Dr Matthew Thomas
The Budget provides for an annual increase in tobacco excise
and excise equivalent customs duties of 12.5% on 1 September of each year from 2017
to 2020. The increases will raise
the excise on a cigarette to around 69% of the average price of a cigarette,
close to the World Health Organisation (WHO) recommendation of 70%. The
Government has also reduced the duty free tobacco allowance from 50 cigarettes
to 25 cigarettes, or equivalent, from 1 July 2017. Combined, these measures are expected to realise additional revenue of $4.7
billion over the forward estimates period.
On 1 August 2013, the Rudd-Gillard Government announced its
intention to introduce an annual increase of 12.5% in tobacco excise over the subsequent
four years. This was to ‘battle smoking-related cancer and help return the
Federal Budget to surplus in 2016–17’. The first of the four
increases was implemented on 1 December 2013, the second on 1 September 2014,
and the third on 1 September 2015. The fourth increase is to take effect from 1
September 2016. These increases are in addition to twice-yearly indexation of
excise on tobacco products based on average weekly ordinary time earnings and the
Goods and Services Tax (GST) imposed at a rate of 10%.
On 24 November 2015, Shadow Treasurer Chris Bowen and Shadow
Minister for Health Catherine King announced that a Shorten Labor Government
would continue the 12.5% annual increase in tobacco excise for a further four
years, from 1 July 2017. Mr Bowen and Ms King
argued that this staged increase would raise tobacco taxes in Australia to more
than 75% of the retail price of tobacco products by 2020, in line with WHO recommended
best practice. Excise currently accounts
for around 63% of the price of a packet of cigarettes.
Based on costings undertaken by the Parliamentary Budget
Office (PBO), Labor expected that the continued excise increases would raise an
additional $3.8 billion over the current forward estimates period and $47.7
billion over the next decade.
In the lead-up to the Budget, there were a number of reports
that these revenue figures would be unlikely to be realised. Indeed, based on a recent Treasury downgrade of expected tobacco excise
revenue, it has been claimed that the staged increases proposed by Labor would
raise only $28.2 billion over 10 years—some $19.5 billion less than the PBO
modelling indicated. It is not clear whether
the downgrade is a result of the Treasury having used updated figures on tobacco
consumption or different assumptions about the impact of the excise increases.
Whatever the case, it is worth noting that to some extent such
discrepancies in modelling figures are to be expected due to the complexities
associated with estimating the impact of excise increases.
Because tobacco is an addictive substance, demand for
tobacco products is less responsive to price increases than demand for many
other consumer products. While there is some variation in estimates, most
studies have found that the responsiveness (elasticity of demand) for tobacco
products in developed countries such as Australia is around -0.4. This means that a 10% increase in the price of tobacco products could be
expected to produce a decrease in consumption of around 4% in the general
population. When combined with
population growth and the indexation of tobacco excise, the fact that tobacco
is addictive has resulted in tobacco excise having been a relatively stable
source of revenue over time.
However, according to the Treasury, the amount of tobacco
excise revenue is in decline, both in real terms and as a proportion of
government revenue. This is to be expected,
as tobacco consumption and rates of smoking in Australia are at record low
levels and falling.
While tobacco sales data are not publicly available,
Australian Bureau of Statistics (ABS) National Accounts figures indicate that total
trend expenditure on consumption of tobacco and cigarettes in the December
quarter of 2015 was $3.3 billion. This is the lowest figure
ever recorded, with expenditure estimates going back to 1959. These figures find
support in National Drug Strategy Household Survey findings that show that rates
of smoking in Australia are also at record low levels. In 2013, 12.8% of people
in Australia aged 14 or older were daily smokers, declining from 15.1% in 2010. Over the same period, the number of people smoking daily fell by around 200,000—from
2.7 million in 2010 to 2.5 million in 2013.
Based on the above figures and trends, tobacco excise revenue
is likely to continue to decline, and this might be viewed as a positive
outcome in overall terms.
Tobacco excise serves two main purposes. Firstly, it is a
source of revenue that is justifiable due to the negative consequences that
result from tobacco consumption. It has been estimated that tobacco consumption
imposes costs of around $31.5 billion per year on the Australian community,
chiefly through increased healthcare costs. These costs are significantly
higher than the excise imposed on tobacco. Secondly, tobacco excise helps to
reduce the affordability of tobacco products, and to thereby decrease their
level of consumption. Raising tobacco taxes has been found to be one of the
most effective means for governments to reduce tobacco use and the associated
negative health impacts of smoking.
Hence, it can be expected that reductions in tobacco excise revenue
will be accompanied by big savings in health and other costs over the longer
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