Poor smokers are an easier target than mining companies

Judith Sloan
August 06, 2013
The Australian

THE government obviously thinks that it is much easier to raise money from smokers than mining companies.

In the next four years, the government expects to raise nearly $39 billion from excise on tobacco products. By contrast, the minerals resource rent tax will bring in $5.5bn across the same period.

For every dollar extracted from mining companies in the form of the MRRT, the Labor government expects to collect $7 from smokers. And don’t be fooled that the government wants smokers to give up their habit. The estimates of future excise revenue are firmly predicated on the basis that most smokers will not quit.

Technically speaking, the price elasticity of demand for cigarettes is low and the government knows this. As the Treasury paper on issues in tobacco taxation states, “applying higher taxes on goods which have relatively low price elasticities is optimal as these taxes are less distortionary, as their effects on consumer preferences are relatively minor”. Tell that to the smoking tradie in western Sydney, I say. Even with the price of a packet of cigarettes expected to increase by more than $5, the Cancer Council estimates that only 200,000 smokers will quit, out of more than three million regular smokers.

In other words, the number of smokers will fall by less than 7 per cent even as excise on tobacco products increases by more than 50 per cent in the next four years.

The council also estimates that 40,000 young people may be deterred from taking up smoking, although this figure is pure guesswork.

So, what do we know about smoking and smokers in Australia? Just after World War II, most Australian adult men smoked – about 75 per cent of them. Since then, however, there has been a continuous decline in the rate of smoking among men. In 2011-12, a little more than one-fifth of men smoked on a daily basis.

For women, smoking rates have always been lower than for men, with a little more than one-quarter smoking in 1945. The rate of smoking among women drifted upwards for several decades, peaking at 33 per cent in 1975, before falling to 16.3 per cent in 2011-12.

The most common age for male smokers is between 30 and 49 years and for female smokers it is between 40 and 49 years.

We also know there is a relationship between a person’s highest level of qualification and the rate of smoking, with early school-leavers the group likeliest to smoke.

Labourers and related workers are three times likelier to smoke than professionals.

Smoking rates among indigenous Australians are also significantly higher than among the rest of the community. In 2008, it is estimated that nearly half of male indigenous Australians smoked and 44 per cent of female indigenous Australians.

The rate of smoking among indigenous Australians has not changed in more than a decade.

What is the relationship between the consumption of cigarettes and their price? We do know that there has been a long-run decline in the incidence of smoking and we also know that the real price of cigarettes has increased, in large part because of higher excise.

The trouble is that there is little alignment between changes to the price of cigarettes and changes in demand for cigarettes, even if lagged effects are taken into account. Although per capita consumption of cigarettes has fallen across time, most of the decline cannot be explained by rising prices.

Moreover, there is some evidence that the fall in consumption caused by more expensive cigarettes takes the form of smokers smoking fewer cigarettes each day rather than quitting. Note that health benefits are associated with people quitting, rather than just cutting back.

If the consumption of cigarettes is not responsive to changes in price, any increase in price – caused by a hike in excise, for instance – will cause smokers to spend less on other things, such as food, clothing, accommodation, caring for their children.

We also know that the bottom 20 per cent of households pay one-third more tobacco excise tax on average than the top 20 per cent. It is the poor who smoke and pay a disproportionate share of the excise. In the words of Julie Novak, a senior fellow at the Institute of Public Affairs, it is a case of “soaking the poor” – not the rich.

None of this information is likely to deter public health zealots; after all, the completely ludicrous figure of $31bn is regularly trotted out as the total social cost of smoking in Australia. It should be noted that the study on which this figure is based assumes that non-smokers don’t die. I’ll drink to that.
There may be a case for taxing a product that imposes social costs that are not borne by the consumer, a so-called Pigovian tax. But this rationale does not form the basis for imposing any old tax on the product, let alone increasing its rate by 12.5 per cent for four years in a row.

According to the Cancer Council, tobacco use accounts for less than 8 per cent of the total burden of disease and injury in Australia. The social cost of smoking probably amounts to several hundred million dollars a year; $1bn at most. hundreds of millions of dollars per year – a billion dollars, at most.
Given that total excise from tobacco will be $8.3bn this financial year, there is absolutely no doubt that smokers are grossly overtaxed, even before the higher rates of excise come into effect.

The government’s latest tax grab is just a cynical exercise dressed up as a public health measure that will hit the poor, the less educated, manual and factory workers and the indigenous community. Increasing the excise on cigarettes is almost entirely tied up with the government keeping up the pretence that there is a “clear path back to (budget) surplus”. Smokers are easy targets.