BILLS DIGEST NO. 10, 2016–17              14 September 2016

Customs Tariff Amendment (Tobacco) Bill 2016 [and] Excise Tariff Amendment (Tobacco) Bill 2016

Paul Davidson
Economics Section 

Date introduced:  31 August 2016
House:  House of Representatives
Portfolio:  Immigration and Border Protection and Treasury
Commencement: On Royal Assent

Links: The links to the Bills, their Explanatory Memoranda and second reading speeches can be found on the home pages for the Customs Tariff Amendment (Tobacco) Bill 2016 and the Excise Tariff Amendment (Tobacco) Bill 2016 or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the Federal Register of Legislation website.

All hyperlinks in this Bills Digest are correct as at September 2016.

Purpose of the Bills

The purpose of the Customs Tariff Amendment (Tobacco) Bill 2016[1] (the Customs Tariff Bill) is to amend the Customs Tariff Act 1995 to extend the existing annual 12.5 per cent annual increase in the excise-equivalent customs duty on tobacco for a further four years until 1 September 2020.

The purpose of the Excise Tariff Amendment (Tobacco) Bill 2016[2] (the Excise Tariff Bill) is to amend the Excise Tariff Act 1921to increase the rate of excise by an equivalent amount.

Background[3]

The objective of the Bills ‘is to improve the health of Australians by reducing their exposure to tobacco products’.[4] To that end, the Bills impose a series of four annual 12.5 per cent increases in the excise and excise equivalent customs duty on tobacco. The proposed increases:

… ensure that average cigarette prices are more closely aligned with the World Health Organisation recommendation concerning the proportion that excise and excise-equivalent customs duty should comprise of the price of a cigarette.[5]

The World Health Organisation (WHO) recommendation is that excise and excise-equivalent customs duty should comprise 70 per cent of the price of a cigarette.[6] Treasury analysis indicated that as at 1 September 2015, excise on cigarettes in Australia accounted for around 54 per cent of the final consumer price.[7]

The Regulation Impact Statement (RIS) for the Bills is attached to the Explanatory Memorandum. As noted in the RIS:

In 2008, the Council of Australian Governments (COAG), committed to reducing the adult daily smoking rate to 10 per cent of the population, and to halving the daily rate of smoking among Aboriginal and Torres Strait Islander people by 2018.[8]

The latest data from the Australian Bureau of Statistics (ABS) indicates that there are approximately 2.6 million Australians smoking daily, which represents 14.5 per cent of the adult population.[9] As stated in the RIS:

Australian smoking rates are still too high. As noted earlier, COAG committed to the following performance benchmark: ‘By 2018, reduce the national smoking rate to 10 per cent of the population, and halve the Indigenous smoking rate, over the 2009 baseline’. Progress against this benchmark is measured by reference to the adult daily smoking rate.[10]

The RIS noted that the target was implemented as a means of measuring progress on tobacco control, with an overall objective of reducing smoking rates.[11]

Committee consideration

Selection of Bills Committee

At its meeting on 1 September 2016, the Selection of Bills Committee determined that the Bills not be referred to Committee for inquiry and report.[12]

Senate Standing Committee for the Scrutiny of Bills

At the time of publication, the Senate Standing Committee for the Scrutiny of Bills had not considered either of the Bills.[13]

Policy position of non-government parties/independents

The Australian Labor Party stated it would extend the annual 12.5 per cent excise increase on tobacco if it formed government as a result of the 2016 Federal election.[14]

The Australian Greens (Greens) have publicly stated that ‘putting up the price of cigarettes to stop people smoking and to fund health or medical research is fundamentally a good idea’. According to Greens spokesperson Adam Bandt, any money raised through this measure should be invested in areas like hospitals and medical research—rather than being used to fund tax cuts.[15]

A document released by the Financial Planning Association of Australia in the lead-up to the election found that the Liberal Democratic Party had a policy to remove tobacco taxation. It noted that there was no public announced policy for any other party.[16]

Position of major interest groups

The Cancer Council indicated support for the announced increase in excise, with CEO Professor Sanchia Aranda having stated:

The increase in tobacco tax alone will translate to tens of thousands of cancer deaths avoided, with trend data showing that the recurrent increases will lead to around 320,000 smokers quitting and 40,000 teenagers deterred from taking smoking up.[17]

The Heart Foundation ‘applauded’ the decision to impose the 12.5 per cent annual excise increase for another four years, to 2020. It stated:

Studies conducted throughout the world across all socio-demographics found that the most effective intervention available to governments to reduce demand for tobacco were tax increases resulting in higher tobacco prices.

Change will provide real health benefits and will be enhanced by the comprehensive set of tobacco control initiatives in place such as tax, education campaigns and plain packaging.

Changes to behaviour by smokers may be difficult but it will occur and these measures will not only help existing smokers quit, but deter people from taking up smoking in the first place.[18]

The Australian Association of Convenience Stores considered the excise increase a ‘lazy’ measure. CEO Jeff Rogut noted:

The Federal Government has shelved its innovative aspirations as the Budget followed the lazy yet predictable path in raising tobacco excise – not even pretending to be motivated by health – in a move that punishes honest retailers, supports criminal gangs and hurts low income earners.[19]

British American Tobacco Australasia expected an increase in illegally imported tobacco. It noted that nearly $1.5 billion annually was foregone in government revenue as a result of the illegal importation of tobacco.[20]

Financial implications

The Explanatory Memorandum outlines the forecast financial implications of the Bills. It forecast that revenue would increase by just more than $5 billion over the forward estimates.

Table 1: Excise and excise-equivalent receipts

Receipts ($m)

2016-17

2017-18

2018-19

2019-20

Department of Immigration and Border Protection

-

660

1,510

2,420

Explanatory Memorandum, Excise Tariff Amendment (Tobacco) Bill [and] Customs Tariff Amendment (Tobacco) Bill 2016, p. 3.

Table 2: Goods and services tax receipts

Receipts ($m)

2016-17

2017-18

2018-19

2019-20

Australian Taxation Office

-

60

140

230

Explanatory Memorandum, Excise Tariff Amendment (Tobacco) Bill [and] Customs Tariff Amendment (Tobacco) Bill 2016, p. 3.

Minor financial costs are expected for the Department of Immigration and Border Protection as it creates a new communications strategy to inform industry and travellers of the reduction in the volume of cigarettes that can be purchased duty-free. Minor administration costs are also expected to impact on the Australian Taxation Office in terms of monitoring market behaviours and determining whether quotas should be imposed.[21]

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bills’ compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bills are compatible.[22]

Parliamentary Joint Committee on Human Rights

At the time of publication, the Parliamentary Joint Committee on Human Rights had not considered either of the Bills.[23]

Key issues

As is standard practice in the economics and health fields, Treasury has not focused on the adult rate of smoking, but rather on the level of tobacco consumption.[24] Treasury estimates that the extension of the excise increases will reduce tobacco consumption by about 17 per cent by 2020.[25] The Bills have an objective to ‘minimise the prevalence of smoking’, but no target is explicitly stated.[26] In contrast, by 2018 COAG has a stated goal of reducing smoking rates to 10 per cent of the adult population.[27] The RIS noted that ‘excise taxation is at the centre of Australia’s tobacco control policy’, so it seems reasonable to assume that the main way of achieving the COAG goal is via excise extensions and possibly (further) excise increases.[28] As noted above, in 2014-15, the smoking rate for the Australian adult population was 14.5 per cent.

The RIS considered the option of extending the current 12.5 per cent annual excise increase that has been in place since 1 December 2013.[29] No other options were considered. As stated in the RIS:

The decision to not examine alternative options was taken because the previous 12.5 per cent increases had proven to be an effective, bipartisan policy that was understood and supported by the community.[30]

It is unclear whether such a statement provides a sufficiently robust basis to not consider alternative policy options. As stated in the Australian Government Guide to Regulation:

Every good RIS will canvass a range of viable options. The number of options you include in your analysis should be commensurate with the magnitude of the policy problem being considered, but three is a good minimum rule of thumb. … At least one option must always be non-regulatory. Remember that a rigorous cost-benefit analysis must always pose the status quo as the benchmark policy option.[31]

It would appear that, at a minimum, the RIS has failed to adequately consider a non-regulatory option.

There are forecast to be just above 19.5 million people aged 18 and over in Australia in 2018.[32] In order to achieve COAG’s stated aim of achieving smoking rates equal to 10 per cent of the adult population, smoking rates will have to fall further. As noted above, ABS data indicates that as of 2014-15, some 2.6 million adult Australians smoke. In order to reach the goal, smoking rates will need to reduce 24 per cent from their 2014-15 levels. Smoking rates fell 1.6 percentage points from 2011-12 to 2014-15 (an average of 0.53 percentage points per year), which coincided with the first of the annual 12.5 per cent increases in excise on tobacco on 1 December 2013 and 1 September 2014.[33]

It is unlikely that smoking rates will fall by 4.5 percentage points (from the 2014-15 numbers) to 2018 because it would require an annual reduction in smoking rates of around 1.1 percentage points. As Treasury recently noted, the remaining smokers in Australia are likely to be progressively less responsive to changes in cigarette prices. In 2013, Treasury estimated the elasticity of demand for cigarettes (that is, the degree of people’s responsiveness from a change in price) to be -0.58.[34] That is, for a 10 per cent increase in the price of cigarettes, quantity demanded falls by 5.8 per cent. For the 2016-17 Budget, Treasury provided an updated estimate of the elasticity of demand which was -0.5. That is, for a 10 per cent increase in the price of cigarettes, quantity demanded falls by five per cent.[35]

Although it is acknowledged in the RIS that the demand for cigarettes is not the same as the adult daily smoking rate,[36] the two are likely to be closely related. The Treasury analysis estimates that the demand for cigarettes will fall by 17 per cent by 2020 after the four annual 12.5 per cent increases in excise.[37] Given that proportionately most of the effect of the excise increase will be realised in 2019 and 2020, a figure lower than 17 per cent is likely to be smokers’ response by 2018.

By way of comparison, in 2010 a range of measures including a 25 per cent one-off increase in the excise on tobacco was announced. Other measures included the introduction of plain packaging, extending advertising restrictions, and increased spending on anti-smoking campaigns. The estimated reduction in consumption was 11 per cent.[38] It would be expected that the first two years of 12.5 per cent annual excise extension would result in an increase in excise of 26.5 per cent above current levels by 2018. Given the past relationship between excise increases and smoking consumption, it may be that the increase in excise on tobacco is insufficient to meet the stated COAG goal of reducing smoking rates to 10 per cent of the adult population. However, it should also be acknowledged that potential new smokers may be dissuaded from commencing as a result of the non-price measures announced in the 2010 package.

Key provisions

Customs Tariff Bill

Existing section 19AB of the Customs Tariff Act contains the formula for calculating the indexation of tobacco duty rates. Tobacco rates are indexed twice a year, on 1 March and 1 September (subsection 19AB(12)). Subsection 19AB(3) provides the method for calculating the indexation factor. The indexation factor is calculated as the average weekly ordinary time earnings (AWOTE) amount for the most recent reference quarter before the indexation day, divided by the AWOTE amount for the base quarter. If the indexation factor for an indexation day (1 March and 1 September each year) is greater than one, the tobacco duty rate is replaced by a new rate of duty as set out in subsection 19AB(1). This is equal to:

Subsection 19AB(6)(a) of the Customs Tariff Act provides that the additional factor is 1.125 for the indexation days that occur on 1 September 2014, 1 September 2015 and 1 September 2016. Item 2 of the Customs Tariff Bill amends paragraph 19AB(6)(a) of the Customs Tariff Act to extend the application of the additional factor of 12.5 per cent on each 1 September indexation day until 1 September 2020.

Theoretically, there is a possibility that the indexation factor worked out under subsection 19AB(3) could fall below one, in which event the indexation factor could lower the applicable tobacco duty rate. However, as set out above, under subsection 19AB(1) the tobacco duty rate is only replaced if the indexation factor is at least one. If it is less than one, the tobacco duty rate is not adjusted. However, if this occurred on a 1 September indexation day, it would mean that the duty rate would not be increased by the scheduled 12.5 per cent. To ensure that this does not occur, subsection 19AB(5) of the Customs Tariff Act provides that the indexation factor as calculated in accordance with subsection 19AB(3) should be treated as one for the 1 September indexation days in 2014, 2015 and 2016. Item 1 of the Customs Tariff Bill amends subsection 19AB(5) of the Customs Tariff Act, by ensuring that the indexation factor will also be treated as equal to one on each 1 September indexation day up to and including 1 September 2020.

Excise Tariff Bill

Section 6AA of the Excise Tariff Act contains the formula for calculating the indexation of tobacco excise rates. Items 1 and 2 of the Excise Tariff Bill amend section 6AA to ensure that the additional 12.5 per cent indexation of the excise on tobacco continues on each 1 September indexation day to 1 September 2020.

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[1].              Parliament of Australia, ‘Customs Tariff Amendment (Tobacco) Bill 2016 homepage’, Australian Parliament website.

[2].              Parliament of Australia, ‘Excise Tariff Amendment (Tobacco) Bill 2016 homepage’, Australian Parliament website.

[3].              These measures were originally announced as part of the 2016-17 Budget. For further background information on the Bills see: M Thomas, Tobacco excise increase, Budget review 2016-17, Parliamentary Library, Canberra, 2016.

[4].              Explanatory Memorandum, Excise Tariff Amendment (Tobacco) Bill [and] Customs Tariff Amendment (Tobacco) Bill 2016 [and] Customs Tariff Amendment (Tobacco) Bill 2016, p. 5.

[5].              Ibid.

[6].              Ibid., p. 6.

[7].              Ibid., p. 14.

[8].              Ibid., p. 12.

[9].              Australian Bureau of Statistics (ABS), National Health Survey: First Results, 2014-15, cat. no. 4364.0.55.001, ABS, Canberra, 2015.

[10].              Explanatory Memorandum, Excise Tariff Amendment (Tobacco) Bill [and] Customs Tariff Amendment (Tobacco) Bill 2016, op. cit., p. 24.

[11].              Ibid., p. 26.

[12].              Senate Standing Committee for Selection of Bills, Report, 5, 2016, The Senate, Canberra, 1 September 2016.

[13].              Senate Standing Committee for the Scrutiny of Bills, Index of bills considered by the committee, 2016, The Senate, Canberra, 2016.

[14].              Australian Labor Party (ALP), A healthier Australia through best practice tobacco policy, ALP policy document, 24 November 2015.

[15].              A Bandt (Greens Treasury spokesperson), Tobacco tax rise should not fund tax cuts: Bandt, media release, 17 April 2016.

[16].              Financial Planning Association of Australia, 2016 federal election — comparison of tax-based policies of key parties, media release, June 2016.

[17].              S Aranda (CEO Cancer Council Australia), Budget lays platform for longer term improvements in cancer policy says Cancer Council Australia, media release, 3 May 2016.

[18].              M Swanson (Heart Foundation spokesperson), Tobacco tax helps take the puff out of smoking, media release, 3 May 2016.

[19].              J Rogut (CEO Australasian Association of Convenience Stores), AACS: Budget targets smokers in a predictably lazy move, media release, 9 May 2016.

[20].              S McIntyre (British American Tobacco Australasia spokesperson), Tobacco black market set to boom, media release, 4 May 2016.

[21].              Explanatory Memorandum, Excise Tariff Amendment (Tobacco) Bill [and] Customs Tariff Amendment (Tobacco) Bill 2016, op. cit., pp. 34, 39-40.

[22].              The Statement of Compatibility with Human Rights can be found at pages 8–9 of the Explanatory Memorandum to the Bill.

[23].              Parliamentary Joint Committee on Human Rights, Index of bills and legislative instruments considered by the committee, 2016.

[24].              Explanatory Memorandum, Excise Tariff Amendment (Tobacco) Bill [and] Customs Tariff Amendment (Tobacco) Bill 2016, op. cit., p. 30.

[25].              Ibid., p. 29.

[26].              Ibid., p. 26.

[27].              Ibid. See also Council of Australian Governments (COAG), National healthcare agreement 2012, Intergovernmental Agreement on Federal Financial Relations, COAG, 2012, p. A-5.

[28].              Explanatory Memorandum, Excise Tariff Amendment (Tobacco) Bill [and] Customs Tariff Amendment (Tobacco) Bill 2016, op. cit., p. 26.

[29].              Ibid., pp. 12, 26.

[30].              Ibid., p. 27.

[31].              Department of the Prime Minister and Cabinet (PM&C), Australian Government guide to regulation, PM&C, Canberra, 2014, p. 26.

[32].              Australian Bureau of Statistics (ABS), Population projections, Australia, 2012 (base) to 2101, cat. no. 3222.0, ABS, Canberra, 2013.

[33].              Explanatory Memorandum, Excise Tariff Amendment (Tobacco) Bill [and] Customs Tariff Amendment (Tobacco) Bill 2016, op. cit., pp. 12, 14.

[34].              Demand functions are taken to be downward sloping (as price and quantity are inversely related) and as such demand elasticities are negative values.

[35].              Senate Economics Legislation Committee, Official Committee Hansard, 6 May 2016, pp. 60–61.

[36].              Explanatory Memorandum, Excise Tariff Amendment (Tobacco) Bill [and] Customs Tariff Amendment (Tobacco) Bill 2016, op. cit., pp. 30.

[37].              Ibid., p. 29.

[38].              Ibid., p. 30. See also The Treasury, Post-implementation review: 25 per cent tobacco excise increase, The Treasury, Canberra, February 2013, pp. 2, 15.