Today’s cigarette tax hike will punish the poor

ScreenHunter_3942 Sep. 01 11.09

By Leith van Onselen

Today, the price of a packet of cigarettes is scheduled to rise by between $1.12 and $2.81 due to the decisions of the former Rudd Government to raise the tobacco excise by 12.5%.

Excise also will be increased under the normal twice-yearly indexation introduced 30 years ago by the Hawke government, although now it will rise in line with average weekly ordinary-time earnings, rather than the Consumer Price Index, as was previously the case.

Last year, in response to the Rudd Government’s decision to raise tobacco excise, Sam Oldfield, who is an economics student at Latrobe University and an Associate at Prosper Australia, penned a guest post slamming the tobacco excise increase, claiming that it unfairly punished the poor. In light of today’s rise in cigarette prices, I thought it timely to revisit Oldfield’s post, which makes some pervasive arguments:

Cigarette taxes are regressive, and on a price-inelastic good to boot. A ten per cent price increase reduces consumption by a paltry four per cent. The Rudd government can tax cigarettes as hard as they like and smokers will keep paying.

The fact that the majority of smokers are from lower income brackets and the economic damage of taxing the poor for the benefit of the rich has evidently escaped the attention of Kevin Rudd and Chris Bowen. It seems nobody has considered how this will affect the wider economy, though the logic is plain: if a ten per cent increase in price leads to a mere four per cent decrease in smoking, then how is the rest of the price increase funded? The answer is obvious, smokers will fund their habit by cutting back elsewhere, and since average smokers are in the income brackets that consume most of their income, the effect of this tax hike on the wider economy will be immediately felt.

Retailers, regardless of how they feel about smoking, should be angered at $5.4 billion disappearing from the pockets of their customers over the next four years. The economic damage this slap-dash policy will have on investment, employment and household financial health should be at the forefront of the conversation…

ScreenHunter_03 Aug. 07 08.05

Chart: The Consumer Price Index, 1973–2011: Cigarettes and Tobacco Sub-group compared with overall index

Smokers can alternatively access the black market. Current market price is 26 cents a stick, so a white market price of $1 leaves plenty of room for both a black market price increase and volume growth. Even current prices offer a tempting $4.5 billion pie to criminals – it would be a tempting pie for anyone…

That smokers are expected to pay for the cost of their healthcare is widely accepted even by smokers. Most smokers would not have a problem with paying a bit beyond that, but when the government is making a profit (tax revenue minus healthcare cost due to smoking) of $1,771 per smoker already, which will rise to $2,902 with the tax hike, many will turn to the black market and thus no longer fund their own healthcare.

Money that should go towards treatment of smoking related illness will instead line the pockets of criminals. The free rider effect becomes apparent.

It is the lack of real economic thinking beyond some basic (and potentially spurious) statistics that most marks the failure of this policy. It is a dark condemnation of the current state of the economics profession and the competence of technocrats that this rubbish passes for economic policy. Instead of real reform (or even debate) of our economic policy and tax system, band-aid solutions like this are offered which should anger smokers and non-smokers alike.

Whether you agree with Oldfield’s arguments or not, it does highlight the inherent inconsistency in the debate over re-indexing fuel excise. While Labor, the Greens and most of the other opposition parties decry a few cents a litre increase in the cost of petrol on the grounds that it is regressive (even though its merely ensures that the tax take from fuel keeps pace with inflation) – this much larger impost on lower income earners and the poor is completely ignored.

[email protected]

Comments are hidden for Membership Subscribers only.