13.0 Introduction

Last updated: September 2020

Suggested citation: Scollo, M and Bayly M. 13.0 Introduction. In Greenhalgh, EM, Scollo, MM and Winstanley, MH [editors]. Tobacco in Australia: Facts and issues. Melbourne: Cancer Council Victoria; 2020. Available from https://www.tobaccoinaustralia.org.au/chapter-13-taxation/13-0-introduction

 

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.

Table 13.0.1
Evidence for effectiveness of tax and price policies in tobacco control

Conclusion statement

 

Evidence

Sufficient*

Strong†

Limited‡

Increases in tobacco excise taxes that increase prices result in a decline in overall tobacco use.

X

 

 

Increases in tobacco excise taxes that increase prices reduce the prevalence of adult tobacco use.

X

 

 

Increases in tobacco excise taxes that increase prices induce current tobacco users to quit.

X

 

 

Increases in tobacco excise taxes that increase prices reduce the prevalence of tobacco use among young people.

X

 

 

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.

X

 

 

Increases in tobacco excise taxes that increase prices lower the consumption of tobacco products among continuing users.

X

 

 

Tobacco use among young people responds more to changes in tobacco product taxes and prices than does tobacco use among adults.

X

 

 

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.

 

 

X

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.

 

X

 

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.

 

 

X

Changes in the relative prices of tobacco products lead to some substitution to the products for which the relative prices have fallen.

 

X

 

Tobacco industry price discounting strategies price-reducing marketing activities and lobbying efforts mitigate the impact of tobacco excise tax increases.

X

 

 

Tobacco tax increases that increase prices improve population health.

X

 

 

Higher and more uniform specific excise taxes result in higher tobacco product prices and increase the effectiveness of taxation policies in reducing tobacco use.

X

 

 

Tax avoidance and tax evasion reduce but do not eliminate the public health and revenue impact of tobacco tax increases.

X

 

 

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.

 

X

 

Increases in tobacco tax increase tobacco tax revenues.

X

 

 

Increases in tobacco tax do not increase unemployment.

 

X

 

Source: Reproduced with permission from Chaloupka Straif and Leon 2011 6

Notes: The IARC defines levels of evidence as follows:

* Sufficient evidence: an association has been observed between the intervention under consideration and a given effect in studies in which chance bias and confounding can be ruled out with reasonable confidence. The association is highly likely to be causal.

† Strong evidence: there is consistent evidence of an association but evidence of causality is limited by the fact that chance bias or confounding have not been ruled out with reasonable confidence. However explanations other than causality are unlikely.

‡ Limited evidence: there is some evidence of association between the intervention under consideration and a given effect but alternative explanations are possible.

 

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 10% goods and services tax (GST) contribute substantially to the price of cigarettes and other tobacco products. In June 2020, at which time excise and customs duty on tobacco was $0.94694 cents per stick, the most popular brand in a pack of 40 cigarettes cost $57.45 in supermarkets.

 

Figure 13.0.1

Breakdown of the retail price of a pack of JPS 40s cigarettes, circa June 2020, Melbourne, Australia

Sources: Calculated from wholesale price information in NSW Retail Traders’ Association. Price lists—Cigarettes. The Retail Tobacconist of NSW, 2020, volume 113, and March 2020 excise duty rates published by the Australian Taxation Office (see https://www.ato.gov.au/Business/Excise-and-excise-equivalent-goods/Tobacco-excise/#Exciseratesfortobacco)

 

As can be seen in Figure 13.0.1, of the total cost of $57.45, 66.1% is accounted for by federal excise duty on tobacco, and a further 9.1% by GST, bringing total taxes to 75.2% of final sale price. Figure 13.0.2 shows the equivalent calculations for a 25 gram pouch of tobacco also from the leading brand at June 2020. Of the $44.45 sale price, 73.7% is excise duty (at $1.30985 per gram), and with the 9.1% GST component, tax makes up 82.8% of the final price of this RYO pouch.

 

 

Figure 13.0.2

Breakdown of the retail price of a 25 gram pouch of JPS tobacco, circa June 2020, Melbourne, Australia

Sources: Calculated from wholesale price information in NSW Retail Traders’ Association. Price lists—Cigarettes. The Retail Tobacconist of NSW, 2020, volume 113, and March 2020 excise duty rates published by the Australian Taxation Office (see https://www.ato.gov.au/Business/Excise-and-excise-equivalent-goods/Tobacco-excise/#Exciseratesfortobacco)

Section 13.2 also provides historical information about excise and customs duty ( Section 13.2.1) and state licence fees ( Section 13.2.2, see also Technical Appendix 13.2.1) 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 and excise and customs duty in Australia compared to New Zealand ( 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), major influences on cigarette prices over time ( Section 13.3.1.2) and provides details on the history of efforts to reform taxes on cigarettes to address the problem of large packs which are a uniquely Australian phenomenon ( Section 13.3.1.3). Section 13.3.1.4 describes the relative affordability of roll-your-own tobacco compared to factory-made cigarettes in terms of cost per pack and per stick.

Section 13.3.2 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), evidence of discounting at retail outlets ( Section 13.3.2.3) and surveys asking smokers what they paid for cigarettes and changes in the types of cigarettes smokers report smoking ( Section 13.3.2.3). International comparisons of cigarette prices in Australia and other comparable countries is also outlined ( Section 13.3.3).

Changes in the affordability of tobacco products rather than the price per se is what determines consumer responses to price increases. At 2019 in Australia, a 20-a-day the smoker on average weekly earnings would have to work for more than 36 minutes in order to earn enough to buy a day’s worth of cigarettes from the most popular brand 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) Section 13.4.3 and  13.4.4 provide compares the affordability of cigarettes in Australia with those elsewhere in the world.

The impact of tobacco price increases on consumption is detailed in Section 13.5. 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. As of 2014–15, in Australia taxpayers receive more than $10.3b in taxes paid by smokers on tobacco products, totaling about 2.4% of total government revenue received in Australia ( Section 13.6.5), comparable as a percentage to that received in other high-income countries ( Section 13.6.6). In 2014–15 this included $8.8b in customs and excise duty and an estimated $1.5b in GST.

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).

 

 

Relevant news and research

For recent news items and research on this topic, click  here. ( Last updated July 2020)  

 

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:  https://www.cdc.gov/mmwr/PDF/rr/rr4304.pdf

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:  https://publications.iarc.fr/Book-And-Report-Series/Iarc-Handbooks-Of-Cancer-Prevention/Effectiveness-Of-Tax-And-Price-Policies-For-Tobacco-Control-2011

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