13.5 Impact of price increases on tobacco consumption in Australia

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13.0 Introduction

13.1 Price elasticity of demand for tobacco products

13.2 Tobacco taxes in Australia

13.3 The price of tobacco products in Australia

13.4 The affordability of tobacco products

13.5 Impact of price increases on tobacco consumption in Australia

13.6 Revenue from tobacco taxes in Australia

13.7 Evasion of taxes on tobacco products

13.8 Tobacco industry arguments against tax increases

13.9 Smuggling a result of tax increases?

13.10 A regressive tax?

13.11 A threat to government revenue?

13.12 Future directions for reform of tobacco taxes

13.13 Hypothecation

13.14 Public opinion about tobacco tax increases

Acknowledgments

References

Attachment 13.1 Legislation relevant to tobacco taxation mentioned in this chapter: Commonwealth

Attachment 13.2 Legislation mentioned in this chapter: States and territories

In line with the findings of price elasticity studies in numerous other countries,155[36] real increases in the price of tobacco products in Australia have also been followed by corresponding declines in tobacco consumption.

13.5.1 Declining consumption following price increases in Australia

Figure 13.19 plots the real price of tobacco products against tobacco consumption in Australia between 1973 and 2002. The Cigarettes and Tobacco Sub-group of the Alcohol and Tobacco Sub-index of the Australian Consumer Price Index (which is available since 1973) is used as an indicator of real changes in price. Per capita tobacco consumption is calculated using ABS population figures on the number of persons 15 years of age and over, and data on the weight of tobacco products excised.158

Figure 13.19 shows that the weight of dutied tobacco products fell in line with real increases in the price of tobacco and cigarettes, with the biggest declines in periods with the largest real price increases.

Analysis of prices and reported consumption following the reform of tobacco taxes between 1999 and 2001 also shows evidence of reduced tobacco consumption corresponding with significant declines in the affordability of cigarettes and other tobacco products, both among adults111 and among children.

Introduction of the new method of calculating excise duty in November 1999, imposition of the GST in June 2000 and a large CPI increase in February 2001 resulted in the price of cigarettes in medium and large pack sizes increasing by between 30% and 40%. As intended, there was a shift from larger to smaller pack sizes following introduction of the reforms. Figure 13.20 shows the percentage of secondary-school students preferring each pack size in school smoking surveys from 1996, 1999, 2002 and 2005.

Figure 13.21 shows the total percentage of secondary-school students preferring large pack sizes, that is pack sizes of 30, 35, 40 or 50.

Between 1999 and 2002, the percentages of secondary-school students using large packs declined by about 18%, which included a 29% reduction in the percentage of teenage smokers preferring 40s, and a 32% reduction in the percentage preferring 50s.

Between 1999 and 2002 there was also a significant reduction in the numbers of secondary-school students smoking at least weekly. The numbers smoking large packs declined by 38% and the total numbers of students smoking declined by 24%.

Between 1999 and 2005, per capita consumption among secondary-school students fell from 266 cigarettes per year per student in 1999 to 122 cigarettes per year per student in 2005, a decline of 54%.

Figure 13.22 plots reported consumption per student against the affordability of cigarettes for young people. Affordability is calculated by dividing the average amount of pocket-money reported among 15-year-old students by the cost per stick of the leading brand of cigarettes among the same group.

Figure 13.22 shows that the reported number of cigarettes smoked per secondary-school student in Australia increased between 1990 and 1996 in line with increases in affordability. It dropped between 1996 and 1999 despite a small increase in affordability. (The hard-hitting National Tobacco Campaign was most prominent between May 1997 and December 1998.) It then dropped even more dramatically between 1999 and 2005 in line with a further big drop in affordability. As is explained in Chapters 1 and 2, most of this decline is attributable to declines in the number of young people smoking rather than declines in reported consumption, in particular declines in the numbers of 12-to-15 year olds reporting smoking since 2002.

Whereas among younger children reported consumption declined little but prevalence declined sharply, surveys of adults on the other hand reveal no immediate change following the introduction of the per stick system in November 1999 in smoking prevalence, but large reductions in reported consumption.163—see Figure 2.6 and Table 2.9. As can be seen from Table 2.9, the percentage of remaining smokers who could be classified as light smokers (14 or fewer cigarettes per day) increased from 42% in 1998 to 48% in 2001. The percentage who could be classified as heavy smokers dropped from 24% to 19%. The mean number of cigarettes smoked per day by people who continued to smoke daily dropped by 11%.

Consistent with declines in reported consumption, industry data also indicate a significant decline in sales following the introduction of the reforms.[37] As outlined in Chapter 2 Section 2.9, even taking into account estimated increased use of contraband cigarettes and tobacco, and increased sales of roll-your-own tobacco and cigars, total sales of tobacco products in Australia appear to have fallen sharply and permanently after implementation of the reforms—see Table 2.25.

Comparing excise receipts before and after the reforms provides a similar picture.[38] Using the index of 'number of minutes to earn 20 cigarettes per day on average weekly earnings',[39] Figure 13.23 compares the affordability of cigarettes between 1998–99 and 2003–04 with estimated tobacco consumption expressed as cigarette equivalents.

While many other tobacco control strategies have contributed to declining consumption over the past 10 years, it seems likely that the sharp price increases in November 1999, June 2000 and February 2001 resulting from tobacco tax reforms were the biggest contributors to the dramatic drop in per capita consumption of tobacco products between 1998–99 and 2000–01. As outlined in Chapter 2 Section 2.9, the number of cigarettes sold legally in 2001–02 was 17.5% lower than the number sold legally in 1998–99. Even taking into account the largest feasible estimates of the increased number of contraband cigarettes sold in the latter period, the total number of cigarettes purchased in Australia in 2004–05 was still 17% lower than in the period before the reforms.164, 165

13.5.2 Quantifying the contribution of price increases to declining consumption

Econometric studies that tease out the impact of numerous factors are required to quantify the contribution of price increases to declines in consumption compared to the contribution of other policies implemented over the same period.

In a University of Melbourne study examining factors affecting sales of tobacco products in Australia published in 1999,166 economists Peter Bardsley and Nilss Olekalns concluded that virtually all the reduction in tobacco consumption in Australia since the 1960s could be attributed to increases in price resulting mainly from increases in tax levels. In line with international estimates, they found price elasticity of demand for tobacco products of about –0.39. This conclusion was contested by several commentators who pointed out that tax levels are merely the most easily quantified of all the tobacco control policies.167, 168 Using sales rather than consumption or prevalence data, the study would have been detecting the very close relationship between price increases and shifts to cheaper products.

In a more recent study of tobacco control policies and their impact on smoking prevalence, preliminary analysis by Wakefield et al once again indicated that real price increases and reductions in affordability of tobacco products was the most significant of seven policy interventions examined. However they found in addition that anti-smoking advertising also had a measurable impact.169

As indicated in Section 13.5.1 above, between 1999 and 2005, per capita consumption among secondary-school students fell dramatically, from 266 cigarettes per year per student in 1999 to 122 cigarettes per year per student in 2005, a decline of 54%. If Gallet and List's median price elasticity, of –1.43 for teenagers is approximately the actual elasticity for Australian teenagers, then about two-thirds of the 54% drop in consumption among Australian secondary-school students observed between 1999 and 2005 could be explained by rises in the price of Australian tobacco products. Other major factors likely to have affected smoking trends among young people[40] over the period from 1996 to 2005 were the hard-hitting Australian National Tobacco (advertising) Campaign, which was most prominent in 1997 and 1998170, and the rapid adoption since 1999 of smokefree policies in hospitality venues and public places including railways stations, cafes and shopping centres often visited by teenagers not in the company of parents—see Chapter 15 for further details. It is possible that improved enforcement of legislation banning sales to minors from the mid-1990s may also have delayed experimentation and contributed to reduced uptake in some jurisdictions.