Tobacco excise: a pro-poor policy

THE tobacco excise will be increased by 12.5% every year for the next 4 years. This will mean cigarette pack prices will increase to around $40 by 2020. It will also become more difficult to purchase cheap duty-free cigarettes.

Ultimately, cigarettes will become less affordable, especially for the poor.

However, this policy, similar to previous price controls, has been portrayed in the media as a regressive tax merely aimed at raising revenue so as to better the Budget’s bottom line.

This reasoning suggests that because more poor people smoke, the tax increase targets the poor as they end up paying more tax. This is a shortsighted analysis and demonstrates a poor understanding of a sophisticated tobacco control intervention, which is based on very strong evidence.
 
In reality, the policy actually benefits the poor far more than the rich because it is a progressive tax in terms of public health and long-term economic benefit.

This tax will reduce the long-term financial losses and payments more in lower than in higher socio-economic (SES) groups, by reducing medical expenses and protecting livelihoods especially in poorer groups. Ultimately it saves more lives in lower SES groups than in higher SES groups.

How?

Our line of argument is based on the fact that increasing the cost of tobacco will effectively increase people’s intention to quit and ultimately help them quit. The evidence for this is beyond all reasonable doubt, unless you represent Big Tobacco, which trades in creating doubt about effective interventions.

There are numerous studies around the world showing that increasing the cost of tobacco decreases smoking rates and saves lives. A reference list would run into hundreds of pages but an excellent summary of the evidence can be found at Tobacco in Australia: facts and issues.

Using studies on the effect of price increase on tobacco usage, we can estimate that a 100% price increase (as these excise increases will deliver) will decrease cigarette purchases by around 42%. That is, a price elasticity of –0.42.

In Australia there are sophisticated annual tobacco surveys.

We can deduce from these that taxation has contributed significantly to reducing tobacco use to one of the lowest rates in the world. Australia is one of the leaders in tobacco control interventions, with current surveys suggesting that only 12.8% of adults in Australia currently use tobacco.

Of course, Australia’s success is not due purely to tax increases, but a combination of evidence-based interventions, like plain packaging, bans to smoking in public places, mass media campaigns and advertising bans.
 
But is this excise merely part of a Budget that benefits billionaires and slugs the battlers?

A number of news outlets ran stories suggesting this in the lead up to and aftermath of the Budget. Indeed, these arguments are parroting those from the tobacco industry and their proponents. However, does increasing the tobacco tax really hurt the poor more? The evidence indicates the opposite. This is one Budget line item that benefits the poor more than the rich.

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Basically, it’s an issue of price elasticity being higher among those who have lower incomes. That means that poorer people are more likely to respond by stopping smoking in response to an increase in cost of cigarettes.

That is, when price goes up people tend to buy less and want to quit. If you have less money you are even more likely to react to the price stimulus.

The effect is even more marked in low and middle income countries where the price elasticity can be as high as –0.8. If this tax can help decrease the inequality in smoking rates, bringing smoking rates in lower SES groups closer to those of higher SES groups, it will decrease the inequitable burden of costs of tobacco use on the poor.

This effect of the tax increase is of particular importance for young people who typically have less disposable income. As the price goes up, they are even less likely to start to use tobacco or become addicted. Given that more than 90% of long-term smokers start before they are 23 years old, increasing price can be a very effective intervention in tobacco control.

Increasing the pack price to $40 will not only save more lives, but it will also protect more livelihoods in low SES groups than in high SES groups. These lower SES groups are often the least able to afford to have their breadwinners sick or dying from tobacco-related illness: a result that happens more often than not for those who are long-term smokers. In Australia each year households lose $9.8 billion in tangible costs alone and 99% of these costs are due to loss of labour resulting from premature death and illness.
 
What about the political nature of this tax rise?

There is little doubt that raising this tobacco tax is not entirely consistent with the Turnbull government’s brand of liberalism. It is probably more consistent with the Labor government’s proactive approach to tobacco control, including the introduction of plain packaging and the previous round of excise increases (2012–2016).

This new policy in the Budget has been essentially lifted from Labor’s policy folder. It’s nice to see bipartisan policy in promoting effective tobacco control, even if the motivation seems to be more related to raising revenue.

However, for those in the tobacco control movement, this tax increase is not an issue of revenue (I haven’t even bothered to look at the revenue this raises to support the Budget’s bottom line), this is an issue of saving lives – tens of thousands of lives.

Tobacco kills one half of those who smoke long term. If increasing the price stops them from smoking, which it does, then the lives of thousands of Australians will be saved by this increase. Many poorer Australian families will be protected from the economic impact of tobacco, not to mention the emotional stress associated with a premature death of a family member due to tobacco-related illness.
 
This is the impact that we should ultimately care about.

And is tobacco becoming unaffordable, as the scaremongers are claiming? I do hope so! I hope that my children cannot afford this deadly product.

Dr Nathan Grills is a public health physician and NHMRC post-doctoral fellow and Nicole Hughes is a research assistant, both with the Nossal Institute for Global Health at the University of Melbourne.