Pricing of cigarettes and other tobacco products is one of the most effective ways in which tobacco companies can both maintain consumer demand and protect returns to shareholders. Because taxes make up a substantial percentage of the price and because consumers are responsive to price changes, increasing the rate of tax applicable to tobacco products allows governments to both reduce population consumption of tobacco and increase government revenue.
The evidence for the effectiveness of tax and price policies is overwhelming.1–5
A review by a scientific panel convened by the International Agency on Research Against Cancer in 2010 summarised the evidence to that time (see Table 13.0.1) and issued a statement about the strength of the evidence for each of 18 elements of tax and price policies in tobacco control.
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Increases in tobacco excise taxes that increase prices result in a decline in overall tobacco use.
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X
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Increases in tobacco excise taxes that increase prices reduce the prevalence of adult tobacco use.
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X
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Increases in tobacco excise taxes that increase prices induce current tobacco users to quit.
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X
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Increases in tobacco excise taxes that increase prices reduce the prevalence of tobacco use among young people.
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X
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Increases in tobacco excise taxes that increase prices reduce the initiation and uptake of tobacco use among young people with a greater impact on the transition to regular use.
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X
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Increases in tobacco excise taxes that increase prices lower the consumption of tobacco products among continuing users.
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X
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Tobacco use among young people responds more to changes in tobacco product taxes and prices than does tobacco use among adults.
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X
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The demand for tobacco products in low-income countries is more responsive to price than is the demand for tobacco products in high-income countries.
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X
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In high-income countries tobacco use among lower-income populations is more responsive to tax and price increases than is tobacco use among higher-income populations.
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X
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In low-income and middle-income countries tobacco use among lower-income populations is more responsive to tax and price increases than is tobacco use among higher-income populations.
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X
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Changes in the relative prices of tobacco products lead to some substitution to the products for which the relative prices have fallen.
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X
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Tobacco industry price discounting strategies price-reducing marketing activities and lobbying efforts mitigate the impact of tobacco excise tax increases.
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X
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Tobacco tax increases that increase prices improve population health.
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X
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Higher and more uniform specific excise taxes result in higher tobacco product prices and increase the effectiveness of taxation policies in reducing tobacco use.
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X
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Tax avoidance and tax evasion reduce but do not eliminate the public health and revenue impact of tobacco tax increases.
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X
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A co-ordinated set of interventions (a set of interventions that includes international collaborations strengthened tax administration increased enforcement and swift severe penalties) reduces illicit trade in tobacco products.
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X
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Increases in tobacco tax increase tobacco tax revenues.
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X
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Increases in tobacco tax do not increase unemployment.
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X
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While evidence was limited about the relative price sensitivity of low-income people in developing countries, the panel concluded 'strong' evidence for four statements and 'sufficient' evidence of a causal association for 12 of the policy elements.
In addition to summarising research on the price elasticity of demand for cigarettes (Section 13.1) this chapter also provides data on the taxes applicable to tobacco products in this country (Section 13.2). In Australia federal excise or customs duty and the more recently introduced 10% goods and services tax (GST) contribute substantially to the price of cigarettes and other tobacco products. In February 2012 at which time excise and customs duty on tobacco was 34.681 cents per stick a typical packet of 25 cigarettes cost $17.15 in convenience outlets.
As can be seen in Figure 13.0.1 of the total cost of $17.15, 50.9% is accounted for by federal excise duty on tobacco and a further 9.1% by GST bringing total taxes to 59.7% of final price.Section 13.2 also provides historical information about excise and customs duty (Section 13.2.1) and state licence feeds (Section 13.2.2) and the GST (Section 13.2.3) as well as comparisons of the proportion that taxes make up of final price in Australia compared with that in other countries (Section 13.2.4).
While the price of the leading brand of cigarettes varies little in convenience outlets across the country, many different brands of cigarettes are sold in Australia at considerably cheaper prices particularly where these brands are packaged in large packs or sold in packs or cartons from discount outlets. Section 13.3 provides data on changes in recommended prices over time in Australia (Section 13.3.1.1) and provides details on the history of efforts to reform taxes on cigarettes to address the problem of large packs that are a uniquely Australian phenomenon (Section 13.3.1.2). It also sets out what is known about actual prices paid from three sources: the Cigarettes and Tobacco Sub-Group of the Consumer Price Index (Section 13.3.2.1), surveys of prices charged in retail outlets (Section 13.3.2.3) and surveys asking smokers what they paid for cigarettes (Section 13.3.2.3).
Changes in the affordability of tobacco products rather than the price per se is what determines consumer responses to price increases. At present in Australia the average smoker on average weekly earnings would have to work for 23 minutes in order to earn enough to buy a day's worth of cigarettes at recommended retail prices. Section 13.4 describes changes over time in the price of cigarettes in comparison to changes in Average Weekly Earnings (Section 13.4.1) and changes in teenagers' pocket money. (Section 13.4.2) The average 15-year-old who wanted to devote all their weekly pocket money to smoking could buy up to 73 cigarettes – more than 10 each day. Section 13.4.3 and 13.4.4 provide compares the affordability of cigarettes in Australia with those elsewhere in the world.
Currently in Australia taxpayers receive more than $8.7 billion in taxes paid by smokers on tobacco products totaling about 2.5% of total government revenue received in Australia (Section 13.6.5) comparable as a percentage with that received in other high-income countries (Section 13.6.6) This includes in 2011–12 $6.4 billion in excise duty, $1.1 billion in customs duty and an estimated $1.2 billion in GST. Sections 13.6.1 to 13.6.4 document changes over time in the amounts of revenue received by government from duties, fees and taxes on tobacco products. Section 13.7 provides detailed information on a highly topical aspect of tobacco taxes, namely the extent of illicit trade in Australia and elsewhere and factors which might contribute to its growth. It explains several important and emerging policy issues relevant to tobacco taxation in particular how to decide on the 'right' level for tobacco taxation (Section 13.8) and how best to structure and administer tobacco taxes (Section 13.9). It explains and counters several objections to tobacco tax increases commonly put by tobacco companies (Section 13.10). It discusses the question of whether increases in taxes have regressive effects resulting in greater financial hardship for disadvantaged smokers (Section 13.11). Finally it describes public attitudes to tobacco taxes and the uses of the revenue they generate (Section 13.12).
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References
1. US Department of Health and Human Services. Reducing the health consequences of smoking: 25 years of progress. A report of the Surgeon General. Rockville Maryland: US Department of Health and Human Services Public Health Service Centers for Disease Control Center for Chronic Disease Prevention and Health Promotion Office of Smoking and Health 1989. Available from: http://profiles.nlm.nih.gov/NN/B/B/X/S/
2. US Department of Health and Human Services. Preventing tobacco use among young people. A report of the Surgeon General 1994. Atlanta Georgia: Public Health Service Centers for Disease Control and Prevention Office on Smoking and Health 1994. Available from: http://www.cdc.gov/tobacco/data_statistics/sgr/sgr_1994/index.htm
3. US Department of Health and Human Services. Reducing tobacco use: a report of the Surgeon General. Atlanta Georgia: US Department of Health and Human Services Public Health Service Centers for Disease Control and Prevention National Center for Chronic Disease Prevention and Health Promotion Office on Smoking and Health 2000. Available from: http://www.cdc.gov/tobacco/data_statistics/sgr/2000/complete_report/index.htm
4. World Bank. Curbing the epidemic: governments and the economics of tobacco control. Washington: World Bank 1999. Available from: http://documents.worldbank.org/curated/en/1999/05/437174/curbing-epidemic-governments-economics-tobacco-control
5. International Agency for Research on Cancer. Effectiveness of tax and price policies for tobacco control. Handbooks of Cancer Prevention Vol.14. Lyon France: IARC 2011. Available from: http://www.iarc.fr/en/publications/list/handbooks/
6. Chaloupka FJ Straif K and Leon ME. Effectiveness of tax and price policies in tobacco control. Tobacco Control 2011;20(3):235-8. Available from: http://tobaccocontrol.bmj.com/content/20/3/235.abstract
7. NSW Retail Tobacco Traders' Association. Price lists-cigarettes. The Australian Retail Tobacconist 2012;84(no. 5 Feb-Apr):1-2.
8. 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