Australia's Future Tax System

Final Report: Detailed Analysis

Chapter E: Enhancing social and market outcomes

E6. Tobacco taxation

Key points

While consumer sovereignty is an important principle in tax policy design, government intervention in the tobacco market is justified by the strongly addictive qualities of tobacco, its serious health impacts, its uptake by minors and the costs that smoking imposes on non-smokers.

Whether taxation is an appropriate intervention is an empirical question that depends on its costs and benefits relative to those of available alternatives.

Tobacco taxes raise prices and reduce both smoking rates and smoking intensity. Australian retail prices for cigarettes are moderate by international standards and taxes constitute a relatively small share of the retail price. Indexation of excise rates to consumer prices means that excise falls as a proportion of average wages over time.

To maintain the value of tobacco excise in terms of household income, it should be indexed to wages rather than consumer prices. The existing regime for tobacco taxation in Australia should be retained with the rates of tax substantially increased, depending on further evidence on the costs of harm from tobacco smoking.