National Drug Strategy
National Drug Strategy

Taxation reform and tobacco excise: best practice for a sustainable future

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Joint submission to the Australian Government review of Australia's tax system

Cancer Council Australia Logo

Cancer Council Australia is the nation’s largest non- government cancer control organisation, representing the national interests of the eight state and territory Cancer Councils in reducing the impact of cancer in Australia.

Heart Foundation Logo

The National Heart Foundation of Australia is the peak body dedicated to reducing the suffering and death from heart, stroke and blood vessel disease in Australia.

Responsibility for the content of this submission is taken by the Chief Executive Officer of Cancer Council Australia, Professor Ian Olver, and the Chief Executive Officer of the National Heart Foundation of Australia, Dr Lyn Roberts. Correspondence to Paul Grogan, c/o Paul Grogan at Cancer Council Australia.

Recommendations

That tobacco excise in Australia be increased in two phases: Evidence shows a 21% increase in price through excise would prompt 130,000 adults to quit and prevent 35,500 children from taking up smoking, while boosting federal revenue by $1.03 billion per annum. A 50% price increase would prompt 306,000 adults to quit and prevent 183,000 children from taking up smoking, while raising $1.97 billion per annum.

Overview

Other than twice yearly indexation, excise and customs duty on cigarettes in Australia have not increased since November 1999. We have by all key global indicators fallen well behind international best practice in reducing tobacco burden through price controls.

Yet the real costs of tobacco to Australia are estimated to have risen by 23.5% between 1998-99 ($25.5 billion) and 2004-05 ($31.5 billion).1 The cost of tobacco use in 2004-05 included $5.7 billion in lost workplace productivity and $1.8 billion in gross healthcare costs.1

Taxation reform is one of the most effective measures to reduce the unsustainable economic and social burden of smoking in Australia.1,2

This submission focuses on the potential for tobacco taxation reform to provide long-term, measurable benefits to Australia’s economy while improving population health and wellbeing. Tobacco tax increases through excise provide a twofold benefit to government: a substantial source of new revenue, and reductions in taxpayer-funded healthcare costs.2,3 The attributable improvements in overall population health would also contribute to significant increases in workplace productivity.1

The recommendations in this submission are based on longstanding research and evidence and are aligned with international best practice. 2,3,4 They are also aligned with the recommendations of the Government’s National Preventative Health Taskforce.5 Their adoption would help Australia to prepare for the economic and social challenges of population ageing.

Moreover, increasing tobacco excise and adhering to international best practice are, in our view, clearly aligned with the terms of reference of this broad-ranging taxation review. Most notably (TOR in italics):

‘[TOR 3] …to create a tax structure that will position Australia to deal with the demographic, social, economic and environmental challenges of the 21st century and enhance Australia's economic and social outcomes.’

Relevance to this submission: Increased tobacco excise would reduce consumption of harmful substances while providing new revenue to invest in public health – at a time when Australia faces the economic challenges of population ageing.

‘[TOR 3.4] Enhancing the taxation arrangements on consumption (including excise taxes)…’

Relevance to this submission: Our recommendations focus entirely on excise opportunities that will strengthen the economy and help prepare for generational change.

‘[TOR 3.5] Simplifying the tax system, including consideration of appropriate administrative arrangements across the Australian Federation.’

Relevance to this submission: Consistent approaches to tobacco tax would provide benefits across the Federation and are aligned with the recommendations of the Government’s National Preventative Health Taskforce, whose remit includes advising on inter-jurisdictional preventative health partnerships.

‘[TOR 4] The review should make coherent recommendations to enhance overall economic, social and environmental wellbeing, with a particular focus on ensuring there are appropriate incentives for: workforce participation and skill formation; and investment and the promotion of efficient resource allocation to enhance productivity and international competitiveness.

Relevance to this submission: The substantial health gains derived from tobacco price controls, combined with the revenue stream available, demonstrate the potential for our recommendations to contribute to Australia’s overall wellbeing. A recent ABS study showed that chronic disease has a major impact on workforce participation, particularly among an ageing workforce. 6 Effective tobacco control is an important investment in productivity, as it delays or avoids the onset of chronic disease.

[TOR 5.] The review will reflect the government's policy not to increase the rate or broaden the base of the goods and services tax (GST); preserve tax-free superannuation payments for the over 60s; and the announced aspirational personal income tax goals.
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Relevance to this submission: There is broad community support for tobacco excise, particularly if revenues fund public health and medical treatment.7 Increased tobacco excise can therefore provide a substantial revenue stream without compromising the Government’s commitments in other areas of taxation policy.

Tobacco excise increase – analyses and rationale

Recommendations
That tobacco excise in Australia be increased in two phases:

Analysis of 21% price increase

Revenue: A 21% increase in the price of tobacco products through excise would raise an additional $1.03 billion per annum in federal revenue.8

Impact on smoking prevalence: A 21% increase in the price of tobacco products would, on current evidence, prompt 130,000 adults to quit and prevent 35,500 children from taking up smoking. 9 (Excise as a tobacco control measure is particularly effective among blue collar workers, who bear a higher proportion of tobacco burden than white collar workers.2)

Impact on inflation: Projected reductions in smoking prevalence as a result of increased tobacco excise would mean that increasing tobacco prices would have a declining effect on overall inflation, as the tobacco component of CPI would be re-weighted.10,11 A 21% increase in price is estimated to increase inflation by 0.5%.

Offset effect: A 21% increase in tobacco excise would more than offset revenue loss from fewer smokers purchasing tobacco products. (Anticipated declines in tobacco excise revenue were factored into considerations for the GST.)12

Impact on household budgets: The average Australian smoker would spend an additional $9.20 per week on tobacco products if they maintained current consumption levels.

Public opinion: More than 67% of Australians support an increase in tobacco excise if the revenue contributes to health education; 68.6% support increased excise if revenues contribute to medical treatment.3 (A 2008 Newspoll survey showed 88% of Australians supported increased tobacco tax if the revenues supported health programs.)

Current and recommended future retail prices: The recommended retail price of a packet of 30 cigarettes in Australia was $13.50AUD in September 2008. Increasing price through excise by 21% would see a typical packet of 30 cigarettes retail at around $16.35.

Analysis of 50% price increase

Revenue: A 50% increase in the price of tobacco products through excise would raise an additional $1.97 billion per annum in federal revenue, provided there was adequate policing of illicit trade and excluding the impact of reduced consumption/purchasing from other tobacco control measures.8

Impact on smoking prevalence: A 50% increase in the price of tobacco products would, on current evidence, prompt 306,000 adults to quit and prevent 183,000 children from taking up smoking. 9 (Excise as a tobacco control measure is particularly effective among blue collar workers, who bear a higher proportion of tobacco burden than white collar workers.)2

Impact on inflation: Projected reductions in smoking prevalence as a result of increased tobacco excise would mean that increasing tobacco prices would have a declining effect on overall inflation, as the tobacco component of CPI would be re-weighted.10,11 A 50% increase in price is estimated to increase inflation by 1.2%.

Offset effect: A 50% increase in tobacco excise would more than offset revenue loss from fewer smokers purchasing tobacco products. (Anticipated declines in tobacco excise revenue were factored into considerations for the GST.)12

Impact on household budgets: The average Australian smoker would spend an additional $21.55 per week on tobacco products if they maintained current consumption levels.

Public opinion: More than 67% of Australians support an increase in tobacco excise if the revenue contributes to health education; 68.6% support increased excise if revenues contribute to medical treatment.3 (A 2008 Newspoll survey showed 88% of Australians supported increased tobacco tax if the revenues supported health programs.)

Current and recommended future retail prices: The recommended retail price of a packet of 30 cigarettes in Australia was $13.50AUD in September 2008. Increasing price through excise by 50% would see a typical packet of 30 cigarettes retail at around $20.15.

International comparisons

There are a number of important considerations in an international context that support the case for increased tobacco excise in Australia: Top of page

Rationale in summary

Tobacco excise – a twofold benefit to government

Price increases reduce both the numbers of people smoking and the amount smoked by remaining smokers,4,9 with greater decreases observed among young people and people on lower incomes.16

The World Bank has stated that tax increases on tobacco products are the single most effective means available to governments to reduce death and disease caused by smoking. 4 A detailed analysis of changes in smoking prevalence in Australia in the 15 years since 1990 shows that price increases were by far the most important factor driving reductions in smoking across the whole population over that period.2

Moreover, as shown in our analysis, increased tobacco excise would also generate substantial revenue for government – more than enough to provide effective tobacco control support services and offset declines in excise from relatively fewer people purchasing tobacco products.

Other than twice yearly indexation, excise and customs duty on cigarettes in Australia has not increased since November 1999.

Global benchmarks

Cigarettes in Australia are less costly than they are in many other countries, including Ireland, the United Kingdom, Hong Kong, and most of Canada. Taxes are very low as a proportion of the retail price compared with other high and middle-income countries.14,15

Table 1 - Tax paid per 20 cigarettes as a percentage of final recommended retail price, 2003 – high and upper-middle income countries

Country
Income
OECD?
Tax as % of final price
France
High
OECD
80.4%
Ireland
High
OECD
78.4%
UK
High
OECD
78.0%
Portugal
High
OECD
77.6%
Turkey
High
OECD
77.0%
Chile
Upper middle
76.4%
Canada
High
OECD
76.3%
Denmark
High
OECD
76.1%
Malta
High
76.1%
Finland
High
OECD
75.6%
Austria
High
OECD
75.4%
Italy
High
OECD
75.2%
Germany
High
OECD
74.5%
Belgium
High
OECD
74.4%
Slovenia
High
74.2%
Hungary
Upper middle
74.1%
Greece
High
OECD
73.5%
Netherlands
High
OECD
73.1%
Norway
High
OECD
72.6%
Poland
Upper middle
72.3%
Cyprus
High
72.1%
Estonia
Upper middle
71.8%
Romania
Upper middle
71.7%
Spain
High
    OECD
71.4%
Croatia
Upper middle
71.1%
Argentina
Upper middle
70.0%
Sweden
High
    OECD
69.6%
New Zealand
High
    OECD
69.5%
Luxembourg
High
    OECD
69.0%
Australia
High
    OECD
67.9%
Czech Republic
Upper middle
67.3%
Switzerland
High
    OECD
63.3%
Slovak Republic
Upper middle
62.0%
Japan
High
    OECD
61.1%
Lithuania
Upper middle
60.9%
Latvia
Upper middle
60.3%
Uruguay
Upper middle
59.0%
South Africa
Upper middle
46.2%

Why a two-phased approach?

Evidence of the effectiveness of pricing as a lever for reduced tobacco consumption shows Australia is performing well short of its potential to reduce tobacco burden through excise. This is borne out by international pricing comparisons and the fact that Australia has not increased excise beyond CPI adjustment since 1999.

Australia’s comparatively poor global record in tobacco excise since 1999 has also denied the government a source of substantial additional revenue through a form of taxation for which there is broad public support.

Increasing cigarette prices by 21% would bring Australia into line with where it would be had it continued to increase excise incrementally since 1999 on the basis of minimum WHO recommendations. And, while we recommend a 21% interim increase in price, this would still see excise as a proportion of cost, and overall tobacco product prices, falling well short of the benchmarks set by a number of OECD nations including France and Ireland. A 21% increase would also deliver only half of the potential new revenue available to government through a 50% increase in price.

However, Cancer Council Australia and the National Heart Foundation of Australia recognise that an immediate 50% increase in price may not be feasible for two principal reasons: We therefore recommend that tobacco excise in Australia be increased in two phases: A 21% increase in price through excise would prompt 130,000 adults to quit and prevent 35,500 children from taking up smoking, while boosting federal revenue by $1.03 billion per annum.

A 50% increase on current prices would boost government revenue by around $1.97 billion per annum, motivate 306,000 Australian smokers to quit and prevent 83,000 children from taking up smoking. It would also bring Australia into line with international best practice.

References

1 Collins D and Lapsley H. The costs of tobacco, alcohol and illicit drug abuse to Australian society in 2004/05. P3 2625. Canberra: Department of Health and Ageing, 2008. Available from: National Drug Strategy website

2 Wakefield M, Durkin S, Spittal M, Siahpush M, Scollo M, Simpson J, et al. Impact of tobacco control policies and mass media campaigns on monthly adult smoking prevalence: time series analysis. American Journal of Public Health. 2008;98:1443-50,. Available from: American Journal of Public Health website.

3 Chaloupka F. Chapter 6: Economic Approaches in Reducing Tobacco Use: A Report of the U.S. Surgeon General, Atlanta, Georgia: U.S. Department of Health and Human Services, Centers for Disease Control and Prevention, National Center for Chronic Disease Prevention and Health Promotion, Office on Smoking and Health, 2000. 295-369. Available from: 0-www.cdc.gov.mill1.sjlibrary.org/tobacco/data_statistics/sgr/sgr_2000/sgr_tobacco_chap.htm (This website link was valid at the time of submission)

4 World Bank. Curbing the Epidemic: Governments and the Economics of Tobacco Control. Washington: World Bank, 1999. Available from: www1.worldbank.org/tobacco/ (This website link was valid at the time of submission)

5 Commonwealth of Australia, Technical Report No 2. Tobacco in Australia: Making Smoking History Prepared for the National Preventative Health Taskforce by the Tobacco Working Group ISBN: 1-74186-731-2

6 Australian Bureau of Statistics, 2008, Health of Mature Age Workers in Australia: A Snapshot, 2004-05.

7 Australian Institute of Health and Welfare. 2007 National Drug Strategy Household Survey: first results. Drug Statistics Series, Number 20. Canberra: Australian Institute of Health and Welfare, 2008. Available from: www.aihw.gov.au/publications/phe/ndshs07-fr/ndshs07-fr-no-questionnaire.pdf (This website link was valid at the time of submission)

8 Extrapolation of current revenues reported in Swan W. Budget 2008-09 Budget Paper No. 1 > Statement 5: Revenue > Revenue estimates by revenue head. 2008.

9 Chaloupka F. Chapter 6: Economic Approaches. in Reducing Tobacco Use: A Report of the U.S. Surgeon General, Atlanta, Georgia: U.S. Department of Health and Human Services, Centers for Disease Control and Prevention, National Center for Chronic Disease Prevention and Health Promotion, Office on Smoking and Health, 2000. 295-369. Available from: 0-www.cdc.gov.mill1.sjlibrary.org/tobacco/data_statistics/sgr/sgr_2000/sgr_tobacco_chap.htm (This website link was valid at the time of submission)

10 Australian Bureau of Statistics. 6430.0 Consumer Price Index: 15th Series Weighting Pattern (Reissue), Sep 2005 Table 6B CPI: Alcohol and Tobacco. Contribution to Change in All Groups Indexes (Quarterly)(a). Canberra: Australian Bureau of Statistics, 2005. Available from: Australian Bureau of Statistics website

11 Australian Bureau of Statistics. 6461.0 Australian Consumer Price Index: Concepts, Sources and Methods, 2005. Australian Bureau of Statistics, 2005. Available from: Australian Bureau of Statistics website

12 Costello P. The Hon. Not a New Tax: a New Tax System. Canberra: Australian Government Printing Service, 1998. Available from: www.treasury.gov.au/documents/159/HTML/docshell.asp?URL=Overview.asp (This website link was valid at the time of submission)

13 World Health Organization. Tools for Advancing Tobacco Control in the XX1st century: Policy recommendations for smoking cessation and treatment of tobacco dependence. Tools for public health. Geneva: World Health Organization, 2003. Available from: www.wpro.who.int/NR/rdonlyres/8D25E4D3-BB81-479E-8DF5-7BAF674DB104/0/PolicyRecommendations.pdf (This website link was valid at the time of submission)

14 Mackay J, Eriksen M and Shafey O. The Tobacco Atlas, Second Edition. Washington: The American Cancer Society and the Union International Contre Cancer, 2006. Available from: www.cancer.org/docroot/AA/content/AA_2_5_9x_Tobacco_Atlas.asp (This website link was valid at the time of submission)

15 World Bank. World Development Indicators database, country classification database. New York: World Bank, 2006, Last modified July 2006 [viewed 1 October 2006]. Available from: web.worldbank.org/WBSITE/EXTERNAL/DATASTATISTICS/0,,contentMDK:20421402~pagePK:64 133150~piPK:64133175~theSitePK:239419,00.html (This website link was valid at the time of submission)

16 Gallet C and List J. Cigarette demand: a meta-analysis of elasticities. Health Econ. 2003;12:821-35. Available from: Wiley website.
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