Mexico City, Mexico — The sale of illegal tobacco is growing rapidly in Mexico and is now raising a red flag for fiscal policy. Researchers warn that the update to the Special Tax on Production and Services (IEPS) could increase demand in the illicit market and cause public losses of up to 30 billion pesos (MXN) per year (around USD $1.6 billion).
Researchers from El Colegio de México college presented the study “Illegal Cigarettes and Organized Crime,” which warns that the black market already controls one out of every five cigarettes consumed in the country.
Manuel Pérez Aguirre, an author on the study, told Aztec Reports that the lack of clear controls creates a gray area that allows the sale of illegal tobacco to expand unchecked. The researcher pointed out that weak traceability makes it easy for many products to appear legal, even though they enter the country unregulated.
Pérez Aguirre said that traffickers take advantage of a highly profitable, low-risk, and discreet business. The price gap exacerbates the problem: a legal pack can cost 80 pesos (USD $4.38), while an illegal one sells for as little as 12 pesos, or less than one U.S. dollar.
The study notes that, after the tax increase in 2011, illicit cigarette consumption jumped from 2% of the market to almost 17% in three years. Current figures place the phenomenon at up to 20%, confirming that the sale of illegal tobacco continues to expand.
Seizures are also failing to curb the problem. Since 2012, annual seizures have not exceeded 10 operations, and fines range from 10 to 20 (around 50 cents to 1 US dollar) pesos per pack, a negligible cost for criminal networks. A measure that curbs legal consumption but increases illegality
Experts point out that the increase in the Special Tax on Production and Services (IEPS) could reduce legal consumption, but it will also drive more purchases on the illicit market, where there is no health control or guarantee regarding the product’s components.
Jorge Javier Romero, a researcher at El Colegio de México (Colmex), warned that a tax system lacking solid traceability mechanisms turns the tax into a trigger for the problem. He mentioned that excessive taxation, along with weak institutions, creates ideal conditions for the growth of the illegal market.
The impact would also reach young and low-income consumers, who would seek cheaper options in illicit channels. This shift would expand the presence of organized crime in cigarette distribution, according to the researcher.
The study also documents that organized crime dominates the sale of illegal tobacco, forces local businesses to distribute its products, and displaces authorized brands in various regions.
Cigarette tax revenue without a clear destination
Regarding the destination of the Special Tax on Production and Services (IEPS), Jonathan Hernández, a public revenue researcher at the Center for Economic and Budgetary Research (CIEP), indicated that the tax lacks a specific allocation. Although it is mentioned that it finances health programs, there is no clarity on the resources that actually reach the sector.
“On paper, it says that the resources go to health, but there is no clarity on which specific budget items. For years, there has been insistence that the revenue from the ‘health’ IEPS should be earmarked; however, today the public really doesn’t know where those funds are going,” the researcher told Aztec Reports.
A simulation by CIEP estimates that, with the proposed increase starting in 2026—which raises the specific tax per cigarette and the ad valorem tax from 160% to 200%—revenue could reach 62 billion pesos (USD $3.4 billion), while consumption would decrease by 7.3%.
In the long term, the CIEP projects a 10% to 11% reduction in consumption by 2030, provided that effective traceability mechanisms and harm reduction policies are in place to curb the sale of illicit tobacco.
The CIEP researcher explained that Mexico follows international standards recommended by the World Health Organization (WHO), but they cautioned that the country needs to strengthen institutions before increasing the tax burden, to prevent the illicit market from growing even further.
Featured image credit: Julio Lopez via Unsplash
