Australia's Future Tax System

Final Report: Detailed Analysis

Chapter E: Enhancing social and market outcomes

E6. Tobacco taxation

E6–2 Existing taxes on tobacco

Currently in Australia, cigarettes and cigars that contain 0.8 grams or less of tobacco are taxed on a 'per stick' basis, regardless of how much tobacco the stick contains. From 1 August 2009 the excise was $0.25833 per stick or $6.46 on a pack of 25. Excise rates are indexed twice a year in line with the CPI. Since wages generally rise more quickly than consumer prices, this means that excise falls as a proportion of average wages over time.

Tobacco products are also subject to GST, which is levied on the post-excise price. On a pack of 25 cigarettes with a retail price of $13.00, excise accounts for 50 per cent of the retail price and GST for 9 per cent.

Other tobacco products — including cigars and cigarettes containing more than 0.8 grams of tobacco, rolling tobacco and smokeless tobacco — are subject to excise at a per kilo rate equivalent to the per stick tax on 0.8 gram sticks. From 1 August 2009, this amounted to $322.93 per kilo of tobacco content. The main features of the existing excise system for tobacco have been in place since 1999, when the per-stick rate was introduced. There has been no real increase in the rate of excise since then.

A person over 18 years of age can bring 250 cigarettes (or 250 grams of other tobacco products) into Australia duty free. This tax concession costs the revenue around $200 million per year. The sale of smokeless tobacco has been prohibited since 1991. It may legally be imported for personal use, subject to excise-equivalent rates of customs duty.

In 2007–08, the Australian government raised $5,666 million from tobacco excise and $273 million from customs duty on tobacco imports, together amounting to 1.7 per cent of total tax revenue collected by Australian governments.

Australian taxes on tobacco products are low, as a proportion of the retail price, compared with other OECD countries. Tobacco prices in Australia are moderate by the standards of comparable countries (see Chart E6–1).

Chart E6–1: Tobacco taxes and prices in OECD countries

Panel A: Tobacco taxes as a percentage of price, 23 OECD countries

Chart E6–1: Tobacco taxes and prices in OECD countries - Panel A: Tobacco taxes as a percentage of price, 23 OECD countries

Panel B: Price of 30 cigarettes in six English-speaking cities, September 2008

Chart E6–1: Tobacco taxes and prices in OECD countries - Panel B: Price of 30 cigarettes in six English-speaking cities, September 2008

Note: Tobacco taxes in Panel A include VAT, and Australia's GST, as well as tobacco-specific taxes. Many European countries have much higher VAT rates than Australia's 10 per cent GST rate, so that the differences between total tax rates on tobacco products and other products are smaller in those countries than in Australia. In Panel B, prices are for popular brands from medium-priced stores.

Source: Panel A: Scollo and Winstanley (2008); Panel B: National Preventative Health Task Force (2009).

Findings

By international standards, Australian retail prices for cigarettes are moderate and taxes constitute a relatively small share of the retail price.

Indexation of excise to consumer prices means that excise will fall in relation to wages over time.

Duty-free concessions allow international travellers, whether Australians or foreigners, to consume tobacco products in Australia free of specific tobacco taxes.

Impact of tax on demand

Demand for tobacco products responds to price changes, but less so than demand for many other goods. A 10 per cent increase in price would decrease consumption by around 4 per cent (Chaloupka & Warner 1999). Demand among young people, low income people and men is more responsive than among older people, higher income people and women. Although many young people begin to experiment with cigarettes they obtain from others, there is strong evidence that high tobacco taxes, and consequent high prices, significantly reduce both smoking rates and smoking intensity among young people (Carpenter & Cook 2007; Ross & Chaloupka 2003).

Findings

Tobacco taxes raise prices and reduce both the number of people who smoke and the total amount of tobacco consumed. As tobacco is a highly addictive commodity, consumption does not respond readily to price changes — that is, demand for tobacco is relatively inelastic.

Young people and low income people respond more to tobacco price changes than others.

Low income and disadvantaged people smoke more

In 2007, 19.4 per cent of Australians aged 14 years or older had smoked in the past 12 months (AIHW 2008a). Eighty-six per cent of smokers smoked daily. The proportion of the population that smokes has been falling over the past 20 years (see Chart E6–2) and the average consumption per smoker has also declined, from 15.7 per day in 1997 to 13.0 per day in 2005 (Scollo & Winstanley 2008). Tobacco consumption varies among different demographic groups. People in lower socioeconomic groups smoke more than those in higher groups. People in the lowest 20 per cent by income devote 1.8 per cent of their total goods and services spending to tobacco compared to 0.8 per cent for people in the highest 20 per cent (ABS 2006c). In 2004, 23 per cent of people with an education level of Year 9 or less smoked while only 11 per cent of those who had studied at university smoked (Scollo & Winstanley 2008). Other indicators of socioeconomic status display a similar pattern (Siahpush & Borland 2001). Smoking rates are also high among some disadvantaged groups.

  • In 2004–05, around 50 per cent of Aboriginals and Torres Strait Islanders were daily smokers (ABS 2006d), compared with around 17 per cent of the general population (AIHW 2005). Smoking rates among Indigenous people have not fallen significantly since 1994–95. Smoking is the single biggest contributing factor to the life expectancy gap between Indigenous and non-Indigenous Australians (Ivers 2001).
  • People with mental illness are much more likely to smoke than others. A 1997–98 study found that smokers account for 73 per cent of men and 56 per cent of women with psychotic illnesses such as schizophrenia (Jablensky et al. 1999).
  • Data from 1995 reveal smoking prevalence among single mothers of 46 per cent, compared with 26 per cent for the general population at that time (Siahpush et al. 2002).

Chart E6–2: Smoking prevalence in Australia, 1991–2007

Chart E6–2: Smoking prevalence in Australia, 1991–2007

Source: Scollo & Winstanley 2008.

Lower income people who continue to smoke are adversely affected by tobacco taxes. Many of them incur the health costs of smoking twice over — by paying high taxes designed to reduce those costs and by suffering the health effects of smoking. Assuming unchanged levels of tobacco consumption, a 10 per cent increase in tobacco excise rates would be equivalent to an additional tax on gross household income of 0.16 per cent for households in the lowest 20 per cent of incomes but only 0.03 per cent for households in the highest 20 per cent. A similar regressive impact would apply to specific disadvantaged groups in which smoking rates are particularly high. On the other hand, some lower income people would avoid serious harm by giving up smoking as a result of tobacco taxes — and are more likely to do so than high income people.