National Drug Strategy
National Drug Strategy

The costs of tobacco, alcohol and illicit drug abuse to Australian Society in 2004/05

3. Availability of new or revised methodologies and data

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This section provides details of areas of estimation where revised or new estimation methodologies have become available or where data availability has improved.

3.1 The impact of the GST on the taxation of alcohol and tobacco

This study, like previous studies by the present authors in this series, estimates the budgetary impact of drug abuse on the Commonwealth and on the states and territories (referred to subsequently for the purpose of brevity as the states). This involves a comparison of drug-attributable expenditures, for example on healthcare and justice, with the relevant tax revenues. Since the previous study (Collins and Lapsley, 2002) there have been significant changes in the ways in which alcohol and tobacco are taxed.

Prior to 1997, tobacco was taxed through federal customs and excise duties and state franchise fees. Alcohol was subject to the federal wholesale sales tax as well as customs and excise duties and franchise fees. In August 1997, in response to a challenge to NSW franchise fees on tobacco, a High Court decision in Ha and Lim v The State of New South Wales struck down these fees. This decision clearly also had applicability to tobacco franchise fees imposed by other states and to liquor franchise fees across all states and, as a result, all franchise fees were suspended.

As a consequence, the Commonwealth Government negotiated a safety net agreement with the states under which the Commonwealth would increase its tax rates on alcohol and tobacco to cover the revenue which would have been raised by the now-suspended franchise fees. The safety net revenue was returned to the states as Revenue Replacement Payments (RRPs). This situation was reflected in the 1998/99 tax revenue data in Collins and Lapsley (2002).

In July 2000 the Commonwealth Government introduced the Goods and Services Tax (GST) and abolished the wholesale sales tax, as part of a complicated package of changes resulting from the 1999 Intergovernmental Agreement (IGA) negotiated between the Commonwealth and the states. The IGA changed the methods of taxing alcohol and tobacco, and the distribution of that revenue between the Commonwealth and the states. Under the IGA, all GST revenue was earmarked for the states (though much of this revenue was clawed back by the Commonwealth through the simultaneous abolition of Financial Assistance Grants to the states).

It was intended that the GST should be applied to all forms of alcohol and tobacco at the standard rate of 10 per cent, but that the overall rates of tax on these products should be largely unchanged. Thus some compensatory changes in other taxes were implemented:
At the same time, to improve the effectiveness of the tobacco excise tax, its basis was changed from taxation purely by weight of tobacco to a combination of “per stick” taxation and taxation by tobacco weight. This reform was estimated at the time by Federal Treasury to yield an increase in tobacco tax revenue of $440m in a full year.

Apart from the “per stick” tobacco tax reform, the above changes were designed to leave tax revenue levels broadly unchanged. However, they resulted in a major reallocation of revenue from the states to the Commonwealth. The states lost the Revenue Replacement Payments and, in compensation, received only the 10 per cent GST on alcohol and tobacco. The result of all these changes is shown in the following two tables, which compare the situations in the financial years 1998/99 (the year of the previous drug abuse costs study) and 2004/05.

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Table 4, Tobacco tax revenues, 1998/99 and 2004/05

1998/99
2004/05
Federal $m
State (RRPs) $m
Total $m
Federal $m
State (GST) $m
Total $m
Excise tax
1,633.7
3,120.2
4,753.9
5,220.0
0.0
5,220.0
Customs duties
254.0
0.0
254.0
518.0
0.0
518.0
GST
n.a.
n.a.
n.a.
0.0
937.4
937.4
Total revenue
1,887.7
3,120.2
5,007.9
5,738.0
937.4
6,675.4
Percentage
37.7
62.3
100.0
86.0
14.0
100.0


Sources:
Australian Bureau of Statistics, Taxation Revenue (5506.0), various years.
Australian Taxation Office, Taxation Statistics (various years).
Australian Bureau of Statistics, unpublished data on customs duties.
Authors' calculations of GST revenue.


Note: n.a. means not applicable.

Table 5, Alcohol tax revenues, 1998/99 and 2004/05

1998/99
2004/05
Federal $m
State (RRPs) $m
Total $m
Federal $m
State (GST) $m
Total $m
Excise tax
Beer
873.9
0.0
873.9
1,653.0
0.0
1,653.0
Spirits
144.5
0.0
144.5
739.0
0.0
739.0
Total excise tax
1,018.3
0.0
1,018.3
2,392.0
0.0
2,392.0
Sales tax (beer, wine and spirits)
620.6
997.4
1,618.0
n.a.
n.a.
n.a.
Customs duties
Beer
14.0
0.0
14.0
83.0
0.0
83.0
Wine
4.0
0.0
4.0
5.0
0.0
5.0
Spirits
719.0
0.0
719.0
980.0
0.0
980.0
Total customs duties
737.0
0.0
737.0
1,068.0
0.0
1,068.0
GST
n.a.
n.a.
n.a.
0.0
976.5
976.5
Wine equalisation tax
n.a.
n.a.
n.a.
676.0
0.0
676.0
Total revenue
2,375.9
997.4
3,373.3
4,136.0
976.5
5,112.5
Percentage
70.4
29.6
100.0
80.9
19.1
100.0

Sources:
Australian Bureau of Statistics, Taxation Revenue (5506.0), various years.
Australian Taxation Office, Taxation Statistics (various years).
Australian Bureau of Statistics, unpublished data on customs duties.
Authors' calculations of GST revenue.


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Note: n.a. means not applicable.

The above two tables show how the taxation of alcohol and tobacco is now almost entirely a Commonwealth prerogative. In 2004/05 the Commonwealth received 86.0 per cent of total tobacco tax revenue (up from 37.7 per cent in 1998/99) and 80.9 per cent of total alcohol tax revenue (up from 70.4 per cent). In practice, the states have no ability to control the GST tax rate, their single remaining source of tax revenue from alcohol and tobacco.

3.2 Production losses in the paid workforce

Drug abuse can have an important impact upon the productivity of the paid workforce in three ways:

(a) reduction in the size of the available workforce as a result of drug-attributable deaths and illnesses causing premature retirement
(b) increased workforce absenteeism resulting from drug-attributable sickness or injury
(c) reduced on-the-job productivity as a result of drug-attributable morbidity.

These three components are now considered in detail.

3.2.1 Reduced workforce size

The definition of the tangible costs of drug abuse upon which the present research is
based is:

To estimate the workforce impact of drug abuse on costs as defined here, the size of the actual workforce in the financial year 2004/05 is compared with the workforce size estimated
on the assumption that there had been no past or present abuse of the drug in question. An estimate is then made, from national accounts data, of the difference in potential production levels between the actual workforce and the counterfactual, no drug abuse, workforce.

3.2.2 Absenteeism

The absenteeism cost estimates in Collins and Lapsley (2002) relied heavily upon research by Bush and Wooden (1994), who studied the impact of smoking and alcohol on absences from the workplace. Their conclusions can be summarised in the following quotations:

Since the publication of Collins and Lapsley (2002), Pidd et al. (2006) have argued that the 1998/99 costs of absenteeism attributable to consumption of alcohol were seriously underestimated. Their research is based upon data collected as part of the 2001 National Drug Strategy Household Survey. They estimate, on the basis of self-reported results in the survey, that 2,683,000 workdays were lost in 2001 as a result of alcohol-attributable absenteeism. Using an alternative technique which calculates for differences in the illness-related or injury-related absenteeism of drinkers and non-drinkers, they estimate that 7,400,000 workdays were lost as a result of alcohol consumption. Following the conservative approach adopted in the present research, the lower of the two estimates is adopted here.
The Bush and Wooden (1994) data and the Pidd et al. (2006) results, together with prevalence data on smoking and drinking from the 2004 National Drug Strategy Household Survey and Australian Bureau of Statistics data on employee absences from work and their causes, permit the estimation of the excess absenteeism attributable to smoking and drinking compared with the rest of the workforce.

While neither Bush and Wooden nor Pidd et al.estimate the probability of absenteeism due to consumption of illicit drugs, it seems a reasonable assumption that the relationship between absenteeism in the workforce and the number of attributable hospital bed days for patients of workforce age is similar for tobacco and illicit drugs. Thus, this ratio is used to estimate the absenteeism attributable to illicit drug use. It seems plausible that a higher proportion of illicit drug users than smokers are unemployable. If this were the case, the above methodology would tend to underestimate illicit-attributable absenteeism.

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3.2.3 On-the-job productivity

Once again, it has not been possible to identify research from which a reliable estimate of drug-attributable reductions in on-the-job productivity could be produced. We continue to believe that these costs would be considerable, but quantification is still not possible.

3.3 Production losses in the household sector

Drug-attributable sickness or death cause production losses not only in the paid workforce but also in the unpaid household sector. The total economy of a nation consists of both market and non-market sectors. The non-market sector uses, in an unpaid capacity, considerable human resources for the production of goods and services which are directly consumed by households without going through the market. These activities, though productive, are in almost all cases not included in conventional national accounts statistics (see, for example, System of National Accounts, 1993).

The estimates presented here of the value of production losses in the household sector are based upon the most recent ABS estimates of unpaid work in the publication Unpaid Work and the Australian Economy 1997 (5240.0). The definition of unpaid work used in an earlier ABS study is as follows:

A household activity is considered as unpaid work if an economic unit other than the household itself could have supplied the household with an equivalent service. The ABS estimates take account of domestic activities, childcare, purchasing of goods and services, and volunteer and community work. All are services which will be lost by the community in the event of the severe sickness or death of the person supplying them, and therefore should be counted as a component of social cost.

The ABS reports four possible valuation methodologies—individual function replacement cost, housekeeper replacement cost and opportunity cost (gross and net). The valuation method chosen for the purposes of this study is that which is preferred by the ABS, the individual function replacement cost. This method assigns values to the time spent on household production by household members according to the cost of hiring the market replacement for each individual function.

The values derived from the ABS estimates, updated to 2004/05 levels, are applied to the most recent data on drug-attributable mortality and morbidity developed for the purposes of the present study to yield estimates of production losses in the household sector.

3.4 Health

3.4.1 Hospitals

This study applies well-validated case-mix costs to the episodes of hospital care which have been calculated from the aetiological fractions. Costs derived from the identified morbidities therefore reflect actual hospital costs of drug-caused or associated morbidity, rather than average hospital costs.

It is difficult to compare costs estimated in previous years with the hospital costs estimated in this study. While overall hospital costs have been increasing, lengths of stay for most morbidities have been decreasing and patients are treated more intensively during their inpatient stay. A greater amount of acute care is being provided outside acute hospitals, or provided within hospitals as services to non-inpatients. Medical and pharmaceutical costs identify some of these services, but it has still not been possible to cost allied health services, nor other non-medical health services provided within the community.

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3.4.2 Medical costs

The total value of medical costs in 2004/05, and the sources of funds for these expenditures, are presented in the Australian Institute of Health and Welfare publication Health expenditure Australia 2004–05, Table A1. The relevant proportions of this total cost are allocated to the individual drugs (alcohol, tobacco and illicit drugs) according to the estimated attributable hospital bed days.

3.4.3 Nursing homes

Residential care for the sick and disabled aged population has an attributable fraction, derived from the calculation of primary conditions and co-morbidities of people using residential aged care. The estimates have been made only for residential care, and do not include the costs of community care services. This results in an underestimate of aged care costs related to tobacco, alcohol and illicit drug use, as an increasing proportion of services for this population are provided through a range of programs outside residential aged care facilities.

Examples of increased drug morbidity in nursing homes include cases of alcohol-related psychoses leading to dementia, the tobacco-related age impairment of ventilatory function and illicit drug-related conditions of infective entoconditis and true psychoses. One example demonstrated by an early Australian study shows that the absence of addiction to tobacco, alcohol and illicit drugs lessens morbidity, delays mortality and reduces the use of health services (Webster and Rawson, 1979).

The proportion of the aged who are in nursing homes because of drug-related conditions varies mainly as a function of geography, socio-economic status and gender. Drugs cause gross disability in the aged which is more evident in the nursing home population than in the equivalent age cohort in the community. Taking all these factors into consideration, it is estimated conservatively that drug-related morbidity in nursing homes is 15 per cent higher than in the equivalent outside community and that at least 15 per cent of all nursing home admissions have drug-related morbidities.

3.4.4 Ambulances

The only data available on illicit drug-attributable ambulance use relate to ambulance attendances for drug overdoses in NSW (see NSW Chief Health Officer, 2006).These data relate to ambulance attendances where the Ambulance Service Protocol 28 (drug overdose and poisoning) was used and where a narcotic antagonist (such as Naloxone/Narcan) was administered. The Report on Government Services 2006 (Attachment 8A) provides data on total ambulance attendances by state and for Australia as a whole. By applying the proportion of total NSW ambulance attendances which related to drug overdoses to the Australia-wide number of attendances for all causes, an estimate can be produced for drug overdose-related ambulance attendances Australia-wide.

Dietz et al. (2000) studied ambulance attendance at heroin overdoses in Melbourne for three months in 1997/8 and included an estimate of cost per call out. This figure has been updated to 2004/05 values by applying the increase in Australia-wide average ambulance attendance costs for all causes, calculated from data in the Report on Government Services 2000 (Attachment 10A) and Report on Government Services 2006 (Attachment 8A). Application of this average overdose attendance cost to the estimated number of overdose-related ambulance attendances produces an estimate of total overdose attendance costs.

It has, for the first time, proved possible to estimate ambulance costs attributable to the consumption of tobacco and alcohol. The Western Australian Department of Health collects data on separations arriving at hospital by ambulance at a level of disaggregation which permits linking to tobacco- and alcohol-attributable medical conditions. The relevant attributable fractions are applied to these data to yield estimates of attributable ambulance services. These results are then used to estimate Australia-wide attributable ambulance costs by application of ambulance usage and cost data in the Report on Government Services 2006 (Attachment 8A).

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3.4.5 Pharmaceuticals

The pharmaceutical cost estimates presented below relate to selected pharmaceuticals prescribed for the treatment of alcohol- and tobacco-attributable conditions identified in the risk-related fractions, and for which hospital and medical services are provided. The same fraction as in the calculation of hospital and medical services has been applied to each of these drugs. This is necessarily only a partial calculation since it does not include costs of non-prescribed (across-the-counter) drugs consumed in relation to tobacco- or alcohol-attributable conditions, and it has costed only those included in the one hundred highest cost Pharmaceutical Benefits Scheme (PBS) drugs. It was not possible to estimate illicit drug-attributable pharmaceutical costs.

As discussed previously, an increasing component of treatment and care is provided on a non-inpatient basis. It is, therefore, important to identify these costs wherever possible. The cost estimates presented below apply only to prescription pharmaceuticals provided outside the hospital sector. In-patient pharmaceutical costs are incorporated in Diagnosis-Related Groups (DRG) hospital costs.

As this calculation applies only to prescribed pharmaceuticals to maintain or improve health status for tobacco-attributable and alcohol-attributable conditions, it does not include the costs of abuse or misuse of pharmaceuticals. We recognise that such abuse has significant economic impact, but it has not been possible to calculate those costs.These cost estimates do not include the government-subsidised costs of prescription drugs which support smoking cessation.

3.5 Road accidents

The estimates of drug-attributable road accident costs presented here are based on Bureau of Transport Economics estimates of aggregate road crash costs in Australia in 1996 (Bureau of Transport Economics, 2000).

There has for many years been clear evidence that a significant proportion of road accidents is attributable to the consumption of alcohol (Ridolfo and Stevenson, 2001, p. 30). Evidence has also emerged of a causal link between illicit drug use and motor vehicle accidents (see Appendix C for the attributable fractions). There appears to be no convincing evidence that road accidents are causally linked to tobacco consumption. The aetiological fractions presented in Appendix C are used to estimate the proportions of road accident costs calculated by the BTE which are attributable to abuse of alcohol and illicit drugs. The 1996 estimates are factored to 2004/05 values by use of the Australian National Accounts implicit price deflator for domestic final demand and by the estimated change in the number of road accidents over the period.

However, some categories of road crash costs are calculated by the BTE on a different basis from that used in this study, since the concepts of cost adopted in the two studies differ. In essence, the BTE study uses a human capital approach while the present study uses a demographic approach (for an explanation of this distinction see the section above on 'Demographic and human capital approaches'). For costs which are fully borne in the year in which the crash takes place (for example, vehicle repairs and the provision of ambulance services), the distinction has no significance. For others, where costs are ongoing into the future (for example, medical/ rehabilitation services and long-term care), this study adopts a different estimation methodology from that of the BTE.

The BTE study estimates road crash costs in the following categories:

Human costs Medical
Ambulance
Rehabilitation *
Long-term care *
Labour in the workplace *
Labour in the household *
Quality of life *
Legal
Correctional services
Workplace disruption
Premature funerals
Coroner
Vehicle costs Repairs
Unavailability of vehicles
Towing
General costs Travel delays
Insurance administration
Police
Non-vehicle property damage
Fire and emergency services

The symbol * in the above list indicates that the cost item in the present study has been calculated using a different methodology from that utilised by BTE.
For its estimates of drug-attributable hospital costs, labour in the workplace, and labour in the household, the present study uses data derived from Ridolfo and Stevenson (2001). These data are more recent than those used in the BTE study.

It is assumed in the present study that all legal costs are incurred in the year in which the crash occurs. This assumption yields results close to reality since crashes in a given year may not be fully legally processed in that year but, in compensation, some legal costs will be resulting from crashes occurring in previous years.

The BTE study calculates the value of the quality of life lost as a result of death or injury by reference to compensation payments from the Victorian Transport Accident Commission. The approach of the present report to the valuation of life is to adopt the willingness-to-pay approach discussed above. However, the BTE estimate for the loss of quality of life resulting from road accident injuries is accepted on the assumption that all such costs are borne in the year of the accident. Again, as with legal costs, this assumption yields results close to reality. Pain and suffering resulting from crashes in a given year may extend into future years but, for the same reason, some pain and suffering resulting from crashes in previous years will carry over into the year under review.

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3.6 Fires caused by smoking

As with our earlier study, the major source of data on fires caused by smoking comes from research conducted by the Operations and Risk Planning Unit of the Queensland Fire and Rescue Service (see Queensland Fire and Rescue Service, 2006). This research attributes 2.7 per cent of all fires to smokers' materials (excluding matches and lighters). This compares with the figure of 1.9 per cent for 1998/99. The QFRS also estimates the value of property damage caused by fires, although it does not list the value of damage by vegetation-only fires.

On the assumption that the Queensland fire experience reflects that of the rest of Australia, it is possible to estimate average smoking-attributable property damage for Australia as a whole. If it is further assumed that the cost of attendance at a smoking-attributable fire can be represented by the average cost of all fire attendances, smoking-attributable fire service costs can also be estimated.

Australia-wide data on numbers of fires and expenditures on fire services are derived from the Report on Government Services 2006 (Steering Committee, 2006, Attachment 8A). In
some of its fire service-related calculations the Productivity Commission appears to have adopted analogous averaging procedures to those adopted here.

The epidemiological data used in the present study separately identify tobacco-attributable fire injuries, deaths and hospital bed days, from which it is possible to calculate medical, hospital and nursing home costs. Health costs in this category predominantly reflect the costs of burn injuries caused by fires in bedding and furniture after smokers fall asleep with lighted cigarettes. It also becomes possible to estimate the impact of smoking-attributable fires on labour output in the workplace and in the home, and on lives lost.

Since the fire costs estimated here do not include valuation of public property damage, such as national parks loss of animals and loss of amenity during bush regeneration—they
represent conservative estimates of the costs of fires resulting from smoking.

3.7 Resources used in the consumption of illicit drugs

The Australian Institute of Criminology Drug Use Careers of Offenders (DUCO) survey provides estimates of expenditures on illicit drugs by prisoners prior to their incarceration. These expenditure data, weighted by prevalence rates for frequent drug users, can be used to estimate the street value of traded drugs, which can then be discounted to adjust for the risk component of street values. For the purposes of estimation it is assumed that the legal market turnover for most illicit drugs would be only about five per cent of estimated current street value. The percentage relating to cannabis is assumed to be somewhat higher at 25 per cent, mainly because the risks of detection of cannabis dealing appear to be lower than for the other drugs and because the resources used in producing the drug in Australia have significant opportunity costs.

However, the DUCO data are now significantly out of date in two important ways:
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Table 6, Drugs recently used, proportion of the population aged 14 years and over, 1998 and 2004

1998 per cent
2004 per cent
2004 as per cent of 1998
Marijuana/cannabis
17.9
11.3
63
Steroids
0.2
-
-
Barbiturates
0.3
0.2
67
Inhalants
0.9
0.4
44
Heroin
0.8
0.2
25
Methadone
0.2
0.1
50
Other opiates/opioids
n.a
0.2
n.a
Meth/amphetamine
3.7
3.2
86
Cocaine
1.4
1.0
71
Hallucinogens
3.0
0.7
23
Ecstasy/designer drugs
2.4
3.4
142
Ketamine
n.a
0.3
n.a
GHB
n.a
0.1
n.a
Injected illegal drugs
0.8
0.4
50
Any illicit drug
22.0
15.3
70


Source: Australian Institute of Health and Welfare, Statistics on Drug Use in Australia 2004, Table 4.2.
Note: -indicates nil or rounded to zero. n.a indicates not available
.

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The estimates presented here of the resources used in the consumption of illegal drugs apply 2004 prevalence data to the DUCO expenditures. From these data are estimated total street values of illegal drugs consumed in 2004. In order to estimate the value which these resources would have in other legitimate uses, these total street values are discounted to eliminate their risk component. However, DUCO expenditure data are not available for barbiturates, inhalants, other opiates/opioids, ecstasy, ketamine and GBH. Accordingly, the costs presented here are likely to have been significantly underestimated.

3.8 Litter

Costs of litter associated with drug abuse are both tangible and intangible, and apply to each category of drug. Costs are borne by governments, particularly state and local governments, and by individuals. There are a number of surveys documenting types and amounts of environmental litter, but none of these studies enable the resource costs or the intangible costs to be identified.

Litter caused by smoking predominantly consists of cigarette butts and cigarette packets which have been thrown away, swept into storm-water drains, or recovered during environmental clean-up days. These costs are not borne by the litterers.

Litter costs associated with alcohol include discarded bottles, cans, ring-pulls, and broken glass. Together with tobacco litter, such litter is ugly and, in the case of broken glass, can be dangerous. The presence of litter diminishes the value of scenery, bushland and coasts.

Litter costs attributed to illicit drugs relate to drug paraphernalia including syringes and, like broken glass, comprise a considerable public health hazard. Most of these costs can be substantially reduced through public education and enforced regulation, but it has not been possible to estimate the costs of litter, let alone effective interventions.
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