Grattan Institute Budget expert, John Daley, has questioned Labor’s plan to raise tobacco excise to pay for increased expenditure on social programs, arguing that such a move could actually worsen the structural Budget deficit. From The AFR:
The Labor opposition expects to raise $47.7 billion over 10 years by increasing tobacco excise dramatically until 2020 and generating a surge of revenue it has earmarked for education, budget repair and other still-to-be announced measures.
Top analysts questioned if tobacco revenue, which is being undermined by falling smoking rates, would keep pace over the longer term with the faster-growing policies it would have to pay for.
“You’re taking a severe structural budget problem and making it even worse,” John Daley, chief executive of the Grattan Institute, said. “Tobacco excise is a structurally declining tax base. It is not going to keep pace with inflation because tobacco use is falling… if you put up prices further that will reduce usage even further.”
“Yet the things they’re talking about funding will go up at least as fast as gross domestic product or faster, and paying for that with things that will not go up as fast as GDP.”
I hate cigarettes with a passion. My mum smoked for 40 years and one of my worst childhood memories is the smell of cigarettes around the house. Thankfully, she quit three years ago, but has been left with emphysema, which has become a big drain on her quality of life.
With these biases in mind, I should be the first to support the Labor Party’s plan to fund Budget repair by extending the excise on cigarettes – which has already been rising by 12.5% per year since 2013 – beyond its 2017 end date. Under Labor’s proposal, the cost of a packet of 25 cigarettes would rise to more than $40 by 2020, or nearly $2 per cigarette.
However, in addition to the issues outlined by John Daley above, there is the inconvenient problem that raising cigarette excise would be highly regressive. That is, the majority of smokers are from lower income brackets, so any increase in excise will adversely affect them the most. In turn, their disposable income would be significantly reduced, thus forcing them to cut back expenditure (lowering tax revenues) elsewhere.
Moreover, with the cost of a cigarette rising to nearly $2 a dart, there is the prospect of a lucrative black market developing, which could dramatically undercut the Government’s forecast tax take.
One option to potentially plug the Budget hole and improve outcomes would be to legalise and tax marijuana, as discussed yesterday. There is no good public policy reason why alcohol and tobacco are legal and pot isn’t. Moreover, legalisation of marijuana would ensure purity of supply, reduce profits to organised crime, and lower law enforcement costs. It’s a win, win, win.
The whole tobacco tax policy from Labor also highlights its own policy inconsistencies. On the one hand, Labor wishes to extend a highly regressive cigarette tax that will badly punish the poor. At the same time, Labor strongly opposed the re-indexation of fuel excise, decrying a few cents a litre increase in the cost of petrol on the grounds that it was regressive, even though its merely ensured that the tax take from fuel kept pace with inflation.
Such is the dysfunctional state of the Labor Party, where band aids are offered in place of genuine policy.
