13.11 A threat to government revenue?
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It is sometimes argued that, by raising tobacco taxes, governments risk decreasing tobacco consumption so much that they will actually begin to lose taxation revenue. Could tax increases kill the goose that lays the golden egg?
The answer is no, at least not immediately, for a number of reasons.
Because taxes contribute a proportion but do not constitute the whole of the price of tobacco products, prices do not increase in direct proportion to tax increases.242 As discussed in Section 13.1 above, because demand is only moderately responsive to prices increases, overall consumption only drops at around half the rate of price increases, not enough to offset the increased revenue gained from increases in the rate of duty. There does not appear to be any documented case internationally of reduced tax revenues when tobacco taxes were increased, even where increases were high, and problems with smuggling documented. 242
However, the combined impact of tobacco tax and other tobacco control policies in the community will reduce tobacco consumption and hence revenue from taxes on tobacco over time. This is to be welcomed as evidence of the success of public health policies, and should be planned for in the longer term. It was partly in recognition of the likely decline in excise revenue that the Australian Coalition government in 1998 decided to introduce a goods and services tax.89
It should be remembered that people who do not consume tobacco products will consume other goods and services. This will result in revenue to government from the goods and services tax they pay on these products and services, and revenue from tax on the profits of companies that sell them. Lower tobacco consumption will also reduce costs to business, thereby increasing revenue to governments from taxes on company profits.
Non-smokers may also impose lower costs on government budgets. People who do not smoke incur lower lifetime health care costs[63]—see Chapter 17—and are also more likely to purchase private health insurance.237 The costs they impose on public health care budgets are therefore likely to be lower.
[63] Even though they live longer they incur lower health care costs. The total costs over the whole lifetime of a smoker are greater than the costs over the whole lifetime of a non-smoker, even though the non-smoker lives much longer.
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