13.9 Future directions for reform of tobacco taxes

With its ratification of the WHO Framework Convention on Tobacco Control (WHO FCTC), which came into force on 27 February 2005,1 Australia is obligated to report on its rates of taxation for tobacco products in periodic reports to the Conference of Parties.i The Convention (Part III, Article 6) also states:

2. Without prejudice to the sovereign right of the Parties to determine and establish their taxation policies, each Party should take account of its national health objectives concerning tobacco control and adopt or maintain as appropriate measures which may include:

a. implementing tax policies and, where appropriate, price policies, on tobacco products so as to contribute to the health objectives aimed at reducing tobacco consumption.1

At its fourth meeting from 5–20 November 2010 in Uruguay,ii the Conference of the Parties to the Convention established a working party to commence work on development of guidelines to meet obligations under Article 6.iii The Framework Convention Alliance (an alliance of international non-government organisations committed to the advancement of tobacco control) had urged the Conference to develop guidelines that would facilitate governments' efforts to simplify and increase taxes on tobacco products.2 The full Working Group on Article 6 met for the first time in Geneva in December 2011. A drafting team composed of the key facilitators and other members of the working group met in March 2012 to prepare the next draft of the guidelines, which was to have been submitted for consideration by the Conference of Parties at its fifth session in Seoul in November 2012.iv

In the meantime a manual on administration of tobacco taxes published in 2010 by the World Health Organization3 sets out the following as best practices for policy on tobacco taxes:

  • Use tobacco excise tax increases to achieve the public health goal of reducing the death and disease caused by tobacco use.
  • Set tobacco excise levels so that they account for at least 70% of the retail prices of tobacco products.
  • Ensure taxes are as simple as possible.
  • Rely more on specific tobacco excises as the share of excise taxes in retail prices increase.
  • Rely more on excise taxes than on import duties.
  • Adopt comparable taxes and tax increases on all tobacco products.
  • Where revenue increases are a goal rely on tobacco tax increases to achieve revenue increases.
  • Automatically adjust specific tobacco taxes for inflation.
  • Increase tobacco taxes by enough to reduce the affordability of tobacco products.
  • Include tobacco excise tax increase as part of a comprehensive strategy to reduce use.
  • Use a portion of tobacco tax revenues to support other tobacco control and/or health promotion efforts.
  • Strengthen tobacco tax administrators' capacity to monitor tobacco product markets and evaluate the impact of tobacco tax increases.

This section provides information relevant to each of these elements of policy as they apply to tobacco taxation in Australia.

The manual also urges governments to:

  • Eliminate tax and duty-free sales and adopt a number of measures intended to minimise avoidance and evasion (see Section 13.7.4).
  • Reject economic arguments against increasing taxes promulgated by the tobacco industry (see Section 13.10).
  • Not allow concerns about the regressivity of higher tobacco taxes to prevent tobacco tax increases (see Section 13.11).

13.9.1 Tax increases to achieve public health goals

Tax increases were listed as a key strategy in Australia's National Tobacco Strategy 2004–094 and in the government's response 5 to the recommendations contained in the draft National Preventative Health Strategy.6 This response included its announcement in April 2010 of a 25% increase in excise duty.7

Modelling undertaken for the Preventative Health Taskforce8 suggests that Australia will be unlikely to meet the public health goal of daily smoking prevalence of less than 10% by 2018 specified in the National Partnership Agreement on Preventive Health without further significant increases in duty beyond the April 2010 increases.9

 

Figure 13.9.1

Figure 13.9.1
Projected prevalence of daily smoking with funding committed under the National Partnership Agreement on Public Health under four alternative scenarios: return to pre-NPAPH spending on media campaigns either with or without a further substantial increases in taxes and additional media spending with or without a further substantial increases in tobacco taxes

Source: Hurley et al 20098

13.9.2 Set excise levels to be at least 70% of retail prices

As indicated in Section 13.2, total taxes on cigarettes in Australia make up only about 60% of the recommended retail price of cigarettes.

Table 13.9.1 sets out various levels of duty and the consequent price and percentages that tax would make up of final price (assuming that manufacturers and retailers maintained current margins).

Table 13.9.1
Projected price per typical pack of 25 cigarettes and percentages that tax make-up of final price: at excise and customs duty of 35, 45, 55, 65, 75 and 85 cents per stick

Excise and custom duty, cents per stick

0.35

0.45

0.55

0.65

0.75

0.85

Cost per pack 25s*

$17.15

$20.30

$23.50

$26.70

$29.85

$33.00

Total tax as % of final price

59.6

63.9

67

69.5

71.3

72.9

Source: Calculations by author using NSW Retail Tobacco Traders’ Association price list,10 Australian Taxation Office excise rate11

* At 2012 rate

13.9.3 Ensure taxes are as simple as possible

Prior to 1998, franchise fees based on the value of sales in the previous month or quarter were charged to wholesalers and/or retailers in each state and territory (see Section 13.2.2 for further details). Differential levels of fees in each state resulted in problems with evasion. Federal revenue could decline as a result of unanticipated increases in state fees. Taxes in Australia since 1999 are considerably simpler, consisting of a single specific duty on each cigarette, which is the same for both locally produced and imported products. Smoking tobacco, cigars and large cigarettes (made of more than 0.8 g of tobacco) are taxed by weight. The goods and services tax (GST) in Australia has been 10% since that time.

13.9.4 Rely more on specific tobacco excises (based on quantity) rather than excise based on value as the share of excise taxes in retail prices increase

As can be seen from Figure 13.2.1 in Section 13.2, GST on tobacco products makes up only 9.1% of the final price whereas excise (or customs) duty makes up more than 50%. This means that GST makes up only 15% of total taxes on tobacco products, whereas 85% comes from excise or customs duty.

With a high percentage of total taxes comprising duty rather than GST, Australian tobacco companies would have much less scope than manufacturers in other countries to cross-subsidise budget brands through sales of premium brands, and much less scope for discounting and specialling.

13.9.5 Rely more on excise taxes than on import duties

Excise duties on tobacco goods manufactured in Australia have been the same rate as customs duties charged on imported products since 1995 (see Section 13.2).

13.9.6 Adopt comparable taxes and tax increases on all tobacco products

Smoking tobacco such as roll-your-own and pipe tobacco is subject to the same level of duty as cigarettes containing tobacco weighing more than 0.8 g each: both are taxed per kilogram of tobacco. Where cigarettes weigh less than 0.8 g each, the charge is set per stick such that it would be equivalent to a cigarette weighing 0.8 grams and taxed by weight.12,13 Smokers generally make roll-your-own cigarettes lighter than factory-made cigarettes, which means that they are able to smoke more cigarettes (though not necessarily more tobacco) for the same outlay as smokers of factory-made cigarettes (see Chapter 12). It is difficult to imagine how this problem might be rectified without returning to a purely (or largely) weight-based system of levying excise and customs duty. As described in Section 13.3, such as system could increase incentives for manufacturers to produce increased numbers of lighter cigarettes in each pack, which would result in packs that were cheaper per stick. It is perhaps not unreasonable for roll-your-own cigarettes to attract less excise, given that they contain less tobacco and are less convenient to smoke.

13.9.7 Automatically adjust specific tobacco taxes for inflation

Australia and New Zealand are two of the very few countries in the world that automatically index excise and customs duty on tobacco products3 (refer Section 13.2.1 for further details).

13.9.8 Increase tobacco taxes by enough to reduce the affordability of tobacco products

As outlined in Section 13.4, indexation of excise and customs duty has not been sufficient to prevent tobacco products from becoming more affordable in Australia. Frequent increases in state franchise fees between 1984 and 1997 as well as occasional increases in federal duty did, however, ensure that tobacco products became substantially less affordable over the 1980s, 1990s and 2000s.

13.9.9 Include tobacco excise tax increases as part of a comprehensive strategy to reduce tobacco use

Because many smokers dependent on tobacco-delivered nicotine will be unable to quit even with the encouragement of regular price increases, it is essential that tax increases be just one part of a comprehensive strategy to discourage smoking and support quitting.14,15

The World Health Organization recommends that when government revenue increases from increases in tobacco taxes, extra funding should be provided for services and treatment to help smokers to quit.16 This recommendation is based on considerations of health, economic efficiency, social justice and political acceptability. Australia's tobacco control strategy is one of the most comprehensive internationally.17 Apart from spending on public education campaigns, increases in excise and customs duty in Australia have been followed by substantial increases in spending on support of pharmaceutical treatments to assist smokers to deal with withdrawal symptoms, for instance listing on the Pharmaceutical Benefits Scheme of bupropion (ZybanR) in February 2001, listing of varenicline (ChampixR) in January 2008 and listing of nicotine replacement therapy in January 2011. Listing of products has resulted in greatly increased levels of use. As can be seen from Figure 13.9.2, the tax increase in April 2010 also appears to have boosted prescriptions for anti-smoking medications.

13.9.10 Use a portion of tobacco tax revenues to support other tobacco-control and/or health promotion efforts

Western Australia is believed to be the first jurisdiction internationally to use an increase in tobacco tax to finance a large investment in tobacco-control activities.v Following the defeat of its Tobacco Products Control Bill 1983, the West Australian Government agreed to allocate $2 million per year to the Health Department's Smoking and Health Project (WA Quit Campaign). This additional funding was made possible because of an increase in the state tobacco licence fee from 12.5% to 35% (personal recollection of The Hon. Barry Hodge, former West Australian Minister for Health 1983–96, communicated to Maurice Swanson, Director National Heart Foundation WA Division, 2007).

Starting with Victoria in 1987,18 South Australia in 198819 and then Western Australia in 1990,20 business franchise legislation was amended and tobacco legislation introduced to hypothecate a proportion of funds accrued from state licence fees into foundations established specifically to promote and fund health promotion activitiesvi.21 Foundations were developed primarily to address community concern about potential loss of sponsorship funds to sport that would have ensued from comprehensive bans on tobacco advertising. A major disadvantage of foundations was that they replicated government funding functions and administrative arrangements in sport and recreation and the arts and culture, with the potential for conflicting policies, duplication and gaps. Major advantages included being able to integrate sports and arts funding with health messages, and being able to act flexibly and across public and private sectors.21

The idea of a health promotion levy was soon copied in US states (California 1989, Massachusetts 1990) and in several countries (Egypt, Iran and Nepal in 1993 for cancer control and Thailand in 2001 for health promotion).21

In the UK in November 1999, the Chancellor of the Exchequer announced that the National Health Service was to benefit from increases in tobacco taxes.22

Because it locks government into spending regardless of revenue from other sources and regardless of priorities for spending in areas outside the dedicated fund, hypothecation of any sort is generally not favoured by Treasury officials.

'Hard' hypothecation ended in Australia in 1997 when the High Court found that state franchise fees on tobacco were unconstitutional (see Section 13.2.2. However, increases in excise and customs duty on tobacco products in Australia have at least since 2001 been accompanied by increased expenditure on anti-smoking medications on the Pharmaceutical Benefits Scheme (see Chapter 7, Section 7.16) and increased expenditure on social marketing campaigns and targeted programs for smokers.5

Whether it be through formal, legislated 'hard' hypothecation or the 'soft hypothecation' of notional budget allocation, the World Health Organization recommends earmarking a small portion of the total national tax revenue from tobacco products to fund health promotion initiatives including tobacco control.16

13.9.11 Strengthen tobacco tax administrators' capacity to monitor tobacco product markets and evaluate the impact of tobacco tax increases

Data on quantities of tobacco products subject to customs duty in Australia is available on request from the Australian Bureau of Statistics.23 Data on quantities subject to excise duty is collected by the Australian Taxation Office. This data is no doubt available to Taxation Office staff, but is made publicly available only annually (almost a year after the end of the relevant financial year).24–27 The capacity to interpret data is also limited by the absence of information about the average weights of the products subject to duty. With the data split across the two agencies, not readily available to researchers there is scope to strengthen Australia's capacity in this area.

 

Figure 13.9.2

Figure 13.9.2
Prescriptions for anti-smoking medications —total subsidised per month February 2001 to December 2011

Source: PBS Statistics https://www.medicareaustralia.gov.au/statistics/pbs_item.shtml

Recent news and research

For recent news items and research on this topic, click here (Last updated February 2017)     

v In 1976 the Indian Government earmarked an amount per thousand bidis to provide funding for welfare programs to assist workers involved in the manufacturing of bidis.

vi Since the abolition of state fees in 1997, foundations have been funded directly through government budget allocations.

References

1. WHO Framework Convention on Tobacco Control. Geneva: World Health Organization, 2003. Available from: http://www.who.int/tobacco/framework/en/

2. Framework Convention Alliance. COP-4: Guidelines for FCTC Article 6 - what Finance Ministries need to know FCA, 2010. Available from: http://www.fctc.org/index.php?option=com_content&view=article&id=441:cop-4-guidelines-for-fctc-article-6-what-finance-ministries-need-to-know&catid=222:meeting-resources&Itemid=230

3. World Health Organization. WHO technical manual on tax administration. Geneva: WHO, 2010. Available from: http://www.who.int/tobacco/publications/tax_administration/en/index.html

4. Ministerial Council on Drug Strategy. Australian National Tobacco Strategy 2004-2009. Canberra: Department of Health and Ageing, 2005. Available from: http://www.health.gov.au/internet/main/publishing.nsf/Content/tobacco-strat

5. Australian Government. Taking preventative action: Government's response to Australia: the healthiest country by 2020. Canberra: Department of Health and Ageing, 2010. Available from: http://yourhealth.gov.au/internet/yourhealth/publishing.nsf/Content/report-preventativehealthcare

6. Preventative Health Taskforce. Australia: the healthiest country by 2020. National Preventative Health Strategy. Canberra: Commonwealth of Australia, 2009. Available from: http://www.preventativehealth.org.au/internet/preventativehealth/publishing.nsf/Content/national-preventative-health-strategy-1lp

7. Rudd K, Swan W and Roxon N. Anti-Smoking Action [Media release] . Canberra: Office of the Prime Minister, 29 April 2010 [viewed 3 September 2010] . Available from: http://www.alp.org.au/federal-government/news/anti-smoking-action/

8. Hurley S, Spittal M, Scollo M, Durkin S and Wakefield M. Predicted impact of proposed tobacco control strategies. Melbourne, Australia: Cancer Council Victoria, 2009. Available from: http://www.health.gov.au/internet/preventativehealth/publishing.nsf/Content/0FBE203C1C547A82CA257529000231BF/$File/commpaper-imp-tob-cont-strat.pdf

9. Commonwealth of Australia, the State of New South Wales, the State of Victoria, the state of Queensland, the state of Western Australia, the state of South Australia, et al. National Partnership Agreement on Preventive Health. Canberra: Council of Australian Governments, 2009. Available from: http://www.federalfinancialrelations.gov.au/content/national_partnership_agreements/health/preventative_health/national_overview.pdf

10. NSW Retail Tobacco Traders Association. Price Lists. Australian Retail Tobacconist 2012;84(No 5. Feb-April):1-2.

11. Australian Taxation Office. Excise duty on tobacco products. Canberra: ATO, 2012. Available from: http://law.ato.gov.au/atolaw/view.htm?docid=PAC/BL030002/1

12. Excise Tariff Act 1921 (Cth). Available from: http://www.comlaw.gov.au/Details/C2012C00517

13. Customs Tariff Act 1995 (Cth). Available from: http://www.comlaw.gov.au/comlaw/management.nsf/lookupindexpagesbyid/IP200401908?OpenDocument

14. Sugarman S. A balanced tobacco control policy. American Journal of Public Health 2003;93(3):416–8. Available from: http://www.ajph.org/cgi/content/full/93/3/416

15. Warner KE, Chaloupka FJ, Cook PJ, Manning WG, Newhouse JP, Novotny TE, et al. Criteria for determining an optimal cigarette tax: the economist's perspective. Tobacco Control 1995;4:380-6. Available from: http://tobaccocontrol.bmj.com/cgi/reprint/4/4/380

16. World Health Organization. Tools for advancing tobacco control in the XX1st century: policy recommendations for smoking cessation and treatment of tobacco dependence. Tools for public health. Geneva: WHO, 2003. Available from: http://www.wpro.who.int/NR/rdonlyres/8D25E4D3-BB81-479E-8DF5-7BAF674DB104/0/PolicyRecommendations.pdf

17. World Health Organization. WHO report on the global tobacco epidemic, 2011: warning about the dangers of tobacco. Appendix 4, Graphs on tobacco taxes and prices. Geneva: World Health Organization, 2011. Available from: http://www.who.int/tobacco/global_report/2011/en/index.html

18. Tobacco Act 1987 (Vic). Available from: http://www.austlii.edu.au/au/legis/vic/consol_act/ta198773/

19. Tobacco Products Control Act 1988 (SA).

20. Tobacco Control Act 1990 (WA). Available from: http://www.austlii.edu.au/au/legis/wa/consol_act/tca1990163/

21. Richardson J, Segal L, Carter R, Catford J, Galbally R and Johnson S. Prioritising and financing health promotion in Australia. Melbourne: Centre for Health Program Evaluation, 1999. Available from: www.buseco.monash.edu.au/centres/che/pubs/rr4.pdf

22. Beecham L. Tobacco tax to be ringfenced for NHS. British Medical Journal 1999;319(7221):1322. Available from: http://www.bmj.com/cgi/content/full/319/7221/1322/a

23. Australian Bureau of Statistics. International trade, customised report. Australian clearance data on tobacco products by quantity, by customs value, 2006-07 to 2010-11. Canberra: ABS, 2011.

24. Australian Taxation Office. Taxation Statistics 2003-04: A summary of tax returns for the 2003–04 income year and collections for the 2004–05 financial year. Canberra: ATO, 2006. Available from: http://www.ato.gov.au/corporate/content.aspx?menuid=35310&doc=/content/70906.htm&page=18#P1198_58931

25. Australian Taxation Office. Taxation Statistics 2004-05: A summary of income tax returns for the 2004-05 income year and other reported tax information for the 2005-06 financial year. Canberra: ATO, 2007 Last modified 17 April 2006 [viewed 21 April 2006] . Available from: http://www.ato.gov.au/corporate/content.asp?doc=/content/81183.htm&page=40&H40=&pc=&mnu=38022&mfp=001&st=&cy=

26. Australian Taxation Office. Taxation Statistics 2008-09: a summary of income tax returns for the 2008-09 income year and other reported tax information for the 2009-10 financial year. Canberra: ATO, 2011 Last modified 17 April 2006 [viewed 21 April 2006] . Available from: http://www.ato.gov.au/content/00268761.htm

27. Australian Taxation Office. Taxation Statistics 2009-10: a summary of income tax returns for the 2009-10 income year and other reported tax information for the 2010-11 financial year. Canberra: ATO, 2012 Last modified 30 April 2012 [viewed 30 April 2012] . Available from: http://www.ato.gov.au/content/downloads/cor00305922_2010TAXSTATS.pdf

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