Background:
Tax policy changes may reduce cigarette consumption, especially those with low incomes.

Objective:
The main aim of this study was to examine the responsiveness of smoking prevalence and cigarette consumption to price and income changes by income groups, and the effectiveness of tax policy changes to reduce cigarette consumption in Montenegro.

Methods:
A two-part model was applied to estimate smoking participation, smoking intensity price and income elasticity. The first part of the model applies logit regression, while the second uses Deaton’s model to improve the validity and objectivity of conditional (smoking intensity) elasticity results. A generalized linear model (GLM) was applied to verify robustness. The reason for this is that Deaton’s model is commonly used in the analysis of Household Budget Survey (HBS) data, especially when households do not report the market price. Moreover, using this model, it is possible to capture the shading of quality to price change. The analysis used HBS data (2006–2017).

Results:
The estimates indicate that tobacco pricing policies had a much higher impact on smoking prevalence in the low-income group (price elasticity of -0.595) relative to the high-income group (price elasticity of -0.344). The same conclusion could be drawn for the smoking intensity elasticity: the high-income group was the least affected by changes in price (price elasticity of -0.258). At the same time, the most affected was the low-income group, with price elasticity of -0.424. Poorer households spent a larger share of their budget on cigarettes. The simulation results confirm that increases in the specific excise taxes of 58.3% on tobacco would reduce total cigarette consumption by 11.25% while increasing government revenue by 8.07%.

Conclusion:
Smoking prevalence and consumption are very responsive to price and income changes, with considerable differences in elasticities between income groups. The taxation policy has a positive impact on changing patterns of consumption and public revenues across each income group. Low-income and middle-income households would benefit the most, while on the other hand, the highest revenue collection was generated from the wealthiest group. Our results align with results obtained so far for other low-income and middle-income countries. This study contributes to the analysis of the smoking prevalence and cigarette consumption responsiveness to price and income changes, which was conducted for the first time in Montenegro.