Tobacco excise increase

Budget Review 2016–17 Index

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.[1] 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.[2] Combined, these measures are expected to realise additional revenue of $4.7 billion over the forward estimates period.

Background

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’.[3] 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%.[4]

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.[5] 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.[6] Excise currently accounts for around 63% of the price of a packet of cigarettes.[7]

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.[8]

In the lead-up to the Budget, there were a number of reports that these revenue figures would be unlikely to be realised.[9] 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.[10] 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.[11] 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.[12] 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.[13]

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.[14] 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.[15] 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.[16] 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.[17] 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.[18]

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 term.

[1]. Australian Government, ‘Part 2: expense measures’, Budget measures: budget paper no. 2: 2016–17, p. 16.

[2]. Ibid.

[3]. C Bowen (Treasurer) and T Plibersek (Minister for Health; Minister for Medical Research), Government to increase tobacco excise, media release, 1 August 2013. The proposed rise followed the Rudd-Gillard Government’s 29 April 2010 increase in tobacco excise of 25%. See Australian Government, Budget measures: budget paper no. 2: 2010–11, 2011, p. 51. Prior to this increase, the last general increase in tobacco excise was a 10% increase in the 1995–96 Budget. For a brief analysis of the tobacco excise increase and other tobacco measures introduced as part of the 2010–11 Budget, see M Thomas, ‘Tobacco excise increase’, Budget review 2010–11, Research paper, 17, 2009–10, Parliamentary Library, Canberra, May 2010, p. 188.

[4]. In Australia, tobacco excise is charged on a per-stick basis for cigarettes with a tobacco content that does not exceed 0.8 grams per cigarette. All other tobacco products, including cigarettes that contain more than 0.8 grams of tobacco, loose tobacco and cigars, are taxed on a per kilogram basis. Currently, the rates are $0.53733 per stick and $671.68 per kilogram. Australian Taxation Office, Excise rates for tobacco. The rates, along with product definitions and descriptions, are set out in the Schedule to the Excise Tariff Act 1921.

[5]. C Bowen (Shadow Treasurer) and C King (Shadow Minister for Health), Labor steps up efforts to reduce tobacco consumption, media release, 24 November 2015. See also Labor, A healthier Australia through best practice tobacco policy, Labor policy document.

[6]. The WHO has recommended that excise should make up at least 70% of the final consumer price of tobacco products. See World Health Organisation (WHO), Technical Manual on Tobacco Tax Administration, WHO, Geneva, 2010, p. 104.

[7]. Labor, A healthier Australia through best practice tobacco policy, Labor policy document.

[8]. C Bowen and C King, op. cit.

[9]. See J Greber, ‘Labor tobacco modelling doesn’t include effect of Treasury downgrade’, Financial Review, 3 May 2016, and G Hutchens, ‘Labor spending plans suffer $20bn blowout on eve of Coalition budget’, The Guardian, 3 May 2016.

[10]. D Crowe, ‘Labor funds for Gonski up in smoke’, The Australian, 3 May 2016, p. 1.

[11]. The price elasticity of demand refers to the extent to which consumers’ demand for a product changes in response to price change. To illustrate, if a price rise of 10% causes the quantity of the product demanded to fall by 5%, then the elasticity of demand is -0.5. The more price-responsive consumers are, the greater the elasticity of demand.

[12]. See World Bank, Curbing the epidemic: Governments and the economics of tobacco control, World Bank, Washington DC, 1999, pp. 37–45 and C Gallet and J List, ‘Cigarette demand: meta-analysis of elasticities’, Health Economics, 12/10, 2003, pp. 821–835. Because young people are on limited budgets, they exhibit a higher degree of price elasticity. According to a systematic review of studies of tobacco elasticities the average price elasticity for teenagers was -1.43 and -0.76 for young adults. As such, a 10% increase in tobacco price could be expected to decrease the tobacco consumption of teenagers by around 14%, and that of young adults by around 7.6%.

[13]. See Treasury, Issues in Tobacco Taxation.

[14]. Ibid.

[15]. Australian Bureau of Statistics (ABS), Australian National Accounts: National Income, Expenditure and Product, Dec 2015, cat. no. 5260.0, ABS, Canberra, 2016. See Table 8: Household Final Consumption Expenditure (HFCE).

[16]. Australian Institute of Health and Welfare (AIHW), National Drug Strategy Household Survey detailed report 2013, Drug Statistics Series no. 28, cat. no. PHE 183, AIHW, Canberra, 2014, p. 19.

[17]. D Collins and H Lapsley, The costs of tobacco, alcohol and illicit drug abuse to Australian society in 2004/05, Commonwealth of Australia, Canberra, 2008, p. 65. The costs presented by Collins and Lapsley are net costs. As such, they take into account tax revenue generated through tobacco excise and customs duty and reduced expenditure on aged care as a result of tobacco-related deaths, as well as the costs (tangible and intangible) of tobacco use.

[18]. See for example World Health Organisation (WHO), WHO Technical Manual, op. cit., and F Chaloupka, A Yurekli and G Fong, ‘Tobacco taxes as a tobacco control strategy’, Tobacco Control, 21, 2012, pp. 172–180.

All online articles accessed May 2016.

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