Background:
Tobacco tax in Montenegro is progressive and that the poorest population would benefit the most from tobacco tax increases.

Objective:
The main aim of this study is to provide evidence to policymakers on the overall high levels of economic, medical, and productivity costs of tobacco use, as well as the significance of tobacco tax progressivity.

Methods:
We estimate the impact of a tobacco tax increase on cumulative income gains, due to the years of working life saved, as well as a reduction in tobacco consumption and medical expenses related to tobacco-attributable diseases in Montenegro. An extended costbenefit analysis (ECBA) is applied to estimate the distributional impacts of tobacco taxes in Montenegro in 2019. ECBA simulates the distributional effect of tobacco tax increases on change in tobacco consumption and expenditures, medical expenditures and earnings.

Results:
An increase in taxes by 50% leads to the increase in available income (total net impact) of the low-income group between 1.6% and 1.8% (being lower for the wealthier). Moreover, the number of premature deaths caused by smoking would be reduced between 7.9% and 11.6%. As a result of increased tobacco taxes, cost reductions from lower spending on cigarettes and medical services, as well as those related to premature deaths due to tobacco use, would result in improvements in total population welfare. An ECBA decomposition shows that the benefits of higher taxes outweigh the costs and that the whole net income effect is positive across all income groups.

Conclusions:
This work contributes to the analysis of the tobacco tax distributional impact, which was conducted for the first time in Montenegro.