13.6 Revenue from tobacco taxes in Australia

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For most forms of taxation, revenue can be expected to increase over time due to increases in population and consequently the number of people from whom tax may be collected. As outlined in Section 13.1, smokers are only moderately price sensitive, and, as outlined in Section 13.2, duties have been indexed and duties and fees have been periodically increased over the past 30 years. The increasing number of potential smokers and increased level of tax might lead one to expect tobacco tax revenue to have risen significantly since the 1970s. However, offsetting the effects of population growth and increased tobacco taxes, population use of tobacco has been falling steadily since the 1980s due to the combined impact of increased costliness, awareness about health risks, declining social acceptability of smoking, campaigns encouraging quitting, improved treatments for tobacco dependence, and greatly reduced opportunities for smoking. Section 13.6 examines the changes in revenue from tobacco products that result from the combined impact of increased population, increased tax rates and steadily falling consumption.

13.6.1 Federal revenue from tobacco products to June 2000

As described in Section 13.2.1, the value in real terms of the federal duty payable on tobacco products remained fairly steady in the early part of the century but fell in the late 1970s and the early 1980s due to the effects of inflation. The value of the duty was restored with indexation in 1983 and once again remained steady until a series of increases in the early 1990s.

Table 13.12 shows the total revenue received by the federal government from excise duty on tobacco products for selected years until 1980 and then for every year until 1999. It shows the amount of tobacco dutied in each year, the total revenue from excise duty collected in current dollars, and the same total expressed in constant 1989–90 dollars. Figure 13.24 plots excise collected per person (Australians of all ages) in $1989–90 for every fifth year since 1965.

Total revenue increased in current dollars in every year apart from 1993, 1998 and 1999. In real terms, revenue fell between 1980 and 1986 and fluctuated between 1987 and 2000. Revenue from federal duty was highest in real and per capita terms in the mid-1970s, the period when smoking prevalence in Australia was at its highest—see Chapter 1. Federal revenue paid per capita gradually declined in real terms until, by 1999–2000, it was just a little over half of what it had been at its peak in 1975.

The large real reduction in per capita federal revenue between 1965 and 2000 results from an 85% increase in the population,172 and a 20% reduction in the total amount of tobacco consumed (as can be seen in column 2, Table 13.12), but only a 40% real increase in the level of duty payable—see Figure 13.25.

13.6.2 State revenue from tobacco products to June 2000

Over the late 1980s and early 1990s, licence fees on tobacco wholesalers or retailers were an increasingly important source of revenue for state and territory governments. Table 13.13 shows the revenue to each jurisdiction between 1974 when business franchise fees on tobacco were first introduced in Victoria, and 1997 when the fees were effectively invalidated by the High Court ruling—See Section 13.2.2. It also shows revenue from 1997–98 to June 2000[41] from tobacco replacement fees. Tobacco replacement fees ended in July 2000 under the terms of the Intergovernmental Agreement on the Reform of Commonwealth–State Financial Relations173 that put into place the reforms to the tax system including the introduction of a Goods and Services Tax.89, 174

In current dollars, between 1975 and 1997 revenue from state and territorial tobacco taxes increased more than one thousand-fold from just under $2.5 million in 1975 to just over $2.85 billion in 1996–97. Revenue to states and territories peaked in 1999–2000. Between 1988–89 (by which time all jurisdictions had instituted fees) and 1999–2000 (at which time tobacco replacement payments were phased out) revenue to states and territories from this source increased by 500%—by 350% in real terms.

13.6.3 Federal revenue from tobacco products since July 2000

Excise revenue received from tobacco following the introduction of new tax arrangements implemented between November 1999 and February 2001 is outlined in Table 13.14.

Between 2001 and 2005 federal excise revenue increased by about 13% in current dollar terms, a real increase of just over 1%.

Customs revenue received on tobacco following the introduction of new tax arrangements is outlined in Table 13.15.

Customs revenue has more than doubled in the five years since 1999. While the rate of customs duty increased by 20% over this period (in current dollar terms), the main factor accounting for this rise has been an increase in imported in preference to locally manufactured tobacco products. This has been largely due to an increase in imported cigarettes since the merger of Rothmans and WD and HO Wills and the entry into the market of Imperial Tobacco, which does not operate production facilities in Australia—see Section 10.4.3.

13.6.4 Total federal and state revenue from tobacco products

Table 13.16 sets out total excise revenue from tobacco products combined with total revenue from state fees and tobacco replacement payments until 2001.[45]

From July 2001 under the New Tax System tobacco replacement payments to states and territories ceased, and all federal excise duty on tobacco products was retained by the federal government. All revenue from GST has been distributed to states in line with the terms of the Intergovernment Agreement.173 Revenue from GST on tobacco products is not reported separately from other GST revenue but can be calculated based on information about revenue from tobacco sales. Estimated total revenue from GST on tobacco products is also set out in Table 13.16. The proportion of revenue going to each state and territory is adjusted for various demographic and economic factors as per the Intergovernment Agreement,173 spelled out in detail each year in Part IV of the Federal Financial Relations sections of Final Budget Outcome reports.186[49]

Increases in state and territorial licence fees resulted in considerable real increases in state and territorial income from this source, in contrast to the much more limited growth in federal income.[50] Between 1984–85 and 1999–2000, revenue to the federal government almost doubled, but revenue to states and territories increased tenfold. Revenue to both the federal government and to states and territories has also increased since 2000–01 in current dollar terms.

Total revenue per capita (federal and state combined) in constant dollar terms is plotted in Figure 13.26.

As can be seen from Figure 13.26, in real terms total revenue per head of population increased sharply between 1990 and 1995 and then again between 1995 and 2000. Total revenue per head of population in 2005 is around the same level as it was in 2000.

Data on revenue from both excise and customs duty (from Tables 13.14 and 13.15) is provided in Table 13.17 along with estimates of GST revenue from the sale of cigarettes and other tobacco products since 2000–01. This represents total tax revenue from sales of tobacco products in Australia for the six years to 2006.

Total revenue has increased by about 10% in real terms between 2001 and 2005.

13.6.5 Revenue from tobacco taxes as a proportion of total government revenue

It is sometimes said that governments are reluctant to tackle tobacco use in the community because of reliance on income from tobacco taxes. Table 13.18 sets out revenue from tobacco products as a percentage of total government revenue in 1998–99 before reforms to the tax system, and in 2003–04 five years after.

As can be seen from Table 13.18, tobacco tax revenue as a percentage of total government revenue declined sharply for states and territories following introduction of the reforms associated with the New Tax System.89 Tobacco tax revenue as a percentage of total revenue increased significantly for the Australian government but still represents only a very small percentage of total government revenue.

13.6.6 International comparisons in tobacco tax revenue as a proportion of total government revenue

Table 13.19 lists tobacco excise tax revenue as a proportion of total tax revenue for a number of countries for which data were available in the mid-to-late 1990s.

At the time this analysis was prepared, the contribution of revenue from tobacco to total government revenue was higher in percentage terms in Australia compared to most other high-income countries for which data are available, but lower than for most middle-income and low-income countries. As indicated in Table 13.18, tobacco tax as a percentage of total government revenue in Australia in 2004–05 was closer to 2.6%.

13.6.7 Tax revenue from children's smoking

In all Australian states and territories it has for many years been illegal to sell cigarettes to children.[52]

Nevertheless, many children do purchase cigarettes from retailers, and many more obtain them from friends who have purchased them.161, 162 The revenue paid in taxes on these cigarettes is all received by governments.

Based on reported prevalence and consumption figures in 1999, White and Scollo estimated that, had numbers of smokers remained at 1999 levels, in the financial year 2002–03, almost 269,000 full-time secondary-school students aged between 12 and 17 would have smoked cigarettes purchased for a total of almost $125 million. Of this, more than $87 million would have been received by federal and state and territory governments.191

Table 13.20 provides updated estimates of the amount spent by secondary-school students and amounts received in revenue from cigarettes used by children under the legal age from sale of cigarettes in each year of the national survey of secondary-school students. Figure 13.27 plots the amount of revenue received by state and federal governments over the survey years.

Revenue received from Australian governments from cigarettes used by children younger than the age at which it is legal to sell cigarettes to children totalled almost $46 million in 2005.