Big Tobacco: 'Of all the concerns, there is one – taxation – which alarms us the most'

Earlier this week opposition leader Bill Shorten confirmed that should Labor return to government, it was considering raising the tobacco tax further. A planned A$40 billion would be raised by the increases.

There is popular cynicism that governments tax tobacco only because it is an ageless goose that just keeps laying massively lucrative golden eggs. Tobacco tax comprised A$8.28 billion (2.16%) of the A$384.078 billion in total tax raised by the Commonwealth in 2014-15.

90% of smokers regret that they ever started smoking and often strongly support tobacco control measures as they nudge their resolve to stop. Daily smokers in Australia now comprise only 12.8% of the population, the lowest in the world.

Putting these two together, there are likely to be only some 1.3% of the population who smoke daily, who don’t want to quit and probably would oppose hikes in tobacco tax. So raising tobacco tax is not only easy but electorally carries very low risk.

In the 2013 national election a Smokers’ Rights party fielded Senate candidates in all six states. Its candidates attracted just 25,123 first preference votes out of 13,464,123 votes cast in these states. In Victoria, only 78 people voted for two individual Smokers’ Rights candidates out of 3,499,438 who voted – one in every 44,865 voters.

In late April 2010, the Rudd government raised tobacco tax overnight by an unprecedented 25%, making the announcement in the same package it announced its historic plain packaging plans, eventually implemented in December 2012.

A 2010 Treasury paper modelled the impact of the 25% rise. They predicted that the 25% tax increase would see

… a decline in tobacco consumption of approximately 8% and an increase of 15% in tax revenue.

But a Department of Finance paper from 2013 shows that this increase in fact reduced consumption of dutied tobacco products by 11%. Reduced consumption reflects both quitting and smoking less by continuing smokers.

British American Tobacco’s boss in Australia, David Crow, publicly acknowledged the impact of the tax in 2011, telling a Senate committee:

We saw that last year very effectively with the increase in excise. There was a 25% increase in the excise and we saw the volumes go down by about 10.2%; there was about a 10.2% reduction in the industry last year in Australia.

In 2013, a further four annual 12.5% increases were announced and later adopted by the incoming Coalition government. This meant that tobacco tax rises will rise 75% over seven years, on top of the routine rises reflecting changes in the consumer price index. Labor had introduced this, and the Coalition supported it.

Tobacco tax certainly raises revenue, but it is the single most important factor driving down smoking. It is a massively important win-win policy. Over decades, internal tobacco industry documents have repeatedly shown full awareness of this. Tobacco company Philip Morris (Australia) in 1983 said:

… The most certain way to reduce consumption is through price.

Then again in 1985:

… Of all the concerns, there is one – taxation – which alarms us the most. While marketing restrictions and public and passive smoking do depress volume, in our experience taxation depresses it much more severely. Our concern for taxation is, therefore, central to our thinking about smoking and health. It has historically been the area to which we have devoted most resources and for the foreseeable future, I think things will stay that way almost everywhere.

And 1993:

… A high cigarette price, more than any other cigarette attribute, has the most dramatic impact on the share of the quitting population.

The tobacco industry’s stock line on price rises is to argue that smoking rates have not changed, it’s just that many more smokers are now buying illegal duty-not-paid loose tobacco (chop chop) and smuggled brands.

I summarized the many problems with these claims in a recent book on plain packaging (where the industry made exactly the same claims, now tellingly silent).

If illicit tobacco were as easy to obtain as the tobacco industry argues (some of their estimates being as high as one in six of all cigarettes smoked) how is it that ordinary smokers can find them with alleged consummate ease, while the full resources of the Australian federal police and tax office inspectors cannot manage to do so very often?

Most amusing here is the duplicity of Big Tobacco’s unctuous posturing about heinous tax rises encouraging smuggling and tax avoidance, when the industry uses these rises to camouflage increases in its own margins. Financial Review journalist Neil Chenoweth’s exposé and the Cancer Council Victoria’s subsequent research on price changes after plain packaging reveal this.

From August 2011 to February 2013, while excise duty rose 24¢ for a pack of 25, the tobacco companies’ portion of the cigarette price (which excludes excise and GST), jumped A$1.75 to A$7.10. While excise had risen 2.8% over the period, the average net price had risen 27%. Philip Morris’ budget brand Choice 25s rose A$1.80 in this period, with only 41¢ of this being from excise and GST. (See Figure below)

Figure OneAuthor provided

It’s often erroneously argued that those on low incomes are impervious to tobacco control measures like price rises, and suffer further deprivation with each price rise. The figure below shows smoking status of Australians aged 14 and over by social disadvantage in 2010. As can be seen, there is not a lot of difference in the proportion of ex-smokers across the five quintiles.

Low socioeconomic smokers quit at around the same rates as those in higher quintiles. The big differences are in the proportions who smoke (and have never smoked). Those in the lowest social disadvantage quintile have nearly double the smoking prevalence of those in the highest quintile because of higher uptake, not because of lower quitting.

Figure TwoFAL

This chapter on tobacco taxation in Australia from the online resource Tobacco in Australia is essential reading