New Year's day – one final tax hit for smokers?

Friday, 20 December 2019

OPINION: January 1 will be another black day for New Zealand's remaining smokers – for them the New Year will usher in another, though probably the last, 10 per cent excise tax hike on the cost of cigarettes.

This may be regarded by some as a good thing. For one, it may help smokers with their New Year's resolution to quit.

The Government also likes the increased excise tax on tobacco because it believes higher prices discourage smoking and thus improves the health of New Zealanders. Over the past decade the price of an average pack of cigarettes has risen from around $15 to nearly $40 now, though not all of that can be attributed to tax increases.

We see proof of the effectiveness of this strong price signal in what happens with tobacco sales. They fall sharply when the tax is increased in January each year, but rise again in the second half of the year, though they never return to the volume of sales seen at the end of the previous year.

Tobacco taxes work, but only to a point.

The Government will also like the boost to revenue it gets from its tobacco tax. It was worth $1.7 billion in 2017 – a 50 per cent increase since 2010.

But tobacco tax is regressive – that is, it hits people on lower incomes the hardest as they are likely to smoke more and have less spare cash to pay for what is really becoming a luxury item. 

**READ MORE:

* Tobacco tax hikes are too good to give up

* Smokers may catch a break as NZ First opposes last of 10 'automatic' tax hikes

* New Zealand tobacco companies use tax hikes as cover

* Smoking the government's dirty little addiction**

Tax increases like this just make this situation worse.

It is interesting to note this festive season that while tobacco taxes hurt the poor, alcohol tax is (mildly) progressive, that is, the rich pay more, the more they drink. That's because of their partiality to high alcohol (and high priced) drinks (above 14 per cent) such as whisky which are taxed at a steeper rate than beer or most wines.

All the same, alcohol tax is a lot less valuable to the Government than tobacco, raising $1b in 2017.

The Tax Working Group, in its final report, called on the Government to develop a framework for deciding when to apply corrective taxes – taxes designed to change people's behaviour. As the group points out, tax may not always be the best way to do this.

It suggested a framework similar to one it proposed for when to apply environmental taxes. The tests would include how much the tax actually changes behaviour, how much revenue it raises and what are the other options.

Also how measurable is the damaging activity being targeted, has enough time been set aside to develop and refine the tax and is the problem big enough to justify the administration and compliance costs associated with the tax?

These are questions for health and policy experts as much as tax ones.

Gone too far?

Regardless, in their interim report, working group members expressed concern about any future large increases in tobacco tax. Firstly, as mentioned, the poor will get hit hardest. Secondly the tax appears to be becoming less effective in changing behaviour.

The interim report also raised a third issue – 'high taxes on tobacco appear to be a factor in an increasing number of robberies and criminal activity'.

On this point, evidence is mixed. An EY report commissioned by the Ministry of Health noted while there was a 'black market' for cigarettes in New Zealand, this is not widespread and not clearly correlated to price increases. In New Zealand and internationally there is no peer-reviewed evidence to back a connection between high tobacco prices and criminal activity.

The working group asked the Government to prioritise ways, other than tax, to help people stop smoking including additional education programmes (to be partly funded by the tax) and regulatory measures before considering any further large tax hikes.

The Government already throws a lot of non-tax weapons at smoking. It has banned smoking in workplaces and other public areas, stopped tobacco advertising and forced tobacco companies to put health warnings on packaging.

Tax alone cannot take credit for the sharp drop in smoking over the last decade.

But where to next? How do we get to the Government's 2025 target of fewer than 5 percent of New Zealanders being smokers, deemed to make the country 'smoke free'. 

A smoking harm expert recently described the current situation as 'just punishing, taking more and more in tax from people who smoke when current stop-smoking help doesn't work for them'.

Tobacco excise tax rates and smoking reduction has been passed to the Ministry of Health where work is already underway on 'both tax and non-tax measures to support Smokefree Aotearoa 2025'

Watch this space in 2020.

John Cuthbertson is New Zealand tax leader for Chartered Accountants Australia and New Zealand