Health - Tobacco excise increase

Budget Review 2010-11 Index

Budget 2010–11: Health

Tobacco excise increase

Matthew Thomas

From midnight on 29 April 2010, the Government increased the excise and excise-equivalent customs duty rate applying to tobacco products by 25 per cent. The excise on cigarettes was increased from $0.2622 to $0.32775 per stick and the excise on loose leaf tobacco was increased from $327.77 to $409.71 per kilogram. The increase was expected to raise the price of a pack of 30 cigarettes by around $2.16 and is calculated to yield an extra $5.5 billion in tax revenue over the forward estimates period.[1] The Government has indicated that this additional revenue will, along with existing tobacco excise revenues, be invested in improving health and hospitals through the newly instituted National Health and Hospitals Network Fund.

The last general increase in tobacco excise—that is, other than adjustments for CPI—was a 10 per cent increase in the 1995–96 Budget.[2] Partly as a consequence of this, Australia has lagged behind other OECD countries where it comes to the rate of tax as a percentage of the final recommended retail price of a typical packet of cigarettes. Prior to the latest increase, taxes comprised around 68 per cent of the total cost of a packet of cigarettes in Australia.[3] This is low compared with countries such as France (80 per cent), the United Kingdom (78 per cent) and Canada (76 per cent) and, as at 2003, Australia ranked 17th out of the 19 OECD countries for which data were available.[4] While cigarettes in Australia are among the most expensive in the world, until the latest excise increase the price of cigarettes was nevertheless typically lower than in other OECD countries.

On the strength of the above factors, it may be argued that a general increase in tobacco excise was overdue in Australia on health grounds.[5] The Government anticipates that the excise increase should cut total tobacco consumption by around six per cent, and the number of smokers by two to three per cent—that is, around 87 000 Australians.[6] (It is to be assumed that this is over the next 10 years, as per the National Preventative Health Strategy goal and the COAG National Partnership Agreement on Preventive Health.) Although it is difficult to quantify precisely the impact of such a measure, it is reasonable to assume that the excise increase should result in a significant reduction in the prevalence and incidence of smoking; that is, a number of existing smokers are likely to give up the habit, and less people are likely to take up smoking.[7] A substantial body of evidence supports the finding that real price increases and reductions in the affordability of tobacco products are the most significant policy intervention in reducing tobacco consumption.[8]

However, as many public health commentators see it, it is important that the reduction in consumption should extend to people in low income groups and other disadvantaged populations (especially Indigenous Australians), and not just be confined to people who are more educated and from higher socio-economic groups.

On this understanding, tobacco excise increases have been described by some as regressive. That is, they impact disproportionately on people from lower socio-economic groups who are more likely to be smokers, and less able to afford the increased purchase price of a product to which they are more or less addicted.[9] This much seems irrefutable.

That said, some have argued from a preventative health perspective that this need not necessarily be the case. As prominent Australian tobacco researcher, Michelle Scollo sees it, ‘the key issue in determining whether tobacco taxes are regressive is the extent to which people in various socio-economic groups actually do reduce tobacco consumption in response to price increases’.[10] Scollo’s rationale is that so long as tobacco excise increases do indeed deter people from lower socio-economic groups from taking up smoking or influence them to quit, then they may be viewed as progressive. This is because it is these people who stand to gain the most financially and in health terms from excise increases that provide an incentive for them to quit or reduce their consumption. A majority of research evidence indicates that low income smokers are either as likely as, or more likely than, higher income smokers to reduce their consumption or quit smoking in response to tax increases.[11] Thus, Scollo suggests that tobacco taxes can be described as being, on the whole, progressive.

However, arguably the degree to which the Government’s tobacco excise increase is likely to prove successful, and may be viewed as progressive, is heavily dependent on the support provided to assist low income and disadvantaged smokers to quit.

It is widely recognised that the achievement of a decline in smoking demands a comprehensive approach. As the National Preventative Health Taskforce notes, ‘the more comprehensive the approach, the more likely it is that prevalence will decline among all social groups’.[12] The Government has not introduced the tobacco excise increase in isolation. It has also committed to restricting Australian internet advertising of tobacco products, increasing by $27.8 million over four years funding for anti-smoking advertising campaigns and, in a world first measure, introducing plain packaging for all cigarettes sold in Australia by 1 July 2012.[13]

What the Government has not done for low income and disadvantaged groups is provide additional assistance such as increased funding for smoking cessation programs. For example, the Government has not adopted a March 2010 recommendation by the Pharmaceutical Benefits Advisory Committee that nicotine replacement therapy patches be placed on the Pharmaceutical Benefits Scheme and subsidised by taxpayers.[14] This was also one of the recommendations made by the National Preventative Health Taskforce.[15] In short, the tobacco excise increase is not as progressive as it might have been had it been accompanied by further measures to assist low income and disadvantaged groups, such as those outlined by the National Preventative Health Taskforce.

[1].    K Rudd (Prime Minister), Anti-smoking action, media release, 29 April 2010, viewed 12 May 2010,; Australian Government, Budget measures: budget paper no. 2: 2010–11, Commonwealth of Australia, Canberra, 2010, p. 51, viewed 12 May 2010, The $5.5 billion estimate of tax revenue more or less tallies with treasury modelling conducted last year of a rise in the price of cigarettes of 21 per cent. The Treasury determined that such an increase would raise additional tax revenue of $1.03 billion a year.

[2].    There have been two other relatively significant increases in excise since this time. The first of these was as a result of a change in the way tobacco excise was levied. Until November 1999, the levy was calculated per kilogram of weight of manufactured cigarettes (including the filter and paper). Subsequently, the levy was calculated per stick. The second price increase was associated with the introduction of the GST in June 2000. M Scollo, ‘Policy measures associated with quitting’, M Scollo and M Winstanley (eds.), Tobacco in Australia: facts and issues, third edn., Cancer Council Victoria, 2008, viewed 12 May 2010,

[3].    M Scollo and A Lal, ‘The very latest tobacco taxes, prices, production, expenditure, reported consumption and revenue in Australia – as at February 2007’, Melbourne, VicHealth Centre for Tobacco Control, 2007.

[4].    Ibid.

[5].    Both present and former Opposition Leaders—Tony Abbott and Malcolm Turnbull—have proposed an increase in tobacco excise. In his 2009–10 Budget reply speech, Malcolm Turnbull proposed a 12.5 per cent increase in tobacco excise as means to increase government revenue while improving public health. The tax hike was recommended as an alternative to the Government’s policy to means test the private health insurance rebate. Tony Abbott has in the past proposed a 20 per cent increase in tobacco excise as a means to subsidise the expansion of income management, or welfare quarantining, to all families in receipt of income support payments. While Abbott is reported to have labelled the tobacco excise increase as a ‘tax grab’, he has nevertheless indicated that the Coalition will support it. P Coorey, ‘Tobacco tax draws support for Rudd’, Sydney Morning Herald, 11 May 2010.

[6].    K Rudd, op. cit.

[7].    There are many determinants of tobacco consumption and econometric analyses are required to distinguish the impact of price increases on tobacco consumption from the impact of other policies that are calculated to reduce consumption.

[8].    P Bardsley and N Olekalns, ‘The impact of anti-smoking policies on tobacco cessation in Australia’, Health Promotion Journal of Australia, vol. 9, 1999, pp. 202–205; M Wakefield, ‘Smoke signals: do anti-smoking messages really make a difference?’ in Nigel Gray Oration, Melbourne, State Library: unpublished paper, 2006; P Jha  and F Chaloupka, ‘The Economics of global tobacco control’, British Medical Journal, vol. 7257, 2000, pp. 358–61; P Jha and F Chaloupka eds., Tobacco control in developing countries, London: Oxford University Press, 2000.

[9].    For example, some have argued that while some people on lower incomes will be driven to reduce their spending on tobacco, others who are unable to quit or cut back may go without food or other essential items rather than give up smoking. Thus, the increases may have unintended consequences. While the National Preventative Health Taskforce acknowledged this possibility, it argued that ‘there is little direct evidence of food insecurity attributable to tobacco use in Australia, although it is likely that some heavy smokers already spend less than is optimal on food, clothing and other goods and services’. Australian Government, Australia: the healthiest country by 2020. National Preventative Health Strategy – the roadmap for action, The Department of Health and Ageing/The Taskforce, Canberra, 2009, p. 176, http://dpl/Books/2009/AustraliaHealthiestCountry.pdf

[10]. M Scollo, ‘A regressive tax?’ in M Scollo and M Winstanley (eds.), Tobacco in Australia: facts and issues, op. cit.

[11]. Australian Government, Australia: the healthiest country by 2020. National Preventative Health Strategy – the roadmap for action, op. cit., p. 175.; M Scollo, ‘A regressive tax?’ in M Scollo and M Winstanley (eds.), Tobacco in Australia: facts and issues, op. cit.

[12]. Australian Government, Australia: the healthiest country by 2020 – National preventative health strategy – the roadmap for action, op. cit., p. 173.

[13]. K Rudd, op cit.

[14]. L Vasek, ‘Roxon ignored plea for nicotine patch subsidy’, The Australian, 3 May 2010.

[15]. Australian Government, Australia: the healthiest country by 2020 – National preventative health strategy – the roadmap for action, op. cit., pp. 188–189.