Member States resulting in a balanced panel of 162 observations. The data were derived from official data providers (European Commission, Eurostat, International Monetary Fund, Transparency International) to provide consistency and reliability for cross-national comparisons.

3.2. Variables Selection

The analysis used a range of variables selected on the basis of their theoretical and empirical relevance to the fiscal risks of illicit tobacco consumption across several economic, trade, behavioral, social, political, demographic, and health dimensions (Appendix A).

The economic variables included in the analysis measure the fiscal and macroeconomic conditions of Member States and also serve to gauge their fiscal vulnerability to illicit tobacco consumption. Among such variables is the share of excise duties in total tax revenues, which shows the degree to which fiscal systems rely on indirect taxation. Real GDP per capita and GDP growth rates give a sense of economic performance and capacity, and government debt and fiscal balances indicate the extent of macroeconomic stability and fiscal pressure. These variables are particularly relevant for evaluating the potential risk of revenue loss from illicit tobacco trade. States with greater reliance on excise taxes and weaker fiscal positions may be more exposed to the economic consequences of illegal consumption (Sylvester, 2025; Goodchild et al., 2022).

Environmental taxes were also considered to understand orientations of fiscal policy toward sustainability and, alongside private sector debt, to shed light on broader economic vulnerabilities. Although environmental taxes are a key tool for the transition towards more sustainable economies and financing green growth, empirical literature shows that, in environments with weak tax enforcement mechanisms or limited administrative capacity, they can create incentives for a shift towards unrecorded or illegal consumption. The increase in final prices due to the tax burden may reinforce tax avoidance or evasion, thereby reducing expected revenues and undermining the effectiveness of the policy (Ferdi, 2022; TRACIT, 2019).

Trade is a prominent feature of the analysis, so trade variables were included to describe the cross-border factors that affect legitimate and illicit tobacco products. This highlights both intra-EU trade, showcasing exchanges among member states, and extra-EU trade, illustrating the dynamic nature of economic relationships in and beyond Europe. Intra-EU and extra-EU trade flows of tobacco products are associated with higher illicit trade risk when retail prices and tax rates differ significantly between countries. When the tax burden in one country is much higher than in a neighboring country, there is an increase in imports (legal or illegal) of cheaper products—a practice that can lead to revenue losses for countries with high taxes (Jackson et al., 2024). Furthermore, “cross-border differentials” make tobacco products more vulnerable to tax evasion and smuggling, while inadequate or inconsistent customs surveillance in border areas further exacerbates the problem (KPMG, 2025).

Behavioral variables related to tobacco use and behavior serve as key indicators of consumption patterns and their implications for the tobacco market (European Commission, 2016, 2019). The analysis includes household spending on tobacco products, a proxy for consumer spending behavior on taxed goods. The consumption of cigarettes and fine-cut tobacco reflects the demand dynamics in the legal market. These variables are crucial for understanding how behavioral trends impact fiscal risks in an environment where consumers, facing affordability challenges, might drift towards untaxed alternatives (Mugosa et al., 2024).

Social variables consider the broader socio-economic environment of Member States. The relationship between socio-economic status and illicit or untaxed tobacco consumption varies significantly across the types of consumers’ behavior. The analysis refers to indicators reflecting labor market conditions and socio-economic disparities (unemployment rates, income distribution, and early school leavers). Individuals with lower incomes) and education (Ross & Blecher, 2019) are more likely to consume contraband cigarettes through the illicit market. Conversely, tax evasion through cross-border legal markets, is more common among individuals with higher incomes and education levels (Nagelhout et al., 2014). These differences indicate that consumers’ socio-economic profiles affect the manner in which tax avoidance or violation occurs.

Political variables such as political stability, institutional effectiveness, and the quality of governance are critical factors influencing the extent of illicit tobacco trade in Europe. Studies show that Member States with lower administrative capacity and higher levels of corruption have higher penetration of illicit and untaxed tobacco products (Merriman et al., 2000). The corruption perceptions index, in particular, documents the relationship between institutional weakness and public revenue losses due to smuggling. Corruption is a key factor in the spread of tobacco smuggling. It affects every stage of the supply chain, from illegal production (often facilitated by the complicity of state officials) to distribution, where systematic bribery of customs, tax, and police authorities facilitates the transport and movement of contraband (Kupatadze, 2021).

The demographic variables such as the total population, median age, old-age dependency ratio, and net migration provide insight into the demographic challenges that underlie consumption patterns and fiscal policy outcomes. Aging populations may pose a long-term threat to the sustainability of excise revenue. Tax increases result in a smaller reduction in consumption among the elderly, suggesting that tax efficiency may decline as the population’s composition shifts toward older ages (Maclean et al., 2015).

Finally, health variables were included to assess the possible indirect effect of public health outcomes on tobacco consumption. Mortality rates, perceived health levels, and other health indicators were analyzed to explore how taxpayer-provided public health conditions impact consumer spending, particularly regarding the prices and accessibility of potentially taxed tobacco products (Centers for Disease Control and Prevention, 2022).

3.3. Methods

3.3.1. Dimension Reduction: Principal Component Analysis

Dimension reduction was performed with principal component analysis (PCA) to obtain latent constructs explaining variance among the observed variables. It allows us to group correlated variables into independent basis components, reducing the number of dimensions we need to consider while retaining the majority of the information in the dataset.

All variables were standardized (z-scores) to ensure comparability across different measurement units. The suitability of the dataset for factor analysis was assessed using the Kaiser–Meyer–Olkin (KMO) Measure of Sampling Adequacy and Bartlett’s Test of Sphericity, both of which confirmed that the data met the statistical assumptions required for PCA. The number of components to be retained was determined according to the Kaiser criterion (eigenvalues greater than one), total variance explained and visual inspection of the scree plot.

Τhe interpretation of each principal component relied on the factor loadings of the variables, considering those loadings high in the corresponding components to gain insight into the underlying construct.

As part of the analytical process, the PCA and clustering results were cross-validated to assess robustness and stability. Sensitivity tests were performed by varying the number of retained components and adjusting the clustering criteria. The resulting structures and country groupings remained consistent across specifications, confirming that the observed patterns are not driven by methodological artefacts.

3.3.2. Hierarchical Clustering for Spatial Classification

Hierarchical clustering based on the retained principal components scores was performed to group the Member States into different clusters, depending on their fiscal risk profiles. It starts with each country as its own cluster and iteratively merges them based on similarity using an agglomerative approach. Intra-cluster variance is minimized, and inter-cluster distinction is maximized using Ward’s minimum variance criterion.

The obtained clusters were further analyzed and interpreted to identify common features within each cluster. This enables spatial risk patterns in fiscal risks, substantiating the combined effects of the risk factors for revenue loss.

3.3.3. Geographic Analysis and Visualization

GIS was used to explore the spatial distribution of fiscal risk. Each cluster was mapped on a thematic map to visualize revenue loss risk by member state. This method emphasizes the geographic correlations and surrounding factors that may play important roles in the patterns of illicit tobacco use and the potential economic consequences that these could incur.

4. Results

The empirical analysis is based on a comprehensive dataset (

Table 1. Descriptive variables for the analysis of fiscal risk from illicit tobacco consumption.

Variable Name	Mean	Median	Std. Deviation	Minimum	Maximum	CV
Corruption Index	63.8	60.0	13.9	42.0	90.0	21.8
Rule of Law	0.7	0.7	0.1	0.5	0.9	13.5
Government Effectiveness	1.0	1.0	0.6	−0.3	2.0	55.6
Regulatory Quality	1.1	1.1	0.5	0.2	2.0	42.9
Health Care Expenditure	2845.1	2302.3	1777.8	493.8	6590.2	62.5
Real GDP per capita	27,666.1	22,400.0	17,692.6	6120.0	86,540.0	64.0
Private Sector Debt	156.2	125.5	80.8	44.7	414.4	51.7
Urban Population Rate	73.7	71.8	12.9	53.7	98.2	17.6
Environmental Taxes	7.0	6.8	2.1	3.2	15.3	29.9
Education Index	0.9	0.9	0.1	0.6	1.0	6.9
Extra-EU27 Exports	3.7	1.2	6.1	0.1	31.0	163.8
Intra-EU27 Imports	3.7	2.0	4.8	0.1	23.2	130.4
Intra-EU27 Exports	3.7	1.7	5.0	0.0	23.4	134.8
Extra-EU27 Imports	3.7	1.4	5.3	0.1	22.0	143.3
Population	16,511,133.7	8,879,919.5	21,898,216.1	459,375.0	83,237,124.0	132.6
Consumption of Fine Cut Tobacco	15,706,623.5	7,134,405.5	19,442,264.7	467,121.0	75,837,781.0	123.8
Consumption of Cigarettes	2,794,624.2	498,366.0	4,994,610.8	30,255.0	26,328,000.0	178.7
Net Migration	65,933.4	21,913.0	153,640.0	−64,758.0	1,538,205.0	233.0
Total Tax Revenue Lost from Illicit Tobacco Consumption	327.3	83.0	877.7	0.4	7.255.0	268.1
Specific Excise to Total Tax Revenue	2.1	2.1	1.4	0.4	7.8	63.6
Income Distribution	4.8	4.4	1.2	3.0	8.2	24.1
Specific Excise to GDP	0.7	0.7	0.4	0.2	2.3	53.0
Poverty Rate	21.2	19.9	5.9	10.7	42.5	27.8
SDG Index	69.9	69.7	5.7	54.7	81.2	8.2
Deaths by Neoplasm	0.2	0.3	0.0	0.1	0.3	15.6
Share of Perceived Health	67.4	68.6	9.4	43.9	84.1	14.0
Sex Ratio	104.9	104.4	4.9	92.3	117.7	4.7
Crude Death Rate	11.1	10.6	2.9	6.2	22.9	26.1
Good Health and Well-Being (SDG3)	79.5	80.4	6.8	63.7	91.0	8.5
Old-Age Dependency Ratio	30.1	30.5	4.2	20.5	37.5	13.9
Median Age	42.7	42.7	2.3	36.9	48.0	5.5
Responsible Consumption and Production (SDG12)	51.2	53.1	9.6	22.9	70.2	18.7
Crude Marriage Rate	4.6	4.5	1.3	1.6	8.9	29.5
Fiscal Balance	−14,563.2	−1603.6	38,699.4	−208,236.2	65,623.0	265.7
Total Tax to WAP	80.1	79.6	5.7	68.1	108.4	7.1
Minimum Excise Duty	62.5	61.9	5.3	50.9	88.4	8.5
Specific Excise WAP	35.1	36.9	15.5	8.1	87.4	44.0
Unemployment Rate	6.7	6.1	3.3	2.0	21.8	49.5
Share of Illicit Cigarette Consumption	0.1	0.1	0.1	0.0	0.3	74.1
Household Saving Rate	10.9	11.5	6.2	−6.0	25.7	57.1

), which includes a wide range of economic, social, political, demographic, health, trade, and behavioral variables relevant to assessing fiscal risks associated with illicit tobacco consumption in the EU. These variables capture macroeconomic structures and national vulnerabilities, allowing for a multidimensional assessment of the factors that may lead to tax revenue losses. Descriptive statistics provide a first insight into the distribution and variability of the data. demonstrate the substantial differences between member states.

4.1. Fiscal Risk Determinants from Illicit Tobacco Consumption in the EU

The Kaiser-Meyer-Olkin measure of sampling adequacy (0.748) indicated that the data were suitable for conducting principal component analysis. The principal component analysis allowed for a significant reduction in the initial dimensions, from 40 variables to seven (82.5%), and consequently offers the opportunity to better interpret the measurable aspects of fiscal risk in illicit tobacco consumption (

Table 2. Risk factors of revenue loss in the 27-EE.

		(1)	(2)	(3)	(4)	(5)	(6)	(7)
	H2	Institutional and Economic Stability	International Trade and Market Share	Socio-Economic Inequality and Tax Burdens	Health and Well-Being	Demographic Aging and Social Dynamics	Tobacco Taxation Policy	Labor Dynamics and Shadow Consumption
Corruption Index	0.921	0.900
Rule of LAW	0.893	0.884
Government Effectiveness	0.932	0.878
Regulatory Quality	0.900	0.876
Health Care Expenditure	0.922	0.822
Real GDP per capita	0.862	0.739
Private sector debt	0.889	0.653
Urban Population Rate	0.632	0.642
Environmental Taxes	0.689	−0.532
Education Index	0.675	0.523
Extra-EU27 Exports	0.957		0.948
Intra-EU27 Imports	0.975		0.947
Intra-EU27 Exports	0.957		0.934
Extra-EU27 Imports	0.957		0.910
Population	0.947		0.907
Consumption of fine cut tobacco	0.892		0.906
Consumption of Cigarettes	0.892		0.850
Net migration	0.768		0.780
Total tax revenue lost from illicit tobacco consumption	0.805		0.763
Specific excise to total tax revenue	0.914			0.806
Income distribution	0.902			0.765
Specific excise to GDP	0.885			0.706
Poverty rate	0.877			−0.650
SDG	0.869			0.644
Deaths by Neoplasm	0.694			−0.620
Share of perceived health	0.806				0.868
Sex ratio	0.832				−0.824
Crude death rate	0.898				−0.623
Good health and well-being (SDG3)	0.946				0.609
Old-age dependency ratio	0.822					0.733
Median age	0.856					0.696
Responsible consumption and production Indicator (SDG12)	0.690					0.653
Crude marriage rate	0.635					−0.604
Fiscal Balance	0.468					−0.489
Total tax to WAP	0.842						0.826
Minimum excise duty	0.741						0.805
Specific Excise WAP	0.585						0.652
Unemployment rate	0.806							0.803
Share of illicit cigarette consumption	0.788							0.639
Household saving rate	0.626							−0.483
Total Variance Explained (%)		32.426	20.382	8.591	6.511	5.553	4.859	3.938

). The seven principal components emerged explain 82.2% of the total variance and all variables have significant factor loadings (>0.4).

Institutional and economic stability (32.42% of the total variance): The first principal component captures broader levels of institutional quality and economic stability in Member States. It comprises a coherent core of variables related to institutions and macroeconomic stability. High positive loading coefficients are observed for the corruption perceptions index (0.900), the rule of law (0.884), the effectiveness of governance (0.878), and the quality of the regulatory framework (0.876), indicating a close correlation among them. On the contrary, environmental taxes show a negative loading (−0.532), indicating that this variable changes inversely concerning the component, compared to the other indicators of institutional and economic stability.

International Trade and Market Share (20.38%): The second component highlights strong international trade activity and its interplay with market size and tobacco demand. It includes strong loadings on intra and extra EU trade flow indicators, demographic variables, and tobacco consumption. Its association with tax revenue loss. is consistent with the view that cross-border trade and demand co-vary with illicit market dynamics.

Socioeconomic Inequality and Tax Burdens (8.59%): The third component reflects socioeconomic inequalities and tax policy structures, with an emphasis on poverty, income distribution and the participation of specific indirect taxes in tax revenues. The negative loading of deaths by neoplasm (−0.620) introduces a dimension related to health outcomes, which appears to differ from the general pattern of the component.

Health and Well-being (6.51%): The fourth principal component brings together variables related to the subjective perception of health and demographic structure. Perceived health variable, reflecting the role of self-perception of health is shaping the profile of this component. The component captures, overall, a dimension where health, both as a subjective perception and as a quantitative expression, is linked to the demographic parameters that co-vary with it.

Demographic Aging and Social Dynamics (5.55%): The fifth component describes the link between population aging and social transformations. The highest positive loadings reflect the strengthening of demographic aging and its effects on population structure and consumption needs. This component summarizes the multidimensional interactions between demographic aging and socio-economic and fiscal variables, underlining the statistical significance of transformations in the composition of the population.

Tobacco Taxation Policy (4.86%): It summarizes the dimensions of tax architecture, and the implementation of special taxes aimed at balancing fiscal stability and control of tobacco shadow markets. It reflects the extent to which tax measures rely on the consumption of tobacco products to generate revenue patterns and is associated with purchasing power and consumption. Minimum excise duty highlights the role of minimum taxation as a key tool for aligning taxation practices in EU member states and preventing differences that may strengthen non legitimate trade.

Labor Dynamics and Illicit Consumption (3.94%): The seventh component captures how labor market instability and household financial difficulties influence trends in tobacco consumption outside the formal market. The unemployment rate indicates the significant impact of unemployment on consumption behavior. The contribution of the share of illicit cigarette consumption (0.639) reveals the connection between illicit consumption and conditions of economic insecurity and unemployment, which increases the risk of lost tax revenues. The household’s saving Rate variable has a negative loading (−0.483), reflecting an inverse relationship between saving and shadow consumption.

4.2. Spatial Patterns of Tax Revenue Loss Risk

The hierarchical analysis identified six spatial patterns of EU Member States in risk of revenue loss from illicit consumption of tobacco products. The spatial patterns revealed reflect the interplay of institutional effectiveness, economic conditions, social interactions, demographic and health conditions highlighted in the principal components (

Table 3. Spatial Patterns of Tax Loss Risk in the 27-EU.

Spatial Patterns	Risk of Tax Loss (%)	Member States	Institutional and Economic Stability	International Trade and Market Share	Socio-Economic Inequality and Tax Burdens	Health and Well-Being	Demographic Aging and Social Dynamics	Tobacco Taxation Policy	Labor Dynamics and Shadow Consumption
Stable and Institutionally Strong Economies	9.8	Austria, Belgium, Denmark, Estonia, Finland, Netherlands, Portugal, Sweden	++	—	—	ᴑ	+	+	—
Economies with Social Inequalities and Development Challenges	9.1	Croatia, Czechia, Hungary, Poland, Slovakia, Slovenia, Bulgaria	——	—	——	—	ᴑ	ᴑ	——
Economies with Aging Populations and Demographic Challenges	23.2	Cyprus, Ireland, Luxembourg, Malta, Romania	ᴑ	—	+	+	——	—	+
Economies with Strong Trade Activity	25.6	Germany	++	++	+	—	—	—	—
Economies with Significant Shadow and Informal Activities	55	Greece, Italy, Spain, France	—	+	+	+	++	—	++
Economies with Health Challenges and Lower Well-being	11.8	Latvia, Lithuania	+	—	+	——	—	+	++

++: very positive association, +: positive association, ᴑ: no association, —: negative association, ——: very negative association. Source: Author’s own elaboration based on study data.

, Figure 1). Each pattern incorporates a specific blend of vulnerabilities and strengths across these dimensions, stressing fiscal risk’s multi-dimensional nature.

The GIS visualization (Figure 1) complements the statistical classification by illustrating the spatial consistency and regional distribution of the identified clusters, thereby revealing cross-border patterns and gradients in fiscal risk exposure that are not directly observable in tabular form.

Stable and Institutionally Strong Economies: The first group includes states with stable and institutionally strong economies: Austria, Belgium, Denmark, Estonia, Finland, Netherlands, Portugal, and Sweden. The well-established governance frameworks, sound fiscal policies, and substantial economic performance of these members are associated with lower exposure to revenue loss from illicit tobacco. The robust institutional environment restricts the proliferation of informal markets, and their economic resilience allows products to be very affordable for most consumers, even when taxed. At the same time, these countries show moderate reliance on excise taxes that, while not a problem in today’s environment, should be closely monitored to ensure it does not lead to vulnerabilities over the long run.

Economies with Social Inequalities and Development Challenges: The second group, which includes Croatia, Czechia, Hungary, Poland, Slovakia, Slovenia and Bulgaria, deals with social inequalities and development challenges. These nations display high scores in the socio-economic inequality and tax burdens component. Income inequality and higher poverty levels translate into higher demand for cheaper variants of tobacco products, including untaxed or illegal tobacco products. Despite such measures, socio-economic vulnerabilities in these countries have created a complex landscape where fiscal stability remains an elusive goal. While the taxation structure is essential for revenue generation, it can deepen inequalities if not carefully calibrated, coinciding with increased shadow market activity.

Economies with Aging Populations and Demographic Challenges: The third group—Cyprus, Ireland, Luxembourg, Malta, and Romania—is shaped by demographic pressures and aging populations. These countries underline growing old-age dependency ratios and changing fundamental social constructs. Aging populations can lead to falling participation in the labor market and a change in consumer behavior by consuming less (especially taxed) goods such as tobacco. Demographic challenges create more pressure on fiscal policies when it comes to balancing the needs of an aging population with sustaining revenues. Fiscal systems in those countries will have to adjust to the changing demographic setting, which poses the risk of losing revenue like this.

Economies with Strong Trade Activity: Germany, as a single-case pattern describes a well-defined group by high trade levels. The country’s growing importance in intra- and extra-EU trade flows makes it an economic heavyweight and vulnerable to specific risks. These transnational trade networks can provide economic advantages, facilitate smuggling, and promote the movement of illicit tobacco. To counteract revenue losses in shadow markets, trade activity in Germany is so influential that it requires complex monitoring and enforcement measures.

Economies with Significant Shadow and Informal Activities: Greece, Italy, Spain, and France are at the highest average risk of revenue loss among the six groups. Labor Dynamics, Shadow Consumption, and Tobacco Taxation Policy components dominate these countries. The high levels of unemployment and a significant reliance on excise taxation led to informal tobacco markets. Economic pressures on households, especially in areas with high unemployment rates, offer a fertile ground for the growth of untaxed goods. Moreover, their tax regimes, an important part of emulating governments, can create incentives to buy from the shadow market if they are too demanding.

Economies with Health Challenges and Lower Well-being: Latvia and Lithuania comprise a group distinguished by health challenges and lower levels of well-being. These members face significant public health concerns, including lower perceived health standards and underdeveloped healthcare systems. These conditions are linked to purchasing patterns with a higher propensity for cheaper, tax-evaded products, including illegal tobacco products. Fiscal costs are closely tied to health outcomes, so policies in each area are becoming increasingly important to consider the perspectives of others.

5. Discussion

The present analysis highlighted the existence of a complex and multidimensional network of factors associated with the risk of tax revenue loss from the shadow consumption of tobacco products. The strong presence of institutional and intergovernmental factors in the first axis highlights that institutional quality, trust in institutions, and effective public administration are systematically associated with lower exposure to the shadow economy. This observation aligns with the existing body of international literature, which attributes a key role to institutional performance as a deterrent mechanism for tax evasion and undeclared consumption (Kamm et al., 2021; Clemente & Lírio, 2018). Yet, while earlier works highlighted institutional credibility as a general safeguard against illicit trade the present analysis adds a spatial perspective, demonstrating that institutional adequacy is uneven across Europe. Southern and Eastern states systematically lag behind in administrative capacity and institutional trust, revealing geographically structured vulnerabilities within the EU.

Another important emerging direction concerns the link between external economic integration and tax risk. Links with international trade and flows of goods do not necessarily lead to an increase in shadow consumption, but are typically linked with greater institutional alignment and the adoption of best practices. This finding challenges previous interpretations that link market openness to an increase in smuggling (Bhagwati & Srinivasan, 1974) and suggests a more nuanced view, where the impact of trade depends on the overall quality of governance and the institutional capital of each country. In the EU context, this more complex pattern is consistent with evidence that effective enforcement and administrative capacity can offset the risks associated with openness (Europol, 2022; European Anti-Fraud Office [OLAF], 2024), while persistent price differentials continue to incentivize cross-border purchasing on the demand side (Stoklosa, 2020).

Of particular research interest is the construction of a multivariate structure linking socioeconomic inequality and burdensome taxation. In this regard, the present study confirms that socially unequal tax systems—especially those that emphasize consumption taxation—are correlated with the emergence of parasitic fiscal behaviors, not only due to economic pressure, but also due to a crisis of legitimacy in the tax mechanism. The composition of this component indicates that social justice is not simply a value issue, but a functional element of tax efficiency (Closs-Davies et al., 2024; Cowen, 2022). Beyond attitudinal channels, our results suggest that fiscal inequality may create structural incentives for shadow consumption in settings where consumption taxation bears heavily on lower-income groups, a point that complements rather than duplicates the existing theoretical claims on fairness and compliance.

In the field of public health and demographic composition, it is apparent that the subjective perception of health and the structure of the population are strongly related to variations in consumer practices. The fact that these variables constitute a common component indicates a systemic relationship between health culture and tax behavior. Interestingly, the relevant axis appears to have a spatial dimension, with countries in Central and Northern Europe exhibiting higher indicators of perceived health and, consequently, lower exposure to shadow consumption. This finding fills a gap in the literature, which has not adequately analyzed the relationship between public health and paraeconomic trends. This linkage between perceived health and fiscal behaviour extends prior evidence by connecting public-health perceptions with tax-relevant consumption choices at a comparative EU scale (Gallus et al., 2014).

The transition to increasingly aging populations is emerging as a burden on fiscal balance and social cohesion. The social shifts resulting from aging, such as changing consumption patterns and pressure on welfare systems, tend to coincide with patterns of fiscal instability, when not supported by structural interventions. This interpretation offers a new perspective on the demographic challenge, suggesting that aging may be viewed not only as a social service concern but also as a contextual factor in macroeconomic and fiscal policy.

Regarding tax policy on tobacco products, the emphasis was not on the absolute tax but on the form and structure of the burden. Findings indicate that countries with a strong dependence on specific consumption taxes may be able to boost their economy, especially when tax alignment is absent at the European level. This element, although not unknown, is supported here through an integrated statistical structure and is documented beyond the simple correlation of variables. Furthermore, the demand for tobacco products remains relatively inelastic. Available evidence suggests limited behavioural substitution towards illegal products following excise increases (DeCicca et al., 2022).

Finally, the component involved in unemployment, underlying consumption and reduced savings capabilities offers a loud reminder that the shadow market is not just a legal or institutional problem, but a social symptom. The spatial deviations here are intense, with a higher concentration of such patterns in regions of southern and eastern Europe, which also have high rates of youth unemployment. Taken together, these patterns indicate that labour-market slack and reduced savings capacity can amplify incentives for untaxed purchases when enforcement is weak, a mechanism consistent with recent EU risk assessments (Europol, 2022; European Anti-Fraud Office [OLAF], 2024).

The spatial dimension of the findings proves to be crucial for understanding tax vulnerability and the shadow consumption of tobacco products in the European Union. The components that emerged are not randomly distributed across the European space, but constitute clear geographical configurations, with Southern and Eastern European countries displaying accumulated high-risk characteristics: increased levels of unemployment, limited institutional effectiveness, greater dependence on excise taxes, and weaker social welfare indicators. In contrast, Northern and Central European countries tend to be associated with components such as institutional stability, a low underground economy, and a stronger perception of health security. This geographical asymmetry suggests that policies aimed at combating illicit trade and protecting tax revenues cannot be uniform; instead, they must account for the spatial variability of socio-economic and institutional conditions. Beyond description, this heterogeneity offers a practical framework for designing cluster-specific mixes of taxation, enforcement, and social policy measures, ensuring that anti-illicit trade interventions are effectively targeted to each country group within the EU.

For the Northern and Central European countries, where institutions are strong and tax compliance is high, policy priorities should focus on maintaining fiscal stability and strengthening cross-border coordination to prevent displacement effects. By contrast, Southern and Eastern European economies, characterised by social inequality, higher unemployment and lower institutional trust, require a more balanced mix of measures—moderate and predictable excise trajectories, targeted consumer awareness campaigns, and investment in administrative transparency—to rebuild the legitimacy of taxation.

In aging societies, mainly found in Western and Southern Europe, preventive health and welfare policies can indirectly support fiscal resilience by reducing consumption patterns that erode revenues. Trade-intensive areas, particularly those located along major transport corridors and ports, would benefit from risk-based customs intelligence and reinforced cooperation among enforcement authorities.

Finally, in countries where shadow consumption remains structurally high—notably in parts of Eastern and Southeastern Europe—policy design should prioritise the strengthening of enforcement capacity and the gradual adoption of digital track-and-trace systems, accompanied by socially calibrated excise structures. This differentiated approach translates the empirical typology of the study into actionable pathways, demonstrating that the success of tax policy in the EU depends on its ability to adapt to the distinct socio-economic and institutional profiles of each territorial group.

A major limitation of the current knowledge on the illicit trade in tobacco products in the EU is the lack of official, publicly available and independently substantiated estimates of the scale of illicit tobacco consumption and the corresponding tax revenue losses. Most of these estimates originate from studies often funded or influenced by the tobacco industry itself, which raises concerns about bias, conflicts of interest, and scientific opacity (Gilmore et al., 2014). This practice poses serious risks for policy-making, as it may inflate the dimensions of the problem or distort the justification for specific tax or regulatory measures. Therefore, the need to strengthen national and European capacity to collect, analyse, and publish independent data is urgent.

Although the analysis captures significant structural patterns across multiple dimensions and over the period 2017–2022, the exploratory nature of the principal components’ method does not allow for causal inferences. Instead, the study highlights strong correlations and latent structures, which require further empirical investigation through causal models, such as panel data regression or instrumental variables methods. At the same time, the heterogeneity of countries and the intra-state heterogeneity that is often hidden at the national level limit the extent of generalizations across different contexts. However, the contribution of this analysis remains essential: it illuminates tax vulnerabilities through a systemic lens, and offers foundations for audit and policies that are not limited in raising taxes but recognize the complex nature of tax behavior.

6. Conclusions

This study provides a comprehensive assessment of the determinants and spatial patterns of tax revenue loss risk due to illicit tobacco consumption across the 27 EU Member States. By integrating multivariate techniques such as Principal Component Analysis, Hierarchical Clustering, and Geographic Information Systems, we identified key economic, social, demographic, political, and behavioral factors that co-occur with fiscal vulnerabilities. The analysis revealed substantial heterogeneity across Member States, highlighting that similar revenue losses can stem from distinct combinations of risk factors, shaped by the specific institutional and socio-economic contexts of each country.

Our findings have both theoretical and practical implications. The study advances the understanding of the multidimensional nature of fiscal risk in the context of illicit trade, emphasizing the need to consider cross-determinant interactions and spatial heterogeneity. The results provide an evidence base to inform the design of targeted anti-smuggling audits, tailored enforcement strategies, and more efficient tax administration policies. By accounting for the diverse risk profiles of EU Member States, policymakers can implement interventions that are context-specific, thereby enhancing their effectiveness in safeguarding public revenues.