(Sept 14): As the government looks ahead to Budget 2027, the cost of living will remain at the centre of the national conversation. 

So too will taxation. Debates around the sales and service tax (SST) and the prospect of some type of hybrid with the goods and services tax (GST) have revived a familiar question: how can the government raise revenue without further burdening ordinary households? 

Not all taxes are the same. 

Broad-based consumption taxes can affect a wide range of everyday goods and services. Tobacco taxes, by contrast, target a harmful and non-essential product. They can reduce cigarette consumption, raise revenue for public programmes and help households spend less on tobacco. 

That distinction is particularly relevant now, with Budget 2027 and the next state elections in Melaka and Sarawak. Recent findings from the national survey in the ‘Tobacco Tax for Big Impact’ report by Social and Economic Research Initiative (SERI), launched in May, challenge the assumption that higher tobacco taxes are a major cost-of-living burden or a political liability. 

Critics of higher cigarette taxes often argue that they place an additional burden on smokers, particularly lower-income households already struggling with rising prices. 

But this overlooks a simple question: what else could that money be spent on? 

This is where understanding the crowding-out effect of tobacco consumption becomes crucial. Money spent on cigarettes is money that cannot be spent on essentials such as food, education and healthcare. 

A study by the Center for Indonesia’s Strategic Development Initiatives and the Universitas Indonesia Faculty of Economics and Business found causal evidence of this crowding-out effect. The research showed that for every rupiah spent on tobacco, households reduced spending on food and non-food commodities, such as clothing, housing, utilities, education, and healthcare. 

Higher tobacco taxes should therefore not be viewed in the same way as taxes on everyday necessities. By encouraging smokers to reduce consumption via higher tobacco taxes, they can potentially free up household spending for more productive uses. 

In addition to tobacco taxes encouraging more productive spending, higher tobacco taxes are not even viewed as a major cost-of-living burden by the majority of Malaysians, even among smokers. In SERI’s survey, respondents were asked how much higher cigarette taxes affected their cost of living; only 17% said it was a moderate or large factor, while among smokers, it was only 38%. 

With state elections in Melaka and Sarawak fast approaching, how their views compare can be insightful. Across both states, only 17% said higher cigarette taxes were a moderate or large factor in affecting their cost of living, reflecting a similar sentiment to the general population. 

This matters as policymakers consider how to raise revenue while responding to continued concerns about household pressures. The question should not simply be whether a tax increases the price of a product, but what effect that tax has on overall household spending. 

Revenue from tobacco taxes can also be directed towards programmes that benefit the public. 

SERI's analysis in the ‘Tobacco Tax for Big Impact’ report estimated that an annual tobacco tax increase of at least 5% could raise an additional RM146 million in a year. That revenue could help fund healthcare, smoking cessation and social programmes aimed at easing financial pressures and curbing illicit trade. 

This creates a potentially virtuous cycle. Higher taxes discourage tobacco consumption. Households can spend less on cigarettes. At the same time, the revenue can support programmes that help Malaysians, including those facing cost-of-living pressures. 

Raising cigarette excise duties by two sen per stick during Budget 2026 was an important step forward, ending a decade without an increase. But one-off and sporadic increases are not enough. 

As cost-of-living pressures rise and cigarette prices remain relatively stable, this deadly product becomes more affordable, unlike the prices of Malaysian staples such as nasi lemak, roti canai and satay, which have risen by up to 48% in real terms when taking inflation into account, as first highlighted by SERI’s policy brief, ‘Food Prices Skyrocketing, Cigarettes Getting Cheaper!’ This disparity is deeply concerning. 

Budget 2027 is an opportunity to take the important next step. 

Rather than treating tobacco taxation solely as a health policy, the government should recognise its place in the wider cost-of-living debate. Higher tobacco taxes can discourage spending on a harmful product, reduce future pressure on the healthcare system and generate revenue for programmes that support Malaysians. 

Not all taxes are equal. And not every tax increase has to mean greater pressure on household budgets. 

When designed properly, tobacco taxation can help families spend less on cigarettes, help fund public programmes and support a healthier Malaysia.

Daniel Kittu is a senior researcher at the Social and Economic Research Initiative.