Chapter 13 - Tobacco In Australia

Transcription

Tobacco in Australia
Facts & Issues
A comprehensive online resource
tobaccoinaustralia.org.au
Book excerpt
List of chapters available at
Introduction
Chapter 1 Trends in the prevalence of smoking
Chapter 2 Trends in tobacco consumption
Chapter 3 The health effects of active smoking
Chapter 4 The health effects of secondhand smoke
Chapter 5 Factors influencing the uptake and prevention of smoking
Chapter 6 Addiction
Chapter 7 Smoking cessation
Chapter 8 Tobacco use among Aboriginal peoples and Torres Strait Islanders
Chapter 9 Smoking and social disadvantage
Chapter 10 The tobacco industry in Australian society
Chapter 11 Tobacco advertising and promotion
Chapter 12 The construction and labelling of Australian cigarettes
Chapter 13 The pricing and taxation of tobacco products in Australia
Chapter 14 Social marketing and public education campaigns
Chapter 15 Smokefree environments
Chapter 16 Tobacco litigation in Australia
Chapter 17 The economics of tobacco control
Chapter 18 The WHO Framework Convention on Tobacco Control
Appendix 1 Useful weblinks to tobacco resources
Tobacco in Australia: Facts and Issues. Fourth Edition
A comprehensive review of the major issues in smoking and health in Australia, compiled by Cancer Council Victoria.
First edition published by ASH (Australia) Limited, Surry Hills, NSW, 1989
Second edition published by the Victorian Smoking and Health Program, Carlton South, Victoria (Quit Victoria), 1995
Third edition published by Cancer Council Victoria 2008 in electronic format only.
ISBN number: 978-0-947283-76-6
Suggested citation:
Scollo, MM and Winstanley, MH. Tobacco in Australia: Facts and issues. 4th edn. Melbourne: Cancer Council Victoria; 2012. Available from www.TobaccoInAustralia.org.au
OR
<Author(s) of relevant chapter section>, <Name of chapter section> in Scollo, MM and Winstanley, MH [editors]. Tobacco in Australia: Facts and issues. 4th edn. Melbourne: Cancer Council Victoria; 2012.
<Last updated on (date of latest update of relevant chapter section)> Available from < url of relevant chapter or section>
Tobacco in Australia: Facts and Issues; 4th Edition updates earlier editions of the book published in 1995, 1989 and 2008. This edition is greatly expanded, comprising chapters written and reviewed by authors
with expertise in each subject area. Tobacco in Australia: Facts and Issues is available online, free of charge. A hard copy version of this publication has not been produced.
This work has been produced with the objective of bringing about a reduction in death and disease caused by tobacco use. Much of it has been derived from other published sources and these should be quoted
where appropriate. The text may be freely reproduced and figures and graphs (except where reproduced from other sources) may be used, giving appropriate acknowledgement to Cancer Council Victoria.
Editors and authors of this work have tried to ensure that the text is free from errors or inconsistencies. However in a resource of this size it is probable that some irregularities remain. Please notify Cancer
Council Victoria if you become aware of matters in the text that require correction.
Editorial views expressed in Tobacco in Australia: Facts and Issues. Fourth Edition are those of the authors.
The update of this publication was funded by the Australian Government Department of Health and Ageing.
Cancer Council Victoria
1 Rathdowne Street
Carlton VIC 3053
Project manager: Michelle Scollo Senior Policy Adviser, with assistance from Merryn Pearce, Policy and Projects Officer, Quit Victoria.
Editorial advice and editing: Rosemary Moore
Website design: Creative Services, Cancer Council Victoria
Design and production: Jean Anselmi Communications
Proofreading: Caz Garvey
Tobacco in Australia
Facts & Issues
Chapter 13
A comprehensive online resource
The pricing and taxation of tobacco products in
Australia
Chapter 13: The pricing and
taxation of tobacco products
in Australia
i
Chapter 13
The pricing and taxation of
tobacco products in Australia
Sugar, rum and tobacco are commodities which are no where necessaries of
life, which are become objects of almost universal consumption, and which
are therefore extremely proper subjects of taxation. […] In the meantime, the
people might be relieved from some of the most burdensome taxes: from those
which are imposed either upon the necessaries of life, or upon the materials of
manufacture. The laboring poor would thus be enabled to live better, to work
cheaper, and to send their goods cheaper to market. The cheapness of their
goods would increase the demand for them, and consequently for the labour of
those who produce them. This increase in the demand for labour, would both
increase the numbers and improve the circumstances of the labouring poor.
Their consumption would increase, and together with it the revenue arising
from all those articles of their consumption upon which the taxes might be
allowed to remain.
Michelle Scollo
Quit Victoria
Cancer Council Victoria
Adam Smith. An Inquiry into the Nature and Causes of the Wealth
of Nations, 1776i
i
From Part 5 Public debts Book V of the Revenue of the Sovereign or Commonweatlth—p294 of Bobbs-Merril edition. Published in New York
1961.

Date of last update: 10 October 2012
ii
Tobacco in Australia:
Facts and Issues
Table of contents
13.0 Introduction.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
13.1 Price elasticity of demand for tobacco products.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
13.1.1
Estimates of elasticity.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
13.1.2
Various methods of measuring elasticity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
13.1.3
Impact of price increases on uptake, continued consumption and
quitting.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
13.1.4
Price sensitivity among various population groups. . . . . . . . . . . . . . . . . . . . . . . . . . 6
13.1.5
Price elasticity for tobacco products other than cigarettes. . . . . . . . . . . . . . . . . 6
13.1.6
Theories of demand.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
13.1.7
Limitations of studies assessing price sensitivity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
13.2 Tobacco taxes in Australia. . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
13.2.1
Federal excise and customs duty. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
13.2.2
State tobacco licence fees.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
13.2.3
Goods and services tax.. . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
13.2.4
Tax levels in Australia compared with overseas. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Technical appendix 13.2.1........................................................................................................
Abolition of state franchise fees on tobacco. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
13.3 The price of tobacco products in Australia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
13.3.1
Recommended retail price of tobacco products.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
13.3.1.1 Changes over time in the recommended retail
price of a standard pack.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
13.3.1.2 The large pack: a peculiarly Australian
phenomenon.. . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
13.3.2
Prices at which tobacco products are sold/purchased. . . . . . . . . . . . . . . . . . . . . 26
13.3.2.1 The Cigarettes and Tobacco Sub-group of the
Consumer Price Index. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
13.3.2.2 Discounting in the tobacco market.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
13.3.2.3 Prices paid as reported by smokers.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
13.3.3
International comparisons of the price of tobacco
products. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
13.3.3.1 International comparisons of cigarette prices. . . . . . . . . . . . . . . . . . 29
13.3.3.2 International comparisons of prices paid.. . . . . . . . . . . . . . . . . . . . . . . 30
Technical Appendix 13.3.1.......................................................................................................
Why health groups were concerned about large pack sizes. . . . . . . . . . . . . . 34
Technical appendix 13.3.2........................................................................................................
Recommended retail price per stick of leading brands in
Australia compared with reported prices paid—Australia
2002 to 2010.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37

in Australia
iii
13.4 The affordability of tobacco products.. . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
13.4.1
Changes in affordability of cigarettes over time in Australia. . . . . . . . . . . . 39
13.4.2
Affordability of cigarettes to Australian children. . . . . . . . . . . . . . . . . . . . . . . . . . . 39
13.4.3
International comparisons in cigarette affordability. . . . . . . . . . . . . . . . . . . . . . . 41
13.4.4
On a lighter note.. . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
13.5 Impact of price increases on tobacco consumption in Australia. . . . . . . . . . . . . . . . . . . . 45
13.5.1 Declining excise and customs receipts following price
increases in Australia.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
13.5.2 Declining prevalence following price increases in Australia:
changes in reported cessation and consumption and other
smoking and product-related behaviours among adults.. . . . . . . . . . . . . . . . . 47
13.5.2.1 Smoking cessation.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
13.5.2.2 Smoking and product-related behaviour. . . . . . . . . . . . . . . . . . . . . . . . 47
13.5.3 Declining consumption following price increases in
Australia: reported prevalence and consumption in children. . . . . . . . . . . 49
13.5.4 Quantifying the contribution of price increases to declining
consumption.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
13.6 Revenue from tobacco taxes in Australia. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
13.6.1
Federal revenue from tobacco products to June 2000. . . . . . . . . . . . . . . . . . . . . 53
13.6.2
State revenue from tobacco products to June 2000. . . . . . . . . . . . . . . . . . . . . . . . . 54
13.6.3
Federal revenue from tobacco products since July 2000.. . . . . . . . . . . . . . . . . 55
13.6.4
Total federal and state revenue from tobacco products. . . . . . . . . . . . . . . . . . . 56
13.6.5
Revenue from tobacco taxes as a proportion of total
government revenue.. . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
13.6.6
International comparisons in tobacco tax revenue as a
proportion of total government revenue.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
13.7 Avoidance and evasion of taxes on tobacco products. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
13.7.1
What constitutes avoidance and what constitutes evasion
of taxes on tobacco products?.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
13.7.1.1 Legal avoidance versus illegal evasion. . . . . . . . . . . . . . . . . . . . . . . . . . . . 61
13.7.1.2 Contraband ‘versus’ counterfeit cigarettes. . . . . . . . . . . . . . . . . . . . . . 62
13.7.1.3 Involvement of licensed tobacco manufacturers. . . . . . . . . . . . . . 62
13.7.2
What factors drive or facilitate avoidance and evasion of
tobacco taxes?.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
13.7.2.1 What drives (legal) tax avoidance?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
13.7.2.2 What drives (illegal) tax evasion?.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
13.7.3
How can the extent of avoidance and evasion be quantified?. . . . . . . . . . . 65
13.7.3.1 Methodological approaches to quantifying
avoidance and evasion.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
13.7.3.2 A note on global compilations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68
13.7.4
Extent of illicit trade internationally—a real concern, or
scare-mongering?.. . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69
13.7.5
‘Butt-legging’ between Australian states and territories.. . . . . . . . . . . . . . . . . . 71
13.7.6
The problem of chop-chop.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

iv
Facts and Issues
13.7.7
Contraband cigarettes—a growing problem in Australia
or a threat about which people are increasingly aware?. . . . . . . . . . . . . . . . . . . 74
13.7.7.1 Well-documented cases of evasion of taxes on
cigarettes in Australia.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
13.7.7.2 Extrapolating case studies to estimates of total
use.. . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75
13.7.7.3 How reliable are consumer estimates of use of
contraband cigarettes?.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
13.7.8
Estimates of total illicit market for tobacco products in
Australia.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
13.7.8.1 Expert opinion. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
13.7.8.2 Analysis of reported use of tobacco products
compared with receipts of product subject to
excise duty.. . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78
13.7.8.3 Observational data.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
13.7.8.4 Estimates based on surveys of consumers.. . . . . . . . . . . . . . . . . . . . . . 79
13.7.9
To what extent does avoidance and evasion of taxes on
tobacco products reduce public health, increase health
disparities and reduce public safety?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
13.7.9.1 Effects on availability of cheap tobacco products
for consumption (and therefore public health). . . . . . . . . . . . . . . . 81
13.7.9.2 Health disparities.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
13.7.9.3 Greater access for children?.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
13.7.9.4 Are illicit tobacco products more dangerous?.. . . . . . . . . . . . . . . . . 82
13.7.9.5 Law and order issues?.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
13.7.10 How can legal and illegal circumvention of tobacco taxes
be reduced?.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
13.7.10.1 Knowledge and experience on measures to
discourage internet selling. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84
13.7.10.2 Measures to reduce or eliminate duty-free sales.. . . . . . . . . . . . . . 84
13.7.10.3 Knowledge and experience about effectiveness
of measures to prevent illegal circumvention. . . . . . . . . . . . . . . . . . 84
13.7.11 The WHO Framework Convention on Tobacco Control
(draft) protocol to eliminate illicit trade in tobacco products.. . . . . . . . . . 85
13.7.11.1 The Convention.. . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 85
13.7.11.2 The draft protocol on illicit trade. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86
13.7.11.3 Challenges posed by illicit tobacco for the
integrity and effectiveness of tobacco control. . . . . . . . . . . . . . . . . . 89
13.7.12 What has been done in Australia to date to reduce
avoidance and evasion of tobacco taxes?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
13.7.12.1 Internet sales.. . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
13.7.12.2 Duty-free.. . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
13.7.12.3 Smuggled tobacco products. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91
13.7.12.4 Protocol on illicit trade.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 92
Industry involvement in large-scale smuggling.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 100

in Australia
v
Australian Taxation Office action to address the problem
of illicit tobacco growing.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 102
Notes on questions about unbranded tobacco in 2010
compared with 2007 National Drug Strategy Household
surveys.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 104
13.8 What is the ‘right’ level of tobacco taxation?.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
13.8.1
Tobacco taxes to recoup social costs. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
13.8.2
Tobacco taxes as a corrective force to combat failures of
self-control.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 105
13.8.3
Pricing products out of the reach of young people. . . . . . . . . . . . . . . . . . . . . . . . 107
13.8.4
Taxing to take tobacco products to smokers’ ‘price point’
for quitting.. . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107
13.8.5
Frequent price rises to discourage tobacco use. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 108
13.9 Future directions for reform of tobacco taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 110
13.9.1
Tax increases to achieve public health goals. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
13.9.2
Set excise levels to be at least 70% of retail prices. . . . . . . . . . . . . . . . . . . . . . . . . . 111
13.9.3
Ensure taxes are as simple as possible. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 111
13.9.4
Rely more on specific tobacco excises (based on quantity)
rather than excise based on value as the share of excise
taxes in retail prices increase.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
13.9.5
Rely more on excise taxes than on import duties. . . . . . . . . . . . . . . . . . . . . . . . . . 112
13.9.6
Adopt comparable taxes and tax increases on all tobacco
products. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
13.9.7
Automatically adjust specific tobacco taxes for inflation. . . . . . . . . . . . . . . . 112
13.9.8
Increase tobacco taxes by enough to reduce the
affordability of tobacco products.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 112
13.9.9
Include tobacco excise tax increases as part of a
comprehensive strategy to reduce tobacco use.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 113
13.9.10 Use a portion of tobacco tax revenues to support other
tobacco-control and/or health promotion efforts.. . . . . . . . . . . . . . . . . . . . . . . . . 113
13.9.11 Strengthen tobacco tax administrators’ capacity to
monitor tobacco product markets and evaluate the
impact of tobacco tax increases.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 114
13.10 Arguments against tax increases promoted by the tobacco industry.. . . . . . . . . . . 116
13.10.1 Do increases in tobacco taxes threaten Australia’s economy?. . . . . . . . . . 117
13.10.2 Are increases in taxes on tobacco products inflationary?.. . . . . . . . . . . . . . 117
13.10.3 Do tax increases have unintended consequences?. . . . . . . . . . . . . . . . . . . . . . . . . 118
13.10.4 Do very high taxes threaten government revenue?.. . . . . . . . . . . . . . . . . . . . . . . 118
13.10.5 Are tobacco taxes paternalistic and overly coercive?.. . . . . . . . . . . . . . . . . . . . . 119

vi
Facts and Issues
13.11 Are tobacco taxes regressive?. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
13.11.1 Findings from early overseas studies.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122
13.11.2 Conclusions of major reviews.. .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
13.11.2.1 Thomas et al 2008. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
13.11.2.2 Bader et al 2011.. . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 123
13.11.2.3 IARC review 2010. . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
13.11.3 Findings of research in Australia.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124
13.11.4 What about highly disadvantaged groups suffering
entrenched disadvantage?.. . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125
13.12 Public opinion about tobacco tax increases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
13.12.1 Results of early state-based public opinion surveys. . . . . . . . . . . . . . . . . . . . . . . 128
13.12.2 Results of national surveys.. . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129
13.12.3 Results of focus group research.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129

in Australia
vii
Tables and figures
Table 13.0.1 Evidence for effectiveness of tax and price policies in tobacco control
Figure 13.0.1 Price breakdown for a pack of Winfield 25s February–April 2012
Australia
Table 13.2.1 Rates of federal excise duty, August, selected years 1965–87: cigarettes,
cigars and tobacco, Australia
Figure 13.2.1 Excise duty rate, Australia 1958 to 1999
Table 13.2.2 Rates of federal duty per kilo of weight, all tobacco products, as at June
1987 to 1999—excise and customs, Australia
Table 13.2.3 Excise and customs duty applicable to cigarettes and other tobacco
products since November 1999, Australia
Figure 13.2.2 Value of excise and customs duty on tobacco: 2000–11, Australia
Table 13.2.4 Rates for business franchise fees on tobacco 1974–97 in each
Australian state and territory
Figure 13.2.3 Dollar value of the tobacco business franchise fee applicable on a
typical packet of Winfield 25s in New South Wales between 1976 and
1998
Figure 13.2.4 Share of total and excise taxes in the price of a pack of the most-sold
brand of cigarettes, 2010, Australia and usual comparators
Figure 13.3.1 Price of Craven A 20s, Australia, 1940–2010
Table 13.3.1 Price of a packet of 20 Craven As, Australia, 1940–80, selected years,
then 1980–2012
Figure 13.3.3
Price of the most popular cigarettes in Australia, 1940–2011 (cents per
stick)
Figure 13.3.2 Market share for 20s, 25s and larger pack sizes in Australia, 1981 to
1997 (% of total sales)
Figure 13.3.6
Percentages of sales of each pack size of cigarettes in Australia 1981
to 2010—20s, 25s, 30s and 35s, 40s and 50s
Figure 13.3.4 Cigarette price movements in Australia, 1990–2011 (NB: this is an
index rather than actual prices, with all notional prices set to 100 at
1990)

viii
Facts and Issues
Figure 13.3.5 Recommended retail price of top five-selling brands of cigarettes,
February 1970 to February 2012
Table 13.3.2 Retail prices of leading brands, Melbourne, Australia, April 2012:
recommended retail price and supermarket price per pack, and per
stick and per pack price differential between largest and smallest pack
size
Table 13.3.3. Percentages of sales of each pack size of cigarettes in Australia 1981 to
2010—20s, 25s, 30s and 35s, 40s and 50s
Figure 13.3.7
Students preferring large pack sizes (30, 35, 40 or 50), secondary
school students 12–17 years who smoked in last week—1996, 1999,
2002, 2005, 2008 and 2011 (%)
Figure 13.3.8
2002, 2005, 2008 and 2011(%)
Table 13.3.4
Cigarettes and Tobacco Sub-group of the Tobacco and Alcohol
Sub-index of the CPI, average all capital cities, all quarters, 1973–2011
(annual average index figure)
Figure 13.3.9 The Consumer Price Index, 1973–2011: Cigarettes and Tobacco Subgroup compared with overall index
Table 13.3.5 Retail prices of leading brands, Melbourne, Australia, April 2012:
recommended retail price and supermarket price per pack, per carton
and per stick
Figure 13.3.10 Price of one Peter Jackson 30s cigarette, 1997–2000, Australia:
recommended retail price, monitored price and price reported paid by
smokers
Figure 13.3.11 Recommended retail prices per cigarette of leading brands in 2002–10
versus reported prices paid by consumers (cents per stick)
Figure 13.3.12 Prices of cigarettes sold in selected cities around the world, 2010:
typical local brand, 20s, as sold in supermarkets
standard pack of Marlboro 20s in moderately priced stores and typical
local brand, 20s, as sold in supermarkets
Figure TA13.3.1 Recommended retail price Rothmans brands, Melbourne, Australia,
1980–81 to 1992–93: cigarettes in pack sizes 20, 25, 30, 35, 40 and 50
(cents per stick)
Table TA 13.3.1 Recommended price per stick, Rothmans brands Melbourne,
Australia, 1980–81 to 1992–93: cigarettes in pack sizes 20, 25, 30, 35,
40 and 50 and weighted average price

in Australia
ix
Figure TA13.3.2 Recommended retail price most popular brands, cheapest brand per
stick, Melbourne 1973 to 1992 (using 1973 as index year, = 100 for all
indicators)
Table 13.3.2.1 Recommended prices per stick (cents) top selling Australian cigarette
brands 2002 to 2010
Table 13.3.2.2 Reported prices per stick (cents) paid by smokers, Australian arm of
ITC cohort study
Table 13.3.2.3 Percentage by which reported average weighted price is different to
recommended price (unweighted)
Figure 13.4.1 Time (in minutes) needed on average weekly earnings to earn enough
to buy one day’s worth of leading brand of cigarettes (between 15 and
21 cigarettes per day), 1984–2011
Table 13.4.1 Time needed on average weekly earnings to earn enough to buy
leading brand of cigarettes, Australia, 1984–2011: per cigarette, per 20
cigarettes, per week @ average number of cigarettes smoked per day
Table 13.4.2 Affordability of cigarettes for students aged 15 years in Australia, 1996,
1999, 2002, 2005, 2008 and 2011
Figure 13.4.2
Affordability of cigarettes for students aged 15 years in Australia, 1996,
1999, 2002, 2005, 2008 and 2011 (number of cigarettes that could have
been purchased on average pocket money)
Figure 13.4.3 The Big Mac Index of Cigarette Affordability for 2011 (number of
cigarettes that can be purchased for price of a Big Mac)
Figure 13.5.1 Tobacco sales compared with price of a pack of cigarettes, US
1970–2007
Figure 13.5.2 Tobacco sales compared with price of a pack of cigarettes, South
Africa, 1961–2008
Figure 13.5.3 Real tobacco prices and tobacco consumption in Australia, 1972–73 to
2010–11
2010–11
Figure 13.5.5 Affordability of cigarettes and apparent tobacco consumption in
Australia, 1998–99 to 2010–11
Figure 13.5.6 Percentages of smokers and recent ex-smokers agreeing that tobacco
prices were an important factor motivating their recent attempts to
change smoking behaviour
Table 13.5.1 Smokers’ self-reported changes to smoking and purchasing behaviours
following the 2010 price increase, Victoria

x
Facts and Issues
Figure 13.5.8 Early price elasticity of demand estimates for Australia
Figure 13.5.7 Reported consumption per secondary school student in Australia per
year vs. affordability, 1990–2011 (number of cigarettes affordable per
week to an average 15-year-old)
Table 13.6.1 Federal excise revenue on tobacco: total tobacco dutied and excise
duty, selected years 1964–65 to 1999–2000, Australia
Table 13.6.2 Revenue collected from Australian state and territory tobacco licence
fees, 1975 to 1997, and from tobacco replacement arrangements from
1997–98 to 1999–2000
Figure 13.6.1 Excise collected per person, 1965 to 2000, Australia
Table 13.6.3 Annual excise revenue from tobacco products, Australia, 2000–01 to
2010–11
Table 13.6.4 Annual customs revenue from tobacco products, Australia, 1999–2000
to 2010–11: cigarettes, cigars, other tobacco products and total
Table 13.6.5 Federal and state/territory revenue arising from excise duty, tobacco
licensing fees, tobacco replacement fees and GST, 1974–75 to
1999–2000, Australia
Figure 13.6.2 Federal and state/territory revenue: 1975 to 2010, Australia
Table 13.6.6 Annual revenue from tobacco products, Australia, 2000–01 to
2010–11: excise revenue, customs revenue and estimated GST revenue
Figure 13.6.3 Total revenue from tobacco per capita (federal and state/territory
combined): 1975 to 2010, Australia
Table 13.6.8 Tobacco excise tax revenue as a proportion of total tax revenue,
selected countries, 2005
Table 13.6.7 Tobacco tax revenue as a percentage of total government revenue:
Australian government and state and territory governments combined,
1998–99, 2003–04 and 2010–11
Table 13.7.1 Estimates of the quantities of tobacco grown, diverted to the illegal
market and seized by the Australian Taxation Office, 2000–01 to
2004–05, (kgs)
Table 13.7.2 Number of detections and quantities of tobacco and numbers of
cigarettes seized by Australian customs authorities, 2006–07 to
2010–11
Table 13.7.3 Responses to the question ‘How often do you smoke this type of
tobacco?’, current smokers
14 years and over, 2010

in Australia
Table 13.7.4 Responses to question to those who have ever used, ‘Would you say
that when you smoke you...?’
Table 13.7.5 Percentage of Australians 14 years and older (smokers and all
Australians) reporting currently using unbranded tobacco and using
‘half the time’ or more often
Table 13.7.6 Estimated penetration of contraband cigarettes in Australia, 1998–99
to 2004–05, (millions of cigarettes)
Table 13.7.7 Awareness of counterfeit cigarettes and belief among smokers that they
may have used them, Australians 14 years and older, 2010 (%)
Table 13.7.8 Consumption estimates based on self-report versus customs and excise
receipts 1998 to 2010
Table 13.7.9 Tobacco industry estimates of size of illicit tobacco market in Australia
based on consumer surveys,
2007, 2009, 2010 and 2011
xi
Table 13.7.11 Estimated market share of illicit trade in Australia based on National
Drug Strategy Household Survey reports and assuming use of
illicit cigarettes compared with unbranded tobacco is similar to the
proportion that illicit cigarettes make up of total seizures
Table 13.7.10 Number of detections and quantities of tobacco and numbers of
cigarettes seized by Australian customs authorities, 2006–07 to
2010–11
Figure 13.7.1
Advertisements placed in Melbourne Age and other Australian
newspapers, 20 to 22 April 2011
Table 13.8.1 Range of optimal tobacco tax rates for Australia ($ per stick)
Table 13.9.2 Projected price per typical pack of 25s and percentages that tax makeup of final price: at excise and customs duty of 35, 45, 55, 65, 75 and 85
cents per stick, incorporating effects of declines in manufacturers or
retail margins
Table 13.9.1 Projected price per typical pack of 25 cigarettes and percentages that
tax make-up of final price: at excise and customs duty of 35, 45, 55, 65,
75 and 85 cents per stick
Figure 13.9.1 Projected prevalence of daily smoking with funding committed
under the National Partnership Agreement on Public Health under
four alternative scenarios: return to pre-NPAPH spending on media
campaigns either with or without a further substantial increases
in taxes and additional media spending with or without a further
substantial increases in tobacco taxes
Figure 13.9.2 Prescriptions for anti-smoking medications —total subsidised per
month February 2001 to December 2011

xii
Facts and Issues
Table 13.10.1 Weighting of cigarettes and tobacco sub-group in overall CPI,
Figure 13.11.1 Extract from Thomas et al 2008 harvest plot of studies examining
relative effectiveness of cigarette price increases among
disadvantaged groups
Table 13.11.1 Summary of changes in smoking prevalence over the period of
the Australian National Tobacco Campaign in adults 18–40 years
(manufactured and RYO cigarettes)
Table 13.12.1 Results of early surveys of public opinion on tobacco tax increases in
six Australian states and nationally, selected years 1987–98
Table 13.12.2 Daily smokers’ views on how much the tax on cigarettes should be
increased if the revenue raised were to go to quit-smoking resources,
Victoria, Australia, 2003
Table 13.12.5 Support for increasing the tax on tobacco products to pay for health
education, proportion of the population aged 14 years or older,
Australia, 1998–2010
Table 13.12.3 Approval for a tax increase on cigarettes if extra funding were given to
services to help smokers quit: current smokers, former smokers, never
smokers and total population,
Victoria, Australia, November 2009
Table 13.12.4 Approval for a tax increase on cigarettes if extra funding were given to
services to help smokers quit: total population and by socio-economic
status, Victoria, Australia,
November 2008
Table 13.12.6 Support for increasing the tax on tobacco products to pay for health
education, proportion of the population aged 14 years or older,
Australia, 2004 to 2010: females compared to males

1
in Australia
13.0
Introduction
Pricing of cigarettes and other tobacco products is one of the most effective ways in which tobacco companies
can both maintain consumer demand and protect returns to shareholders. Because taxes make up a substantial
percentage of the price and because consumers are responsive to price changes, increasing the rate of tax applicable
to tobacco products allows governments to both reduce population consumption of tobacco and increase
government revenue.
The evidence for the effectiveness of tax and price policies is overwhelming.1–5
A review by a scientific panel convened by the International Agency on Research Against Cancer in 2010
summarised the evidence to that time (see Table 13.0.1) and issued a statement about the strength of the evidence
for each of 18 elements of tax and price policies in tobacco control.
Table 13.0.1 Evidence for effectiveness of tax and price policies in tobacco control
Conclusion statement
Increases in tobacco excise taxes that increase prices result in a decline in overall tobacco use.
Increases in tobacco excise taxes that increase prices reduce the prevalence of adult tobacco use.
Increases in tobacco excise taxes that increase prices induce current tobacco users to quit.
Increases in tobacco excise taxes that increase prices reduce the prevalence of tobacco use among young people.
Increases in tobacco excise taxes that increase prices reduce the initiation and uptake of tobacco use among young people with a
greater impact on the transition to regular use.
Increases in tobacco excise taxes that increase prices lower the consumption of tobacco products among continuing users.
Tobacco use among young people responds more to changes in tobacco product taxes and prices than does tobacco use among adults.
The demand for tobacco products in low-income countries is more responsive to price than is the demand for tobacco products in
high-income countries.
In high-income countries tobacco use among lower-income populations is more responsive to tax and price increases than is tobacco
use among higher-income populations.
In low-income and middle-income countries tobacco use among lower-income populations is more responsive to tax and price
increases than is tobacco use among higher-income populations.
Changes in the relative prices of tobacco products lead to some substitution to the products for which the relative prices have fallen.
Tobacco industry price discounting strategies price-reducing marketing activities and lobbying efforts mitigate the impact of tobacco
excise tax increases.
Tobacco tax increases that increase prices improve population health.
Higher and more uniform specific excise taxes result in higher tobacco product prices and increase the effectiveness of taxation policies
in reducing tobacco use.
Tax avoidance and tax evasion reduce but do not eliminate the public health and revenue impact of tobacco tax increases.
A co-ordinated set of interventions (a set of interventions that includes international collaborations strengthened tax administration
increased enforcement and swift severe penalties) reduces illicit trade in tobacco products.
Increases in tobacco tax increase tobacco tax revenues.
Increases in tobacco tax do not increase unemployment.
Sufficient*
X
X
X
X
Evidence
Strong†
Limited‡
X
X
X
X
X
X
X
X
X
X
X
X
X
X
Source: Reproduced with permission from Chaloupka Straif and Leon 20116
Notes: The IARC defines levels of evidence as follows:
*
Sufficient evidence: an association has been observed between the intervention under consideration and a given effect in studies in which chance bias and confounding can be ruled out with reasonable
confidence. The association is highly likely to be causal.
†
Strong evidence: there is consistent evidence of an association but evidence of causality is limited by the fact that chance bias or confounding have not been ruled out with reasonable confidence. However
explanations other than causality are unlikely.
‡
Limited evidence: there is some evidence of association between the intervention under consideration and a given effect but alternative explanations are possible.
Section: 13.0
2
Facts and Issues
Goods and Services tax
@ 1/11th of final price
9.1%
Retail margin
@ 16.5% of wholesale
price excluding GST
12.9%
Federal excise duty
@ 34.681 cents per cigarette
50.6%
Manufacturing costs
and profit
27.5%
Recommended
retail price $17.15*,
taxes = 59.7%
of final price
Figure 13.0.1 Price breakdown for a pack of
Winfield 25s February–April 2012
Australia
While evidence was limited about the relative price sensitivity of low-income people
in developing countries, the panel concluded ‘strong’ evidence for four statements
and ‘sufficient’ evidence of a causal association for 12 of the policy elements.
In addition to summarising research on the price elasticity of demand for cigarettes
(Section 13.1) this chapter also provides data on the taxes applicable to tobacco
products in this country (Section 13.2). In Australia federal excise or customs duty
and the more recently introduced 10% goods and services tax (GST) contribute
substantially to the price of cigarettes and other tobacco products. In February 2012
at which time excise and customs duty on tobacco was 34.681 cents per stick a typical
packet of 25 cigarettes cost $17.15 in convenience outlets.
As can be seen in Figure 13.0.1 of the total cost of $17.15, 50.9% is accounted for
by federal excise duty on tobacco and a further 9.1% by GST bringing total taxes to
59.7% of final price. Section 13.2 also provides historical information about excise
and customs duty (Section 13.2.1) and state licence feeds (Section 13.2.2) and the
GST (Section 13.2.3) as well as comparisons of the proportion that taxes make up of
final price in Australia compared with that in other countries (Section 13.2.4).
While the price of the leading brand of cigarettes varies little in convenience outlets
across the country, many different brands of cigarettes are sold in Australia at
considerably cheaper prices particularly where these brands are packaged in large
packs or sold in packs or cartons from discount outlets. Section 13.3 provides data
on changes in recommended prices over time in Australia (Section 13.3.1.1) and
provides details on the history of efforts to reform taxes on cigarettes to address
the problem of large packs that are a uniquely Australian phenomenon (Section
13.3.1.2). It also sets out what is known about actual prices paid from three sources:
the Cigarettes and Tobacco Sub-Group of the Consumer Price Index (Section
13.3.2.1), surveys of prices charged in retail outlets (Section 13.3.2.3) and surveys
asking smokers what they paid for cigarettes (Section 13.3.2.3).
Changes in the affordability of tobacco products rather than the price per se is what
determines consumer responses to price increases. At present in Australia the
average smoker on average weekly earnings would have to work for 23 minutes in
order to earn enough to buy a day’s worth of cigarettes at recommended retail prices.
Section 13.4 describes changes over time in the price of cigarettes in comparison
to changes in Average Weekly Earnings (Section 13.4.1) and changes in teenagers’
pocket money. (Section 13.4.2) The average 15-year-old who wanted to devote all
their weekly pocket money to smoking could buy up to 73 cigarettes — more than 10
each day. Section 13.4.3 and 13.4.4 provide compares the affordability of cigarettes in
Australia with those elsewhere in the world.
Currently in Australia taxpayers receive more than $8.7 billion in taxes paid by
smokers
on tobacco products totaling about 2.5% of total government revenue
Sources: Calculated from price information in
7
received in Australia (Section 13.6.5) comparable as a percentage with that received
Australian Retail Tobacconist and
February 2012 rates of customs and excise
in other high-income countries (Section 13.6.6) This includes in 2011–12 $6.4 billion
duty8
in excise duty, $1.1 billion in customs duty and an estimated $1.2 billion in GST.
*
Current dollars: the price in the applicable
Sections 13.6.1 to 13.6.4 document changes over time in the amounts of revenue
year; no adjustment has been made for
received by government from duties, fees and taxes on tobacco products. Section 13.7
inflation
provides detailed information on a highly topical aspect of tobacco taxes, namely the
extent of illicit trade in Australia and elsewhere and factors which might contribute
to its growth. It explains several important and emerging policy issues relevant to
tobacco taxation in particular how to decide on the ‘right’ level for tobacco taxation (Section 13.8) and how best
to structure and administer tobacco taxes (Section 13.9). It explains and counters several objections to tobacco
tax increases commonly put by tobacco companies (Section 13.10). It discusses the question of whether increases
in taxes have regressive effects resulting in greater financial hardship for disadvantaged smokers (Section 13.11).
Finally it describes public attitudes to tobacco taxes and the uses of the revenue they generate (Section 13.12).
Section: 13.0
3
in Australia
References
1. US Department of Health and Human Services. Reducing the health consequences of smoking: 25 years of progress. A report of the Surgeon General. Rockville Maryland: US Department
of Health and Human Services Public Health Service Centers for Disease Control Center for Chronic Disease Prevention and Health Promotion Office of Smoking and Health 1989. Available
from: http://profiles.nlm.nih.gov/NN/B/B/X/S/
2. US Department of Health and Human Services. Preventing tobacco use among young people. A report of the Surgeon General 1994. Atlanta Georgia: Public Health Service Centers for
Disease Control and Prevention Office on Smoking and Health 1994. Available from: http://www.cdc.gov/tobacco/data_statistics/sgr/sgr_1994/index.htm
3. US Department of Health and Human Services. Reducing tobacco use: a report of the Surgeon General. Atlanta Georgia: US Department of Health and Human Services Public Health
Service Centers for Disease Control and Prevention National Center for Chronic Disease Prevention and Health Promotion Office on Smoking and Health 2000. Available from: http://www.
cdc.gov/tobacco/data_statistics/sgr/2000/complete_report/index.htm
4. World Bank. Curbing the epidemic: governments and the economics of tobacco control. Washington: World Bank 1999. Available from: http://documents.worldbank.org/curated/
en/1999/05/437174/curbing-epidemic-governments-economics-tobacco-control
5. International Agency for Research on Cancer. Effectiveness of tax and price policies for tobacco control. Handbooks of Cancer Prevention Vol.14. Lyon France: IARC 2011. Available from:
http://www.iarc.fr/en/publications/list/handbooks/
6. Chaloupka FJ Straif K and Leon ME. Effectiveness of tax and price policies in tobacco control. Tobacco Control 2011;20(3):235-8. Available from: http://tobaccocontrol.bmj.com/
content/20/3/235.abstract
7. NSW Retail Tobacco Traders’ Association. Price lists-cigarettes. The Australian Retail Tobacconist 2012;84(no. 5 Feb-Apr):1-2.
8. Australian Taxation Office. Excise duty on tobacco products. Canberra: ATO 2012. Available from: http://law.ato.gov.au/atolaw/view.htm?docid=PAC/BL030002/1
Section: 13.0
4
Facts and Issues
13.1
Price elasticity of demand for tobacco products
A fundamental building block of economic theory is the fact that increasing (or decreasing) the price of a
commodity reduces (or increases) demand for that commodity. Price elasticity of demand refers to the extent to which
use of a product falls or rises after increases or decreases in its price. If price elasticity of demand for a product
were very low—that is, if it were inelastic—then demand would fall or rise only slightly in response to price changes.
For instance, if price elasticity for a particular good were about –0.1, then demand for that good would fall by only
0.1% for every 1% increase in price. Demand would fall by 1% for a 10% increase in price, by 2% for a 20% price
increase and so on. Demand for a good with high price elasticity would fall much more sharply in response to price
increases. If price elasticity of demand for a good were about –1.0, then demand for that good would fall by 1% for
every 1% increase in price. Demand would fall by 10% for a 10% price increase, 20% for a 20% price increase, 100%
for a 100% price increase, and so on.
While demand for tobacco products is not as elastic as demand for many other consumer products1 research has
consistently demonstrated that increases in the price of tobacco products are followed by moderate falls in both the
percentage of people smoking and the amount or number of tobacco products that remaining smokers consume.2,3
The percentage of people smoking declines because tax increases discourage non-users from starting, encourage
current users to quit and, also very important, discourage former smokers from starting again.3 Because increases
in tobacco taxes result in higher tobacco prices for everyone, the effect of even small resulting reductions in
tobacco use can be very large across the whole population.
13.1.1
Estimates of elasticity
Why people reduce smoking in response to increases in the price of tobacco products has been a matter of some
conjecture—see Section 13.1.6. However there is no doubt that they do. The extent to which demand for tobacco
products responds to changes in price is an empirical question, the answer to which can be ascertained by
measuring trends in consumption as prices and other relevant factors change.
Depending on the size of the price increase, reduced consumption of tobacco products following increases in
tobacco taxes can be quite substantial. In 1999, a World Bank review concluded that, all else being equal, price
rises of about 10% would on average reduce tobacco consumption by about 4% in developed countries and about
8% in developing countries.4, 5 In their 2003 meta-analysis reviewing 86 studies published to the year 2001 which
examined the price elasticity of demand for tobacco products, Gallet and List6 found a mean price elasticity of
–0.48, meaning that, on average, a 10% increase in price will be followed by a decrease in consumption of 4.8%.
The review conducted by the International Agency for Research on Cancer published in 2011 concluded that
studies on the impact of price increases on aggregate demand in high income countries on average find price
elasticity of about–0.4, with most estimates from the US and UK falling in a relatively narrow range between–0.2
and –0.6.7
13.1.2
Various methods of measuring elasticity
Price elasticity can be calculated in many different ways, and various methods have different advantages and
different problems (see Section 13.1.7).
Many studies examining the price elasticity of demand have used aggregate data—that is, data at a country or
state level on the total amount of tobacco purchased or taxed for the entire population. Some of these studies
have analysed changes in taxable or reported sales of all tobacco products, and some have looked at cigarettes
alone. Some have measured the weight of product sold, others the number of units. Some studies have compared
Section: 13.1.2
in Australia
5
consumption in the same jurisdiction with different prices over time (time-series analyses). Others have compared
consumption in jurisdictions with different prices at the same points in time (cross-sectional studies).
Other studies make use of surveys conducted regularly among school students, adults or households. These might
be surveys that ask about smoking habits or they might be surveys about spending on a whole range of household
items.i A small number of studies have looked at consumption as reported by a panel of smokers interviewed
(about their consumption and various factors which might affect it) before and after tax increases over time. In
recent times, behavioural economists have examined the response of individuals not to real-life price increases, but
rather to price increases simulated in behavioural experiments in laboratories.
Researchers have also used a variety of statistical models for specifying demand and for estimating elasticity.
In their comprehensive review, Gallet and List6 found that resulting estimates of price elasticity from all these sorts
of studies were generally fairly similar and did not differ systematically depending on the design or method of
analysis used. Studies that measured responses to price changes in the short term tended to report lower elasticity
than studies that reported long-run estimates (–0.40 compared with –0.44). Studies published more recently and in
high-quality journals also tend to report slightly lower estimates, reflecting increasing sophistication in modelling
and the greater number of factors also affecting consumption being taken into account in more recent research.6
13.1.3
Impact of price increases on uptake, continued consumption and
quitting
Data from surveys of individuals across a population allow researchers to examine in more detail the impact of
price increases on both smoking participation (that is, whether people smoke at all) and smoking intensity (that
is, how much people smoke). Different studies have drawn differing conclusions about the relative contribution of
declines in prevalence and declines in smoking intensity.8ii
Overall, recent research among adults indicates that roughly half of the impact of price
on tobacco consumption results from reductions in prevalence, and roughly half results
from remaining smokers smoking less frequently.8 Higher prices increase prevalence by
increasing interest in quitting, quit attempts and successful cessation.8 Higher prices can
reduce consumption among remaining smokers by reducing consumption by daily smokers.8
Recent studies also show that prices can reduce consumption by increasing the likelihood that
smokers will smoke only on some days.8
Unlike for adults where prices affect both participation and intensity, early researchers assumed that most of the
effects of price on young people smoking were on participation, mostly by reducing smoking initiation. Studies
examining the relative effects of price on participation and smoking intensity among youth have reached varying
conclusions,9,10 but those that have used the longest panels of data11, 12 have generally been able to detect some effect
on both initiation and quitting.13 The review of the literature conducted by the International Agency for Research
on Cancer3 concluded the following
<< Cigarette prices influence different stages of uptake of cigarette use, with a relatively larger impact at later stages.
<< Most but not all longitudinal studies from high-income countries find that smoking initiation is inversely
related to price.
<< As cigarette prices increases, smoking cessation among young people increases.
<< Price has a direct effect on young people, and also an indirect effect through both peer and family influence.9
i
ii
An example in Australia would be the Household Expenditure Survey, conducted every three to five years by the Australian Bureau of Statistics, which randomly selects a large number of
households to complete questionnaires about all their purchases and amounts spent.
See Figure 5.1 in Chapter 5 of the IARC review, p176.
Section: 13.1.3
6
Facts and Issues
13.1.4
Price sensitivity among various population groups
Studies collecting data from individuals also allow researchers to assess how different population groups tend to
respond to changes in price.14
Since young adults more commonly than older adults are occasional rather than regular smokers, it is theoretically
possible that they may be less influenced by price changes. However, teenage and younger smokers generally earn
lower wages and are less dependent on tobacco, both of which would tend to make them more price sensitive.15
Early cigarette demand studies by Lewit and colleagues using individual-level data16,17 found a strong inverse
relationship between price sensitivity and age, with younger smokers reducing consumption much more than
adults in response to the same price increases. This finding was thrown into doubt by an influential Rand study by
Wasserman and colleagues in 1991.18 More recent studies however11,12,19,20 supported earlier conclusions of Lewit and
colleagues that younger smokers tend to be more price sensitive.
In the US Surgeon General’s review of the literature published in 1994,21 estimates of elasticity of youth cigarette
demand ranged from –0.9 to –1.5 (about three times the level of elasticity of adult cigarette demand). Across all the
studies published up until 2001, Gallet and List also found greater responsiveness among younger people, with an
average price elasticity of –1.43 for teenagers, –0.76 for young adults, and –0.32 for adults.6
The most recent review of literature on the effect of prices on youth smoking conducted by the
International Agency for Research on Cancer9 concluded that price elasticity of demand for
teenagers was somewhere between –0.5 and –1.2%.9
Studies have differed as to findings about the relative price sensitivity of women compared with that of men.
Townsend and colleagues (1994) found that women in the late 1980s and early 1990s in Britain were more sensitive
than men to increases in tobacco prices. Chaloupka and Pacula,22 however, found that the prevalence elasticityi
for young American men was almost twice as large as that for young women. Across all the studies published
until 2001, Gallet and List6 found an average price sensitivity of –0.50 for men, and –0.34 for women. More recent
studies have generally failed to find gender differences in price sensitivity.8ii
Studies in high-income counties have also tended to show greater price sensitivity among lower socio-economic
groups.23 Low-income groups were more responsive to increases in cigarette prices in the UK in the 1980s and early
1990s.24,25,26 In the US, smoking rates of young black men are significantly more responsive to changes in price than
are smoking rates among young white men.27
While not every study has reached the same conclusion—different levels of access to cheaper
tobacco products over time and in different countries may explain some of the inconsistent
findings28—the majority of studies in high-income countries have found greater price
sensitivity among those on lower incomes.23,28 See Section 13.11 for further details.
Smokers in poorer nations also tend to be more sensitive to price, with estimates of price sensitivity generally
around 0.8% , about double that in more affluent countries.29 Blecher and Walbeek conclude, however, that when
changes in affordability rather than changes in price are taken into account, the level of sensitivity in developing
countries may be similar to that observed in developed countries.30
13.1.5
Price elasticity for tobacco products other than cigarettes
US,31 Canadian32 and Finnish33 research has concluded that an increase in the price of manufactured cigarettes can
lead to an increase in sales of hand-rolled cigarettes and other tobacco products. Increases in the price of those
products without simultaneous increases in the price of cigarettes are also followed by drops in consumption.33
i
ii
The ratio by which prevalence (the proportion of people who smoke at all) rather than consumption (the average amount which people smoke) reduces in response to an increase in
price.
See IARC Chapter 5, Figure 5.2 page 176
Section: 13.1.5
in Australia
7
In Australia, use of roll-your-own tobacco has increased in recent years following substantial increases in tax levels
on all tobacco products (see Section 2.5). Increases in use of roll-your-own have been even more pronounced in
countries where taxes on loose tobacco have not kept pace with taxes on cigarettes.34
13.1.6
Theories of demand
Because many people are highly dependent on tobacco-delivered nicotine and persist in smoking despite
recognising that tobacco products are dangerous, many early economists theorised that tobacco use was an
irrational behaviour and not suitable for conventional economic analysis.35 Other economists simply ignored
the addictive nature of tobacco products. More recent studies explicitly address the addictive nature of cigarette
smoking. The economic models of addiction underlying such research can be divided into three groups:13
imperfectly rational models of addictive behaviour; models of myopic addictive behaviour; and models of rational
addictive behaviour.
Imperfectly rational addiction models assume that the rational, far-sighted part of a person wants good health and a
long life but that their efforts to quit are repeatedly undone by the ‘wayward’ part of their personality that quite
simply ‘adores’ smoking. Proponents of imperfectly rational addiction models hypothesise that consumption will
fall sharply in response to price increases, but will then drift back again with time.
The myopic addiction model assumes that addicted smokers are short-sighted. Myopic addiction theorists predict that
factors such as price and income will affect uptake of smoking but that once addicted patterns of consumption
are well established, individuals tend to ignore or discount future costs (both monetary and health related).
They hypothesise that, while decreases in price will increase consumption and increases in price will reduce
consumption, the effect of price increases will be much smaller than the effect of any price decreases.
The rational addiction model by contrast rejects the proposition that smokers behave myopically. It asserts that
even addicted individuals do take into account future costs. The model assumes that addicted smokers make a
rational choice, weighing up the pleasure of current smoking and the unpleasantness of withdrawal that comes
with quitting on the one hand and the cost of current and continued smoking and the long-term health effects
on the other. Different people will make different decisions depending on how much they value good health, how
unpleasant they believe it will be to quit, and how much financial pressure they are under. Individuals also differ in
the extent to which they prefer short-term over long-term benefits. Nevertheless, the choice an individual makes
will take all relevant factors into account and be a rational one. Proponents of the rational addiction model such
as Becker and Murphy36 have demonstrated that current consumption of an addictive good tends to be inversely
related not only to the current price of the good but also to the past and predicted future prices.37, 38 The model also
suggests that more-educated and older people will be responsive to both new information and to price increases,
and that less-educated and younger people will be much less responsive to information about long-term effects and
relatively more responsive to immediate changes in price.
The rational addiction model was popular among many theorists and researchers over the late 1980s and the 1990s,
but recently has been criticised on several grounds. First, it implies that individuals have good foresight: a very
accurate picture of what the future is going to be like. In reality however, it is evident that some people give little
thought to the future. While they may be able to recite some of the diseases caused by smoking, they do not fully
appreciate the nature and extent of health risks and may not be able to accurately envisage what their life would
be like if they became very ill or disabled due to smoking. Second, the model would predict that individuals rarely
regret past decisions about consumption, a theory not borne out in interviews with current smokers, almost all
of whom regret ever having started smoking.39 Third, critics argue that it might be that smokers do not actually
choose future consumption. Rather, by continuing to smoke they are choosing only current consumption: future
consumption happens to them rather than being chosen by them.
Section: 13.1.6
8
Facts and Issues
13.1.7
Limitations of studies assessing price sensitivity
There is no doubt that smokers are responsive to changes in the price of tobacco products. However there is no one
definitive way of quantifying price sensitivity. Studies that use individual-level data and those that use aggregate
data are both subject to various limitations.
The reliability of individual-level data is very much dependent on adequate sampling and recall and honesty by
respondents about factors such as purchase of illicit tobacco products. Under-reporting of numbers of cigarettes
(or amount of other tobacco products) smoked is also a significant problem.40 Using aggregate data on taxable
product sales avoids these problems and ensures that researchers are looking at the impact of price changes on the
entire market; however, studies that use such data are subject to a number of different limitations.
First, without asking a representative sample of consumers about the prices of the products they are able to buy
over time, it is sometimes difficult to determine exactly what the average or typical price increase is (see Section
13.3.2). Manufacturers use a variety of methods of cushioning consumers from the effect of the increases in taxes.
It is by no means straightforward to assess the extent of price increases across a market where retailers engage in
various degrees of discounting, ‘specialling’ and bulk-selling and where tax-free and illicit tobacco products are
available.
Specifying changing quantities of tobacco products is similarly not straightforward. Studies that measure the
weight of product may not sufficiently account for tobacco companies gradually reducing the taxable weight of
cigarettes (without corresponding decreases in delivery of toxins).41 Studies that analyse changes in the number of
products generally do not take into account any consumer shift to possibly more toxic tobacco products.42
Finally, studies often do not adequately take into account all the less-easily-measured factors that affect tobacco
consumption, such as negative (unpaid) publicity about tobacco in the media and anti-smoking sentiment in the
community. Often changes in such factors coincide with or precede tax increases, and the effects of such factors
may multiply rather than simply add to the effect of price increases.i
Concluding note
Despite debates on the finer points of theory and despite all these methodological limitations, there is no doubt
that price exerts a profound impact on tobacco consumption.3 Falls in consumption following large price increases
are consistently much more rapid and more significant than falls following implementation of most other tobaccocontrol policies, and the World Bank has stated that increasing tobacco taxes is the single most effective measure
that governments can take to reduce health burdens.2 Increasing taxes on tobacco is a key plank in every major
international tobacco-control strategy. 2,43–49
i
For a fuller discussion of the methodological difficulties see Chaloupka and Warner 20004
Section: 13.1.7
in Australia
9
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ob=ArticleURL&_udi=B6V8K-45BC6NV-B&_user=10&_coverDate=08%2F31%2F1982&_rdoc=2&_fmt=summary&_orig=browse&_srch=doc-info(%23toc%235873%231982
%23999989997%23289738%23FLP%23display%23Volume)&_cdi=5873&_sort=d&_docanchor=&view=c&_ct=7&_acct=C000050221&_version=1&_urlVersion=0&_userid
=10&md5=f61b82f985ad0bd335c236dc281b4ab6
17. Lewit EM, Coate D and Grossman M. The effects of government regulation on teenage smoking. The Journal of Law & Economics 1981;24(3):545–69. Available from: http://www.jstor.
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18. Wasserman J, Manning W, Newhouse J and Winkler J. The effects of excise taxes and regulations on cigarette smoking. Journal of Health Economics 1991;101(1):43-64. Available
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orig=browse&_srch=doc-info(%23toc%235873%231991%23999899998%23288487%23FLP%23display%23Volume)&_cdi=5873&_sort=d&_docanchor=&view=c&_ct=8&_
acct=C000050221&_version=1&_urlVersion=0&_userid=10&md5=1fe195cce4937f547e0c24ec77f5e3fb
19. Lewit E, Hyland A, Kerrebrock N and Cummings K. Price, public policy, and smoking in young people. Tobacco Control 1997;6(suppl. 2):S17–24. Available from: http://tobaccocontrol.
bmj.com/cgi/content/citation/6/suppl_2/S17
20. Chaloupka FJ and Grossman M. Price, Tobacco Control Policies and Youth Smoking. Working Paper no. 5740. Cambridge, Massachusetts: National Bureau of Economic Research, 1996.
Available from: http://tigger.uic.edu/~fjc/
21. US Department of Health and Human Services. Preventing tobacco use among young people. A report of the Surgeon General, 1994. Atlanta, Georgia: Public Health Service, Centers for
Disease Control and Prevention, Office on Smoking and Health, 1994. Available from: http://www.cdc.gov/tobacco/data_statistics/sgr/sgr_1994/index.htm
22. Chaloupka FJ and Pacula RL. Sex and race differences in young people’s responsiveness to price and tobacco control policies. Tobacco Control 1999;8(4):373-7. Available from: http://
tobaccocontrol.bmj.com/cgi/content/abstract/8/4/373
23. Thomas S, Fayter D, Misso K, Ogilvie D, Petticrew M, Sowden A, et al. Population tobacco control interventions and their effects on social inequalities in smoking: systematic review.
Tobacco Control 2008;17(4):230–7. Available from: http://tobaccocontrol.bmj.com/cgi/content/abstract/17/4/230
24. Townsend JL. Cigarette tax, economic welfare and social class patterns of smoking. Applied Economics 1987;19:355-65. Available from: http://www.tandfonline.com/doi/abs/10.1080/0
0036848700000007#preview
25. Townsend JL, Roderick P and Cooper J. Cigarette smoking by socioeconomic group, sex, and age: effects of price, income, and health publicity. British Medical Journal
1994;309(6959):923–6. Available from: http://www.bmj.com/cgi/content/full/309/6959/923
26. Townsend J. Price and consumption of tobacco. British Medical Bulletin 1996;52(1):132–42. Available from: http://bmb.oxfordjournals.org/cgi/content/abstract/52/1/132
Section: 13.1.7
10
Facts and Issues
27. Chaloupka FJ and Wechsler H. Price, tobacco control policies and smoking among young adults. Journal of Health Economics 1997;16(3):359-73. Available from: http://papers.ssrn.com/
sol3/papers.cfm?abstract_id=225791
28. International Agency for Research on Cancer. Chapter 7. Tax, price and tobacco use among the poor. Effectiveness of tax and price policies for tobacco control. Lyon, France: IARC, 2011.
Available from: http://www.iarc.fr/en/publications/list/handbooks/
29. Lance P, Akin J, Dow W and Loh C. Is cigarette smoking in poorer nations highly sensitive to price? Evidence from Russia and China. Journal of Health Economics 2004;23(1):173–89.
Available from: http://www.ncbi.nlm.nih.gov/pubmed/15154693
30. Blecher EH and van Walbeek CP. An international analysis of cigarette affordability. Tobacco Control 2004;13(4):339-46. Available from: http://tc.bmjjournals.com/cgi/content/
abstract/13/4/339
31. Ohsfeldt R, Boyle R and Capilouto E. Effects of tobacco excise taxes on the use of smokeless tobacco products in the USA. Health Economics 1997;6(5):525–32. Available from: http://
www3.interscience.wiley.com/cgi-bin/abstract/14681/ABSTRACT
32. Thomson N and McLeod I. The effects of economic variables upon the demand for cigarettes in Canada. Mathematical Scientist 1976;1:121–31.
33. Pekurinen M. The demand for tobacco products in Finland. British Journal of Addiction 1989;84(10):1183–92. Available from: http://www3.interscience.wiley.com/journal/119445417/
34. Sukin K. Tobacco smokescreen. The Nation.2006. Available from: http://www.nationmultimedia.com/2006/01/22/headlines/index.php?news=headlines_19718718.html
35. Elster J. Ulysses and the Sirens: studies in rationality and irrationality. Cambridge: Cambridge University Press, 1979.
36. Becker G and Murphy K. A theory of rational addiction. The Journal of Political Economy 1988;96(4):675–700. Available from: http://www.drugtext.org/library/articles/becker02.htm
37. Becker G, Grossman M and Murphy K. Rational addiction and the effect of price on consumption. The American Economic Review 1991;82(2):237–41. Available from: http://www.
drugtext.org/library/articles/becker1.htm
38. Becker G, Grossman M and Murphy K. An empirical analysis of cigarette addiction. The American Economic Review 1994;84(3):396–418. Available from: www.soc.washington.edu/
users/matsueda/Becker%20AER.pdf
39. Fong G, Hammond D, Laux F, Zanna M, Cummings K, Borland R, et al. The near-universal experience of regret among smokers in four countries: findings from the International Tobacco
Control Policy Evaluation Survey. Nicotine & Tobacco Research 2004;6(suppl. 3):S341–51. Available from: http://www.informaworld.com/smpp/content~content=a753998174~db=a
ll~order=page
40. Warner K. Possible increase in the underreporting of cigarette consumption. Journal of the American Statistical Association 1978;73(362):314-18.
41. Chapman S. Changes in adult cigarette consumption per head in 128 countries 1986-90. Tobacco Control 1992;1:281-4. Available from: http://tobaccocontrol.bmj.com/cgi/
reprint/1/4/281
42. Evans WN and Farrelly MC. The compensating behaviour of smokers: taxes, tar and nicotine. Department of Economics Working Paper. University of Maryland, 1995.
43. Gray N and Daube M. Guidelines for smoking control. UICC technical report series no. 52. Geneva: International Union Against Cancer, 1980.
44. World Health Organization. Tools for advancing tobacco control in the XX1st century: policy recommendations for smoking cessation and treatment of tobacco dependence. Tools for
public health. Geneva: WHO, 2003. Available from: http://www.wpro.who.int/NR/rdonlyres/8D25E4D3-BB81-479E-8DF5-7BAF674DB104/0/PolicyRecommendations.pdf
45. World Health Organization. Higher taxes key to battle against tobacco use, says new WHO/World Bank publication. 2000. Available from: http://www.who.int/inf-pr-2000/en/pr200053.html
46. Jamrozik K. Policy priorities for tobacco control. British Medical Journal 2004;328(7446):1007-9. Available from: PM:15105328
47. Ministerial Council on Drug Strategy. Australian National Tobacco Strategy 2004-2009. Canberra: Department of Health and Ageing, 2005. Available from: http://www.health.gov.au/
internet/main/publishing.nsf/Content/tobacco-strat
48. World Health Organization. MPOWER: A policy package to reverse the tobacco epidemic. Geneva: World Health Organization, 2008. Available from: http://www.who.int/tobacco/
mpower/mpower_english.pdf
49. Australian Government. Taking preventative action: Government’s response to Australia: the healthiest country by 2020. Canberra: Department of Health and Ageing, 2010. Available
from: http://yourhealth.gov.au/internet/yourhealth/publishing.nsf/Content/report-preventativehealthcare
Section: 13.1.7
in Australia
11
13.2
Tobacco taxes in Australia
Tobacco taxes are favoured by governments because of their relatively low level of unpopularity with voters (see
Section 13.12) and because of their low administrative costs relative to the income they generate.1,2
A variety of taxes are applied to cigarettes and other tobacco products internationally. Virtually all countries apply
excise duty specified as an amount payable per x number of cigarette sticks. A small number of countries charge
excise payable per x grams of tobacco weight. Many countries also apply one or more forms of ad valorem taxes, that
is, taxes based on the monetary value of products. These include taxes added to the wholesale value of product sold
and sales tax or goods and service tax applied as a percentage to the (pre-GST) retail price.3,4
13.2.1
Federal excise and customs duty
The federal government has imposed excise duty on Australian-made and customs duty on imported tobacco
products since the passage in 1901 of the Excise Act5 and the Customs Act.5 Prior to federation, the colonies imposed
their own tariffs.6–8
Until 1999, federal excise and customs duty was calculated on the basis of the weight of tobacco products. The
Excise Regulations 19259 specified precisely how manufacturers needed to label, calculate and declare excise duty.
These also specified how the weight of tobacco products (and the volume of alcohol and petroleum products) was
to be calculated. For cigarettes, this included the weight of filter and paper, but not the weight of the packaging.i
In the early years of last century, manufactured tobacco was charged
at a rate of one shilling per pound (of product weight) and cigars were
taxed at one shilling and sixpence per pound. Since 1920, the rate of the
duty has been set out in (frequently amended) schedules to the Excise
Tariff Act passed in 1921.10 Historically, duty on tobacco in cigarettes
was levied at a higher rate than duty on non-cigarette tobacco (Table
13.2.1). In November 1983, the then federal treasurer, the Hon. Paul
Keating, changed customs and excise policy in several ways. First, the
rate of federal excise and customs duty was linked with the Australian
Consumer Price Index (CPI),11 meaning that since that time, excise and
customs duty have automatically increased in February and August each
year in line with the CPI for the six months to the previous December
and June. Second, the rate of duty for cigars was immediately made
equal to that of cigarettes. Third, the rate for non-cigarette tobacco
was increased by $5 a kilo. In subsequent budgets the rate for smoking
tobacco was increased further (by another $5 a kilo in the 1984 and
1985 budgetsii, and then by $1.90 in the 1986 budget).
Table 13.2.1 compares the excise duty on cigarettes with that on cigars
and smoking tobacco in selected years since 1965. As can be seen
in Table 13.2.1, rates for smoking tobacco became equal to that for
cigarettes in 1986.
Historically, tobacco products produced in Australia were subject to a
lower rate of duty than that applicable to imported tobacco products.
Customs duty was brought into line with excise duty following
i
ii
Table 13.2.1 Rates of federal excise duty, August, selected years
1965–87: cigarettes, cigars and tobacco, Australia
Year
$ per kg
cigarettes*
$ per kg
cigars*
1965
1970
1975
1982
1983
1984
1985
9.26
10.36
19.36
29.70
30.98
32.25
34.35
7.39
8.49
16.56
25.34
30.98
32.25
34.35
1986
37.26
37.26
1987
40.73
40.73
$ per kg
smoking
tobacco*
4.94
5.38
9.88
15.10
20.10
25.92
32.60
35.36,
37.26
40.73
Source: Australian Tobacco Marketing Advisory Committee Annual Report
199412
*
Current dollars: the price in the applicable year; no adjustment has
been made for inflation
The weight excisable was also net of moisture. The Australian Customs Services Handbook specified that measuring equipment was to be calibrated to a particular piece of machinery
used in the factory of Sydney-based manufacturer, WD and HO Wills.
The duty rate increased to $35.36 on 1 August 1986 and to $37.26 on 19 August 1986.
Section: 13.2.1
12
Facts and Issues
Table 13.2.2 the publication in June 1994 of a report of an inquiry
by the Industry Commission into tobacco growing and
manufacturing industries in Australia.13 Coinciding with the
end of the Tobacco Stabilisation Plan (see Chapter 10, Section
10.8.2), the harmonisation of customs and excise duty was
in line with government policy to reduce a range of direct
and indirect subsidies in an attempt to improve international
competitiveness of Australian exports. Table 13.2.2 compares
rates of excise and customs duty (per kilo of tobacco weight)
from 1987 to 1999.
Rates of federal duty per kilo of
weight, all tobacco products, as at
June 1987 to 1999—excise and
customs, Australia
Year
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
As can be seen in Table 13.2.2, customs duty became equal to
excise duty in 1995.
Throughout the 1990s, health groups lobbied for increases
in federal excise duty.16,17 In addition to the six-monthly CPI
increases, the government increased the rate of federal excise
applicable to cigarettes and other tobacco products on several
occasions. These included a $5 per kilo increase in 199218 and
increases announced in the 1993 budget19 of 3% in August
1993 and 5% in February and August 1994 and February
1995.20i The final increment rise of 5% planned for August 1995
was brought forward and increased to an immediate 10% rise
in the Federal Budget handed down on 10 May 1995.21
Figure 13.2.1 shows the rate of the federal excise duty on
cigarettes over the period since 1958. The figure is expressed in
constant 1989–90 dollars to take into account rising prices over
that time.ii
It is evident from Figure 13.2.1 that, once its value was restored
by the increase and introduction of indexation in the 1983
budget, federal duty on cigarettes remained fairly steady in
real terms over the late 1980s and early 1990s, increasing
significantly only in the late 1990s. The level of federal duty
on cigarettes in 1998 was about 50% higher in real terms
than it was at its lowest point in the early 1960s.
In 1999, after extensive lobbying by health groups,16 the
government moved from levying excise and customs duty
on cigarettes on the basis of weight to a system based on the
number of cigarettes (see Section 13.3.1.2 for full details).
Excise and customs rates on cigarettes and other tobacco
products applicable since 1999 are set out in Table 13.2.3.
Between 1999 and 2010 there were no increases in tobacco
excise and customs duty on tobacco products apart
from adjustments for CPI. Excise and customs duty was
increased by 25% on 30 April 2010 (Figure 13.2.2).
Excise
rate*
39.35
41.75
44.94
48.42
51.72
52.50
57.67
63.56
79.02
83.02
84.27
86.92
88.03
Customs
rate*
41.79
44.19
47.38
50.86
54.16
54.94
60.11
66.00
79.02
83.02
84.27
86.92
88.03
Sources: 1987 to 1989: Australian Tobacco Marketing
Advisory Committee Annual Report 1994;12
1990 to 1999: Scollo and Lal 200714 using
rates specified in amended schedules to the
Excise Tariff Act10 and the Customs Tariff Act
199515
*
Current rate: the rate in the applicable year; no
adjustment has been made for inflation
80
70
automatic
indexation
60
50
40
30
20
10
0
1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998
Figure 13.2.1 Excise duty rate, Australia 1958 to 1999
Sources: Australian Tobacco Marketing Advisory Board final report 1994,12 Federal Budget papers
1996 to 1999;22 23 adjusted by the CPI24
Note: Excise duty rate expressed in constant 1989–90 dollars
i
ii
Originally the increases were to be 3% but were increased to 5% after a proposal by the Australian
Democrats party designed to recoup forgone fuel excise revenue was accepted by the Government.
The figure for each year is divided by the average CPI in that year and then multiplied by 100, which
was the average CPI for 1989–90.
Section: 13.2.1
in Australia
Table 13.2.3 Excise and customs duty applicable to cigarettes and other tobacco products
since November 1999, Australia
13
$0.35
$0.30
$0.25
Dollars per kg of smoking
Dollars per cigarette or
tobacco, or cigarettes or
cigar weighing less than
cigars weighing greater
0.8 g*
than 0.8 g*
November 1999
0.18872
235.90
February 2000
0.19155
239.44
August 2000
0.19481
243.51
February 2001
0.20260
253.25
August 2001
0.20260
253.25
February 2002
0.20893
261.16
August 2002
0.21227
265.34
February 2003
0.21524
269.05
August 2003
0.21804
272.55
February 2004
0.22044
275.55
August 2004
0.22353
279.41
February 2005
0.22621
282.76
August 2005
0.22915
286.44
February 2006
0.23259
290.74
August 2006
0.23840
298.01
February 2007
0.24031
300.39
August 2007
0.24343
304.30
February 2008
0.24757
309.47
August 2008
0.2545
318.14
February 2008
0.25679
321.00
August 2008
0.25833
322.93
February 2008
0.2622
327.77
August 2008
0.33267
415.86
February 2008
0.33633
420.43
August 2008
0.34474
430.94
February 2012
0.34681
433.53
$0.20
$0.15
$0.10
$0.05
$0.00
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Figure 13.2.2 Value of excise and customs duty on tobacco: 2000–11, Australia
Sources: As for Table 13.2.3 using rates from Australian Taxation Office38 adjusted by the Consumer
Price Index39
Note: Rate expressed in 2010 dollars
13.2.2
State tobacco licence fees
In November 1974 Victoria became the first
Australian jurisdiction to introduce a licence fee
(known as a business franchise fee) on the sale
of tobacco products.40 The business franchise fee
on tobacco had two components. The first was
a set amount charged each year. The second was
an amount based on the value of tobacco sold in
the immediately preceding month. The monthly
(variable) rate was set at 2.5% in 1974 increasing to
10% in 1975. Between 1975 and 1989, all state and
territory governments introduced similar fees.41–47
The fixed licence fee and the percentage levy
varied from state to state. Generally the fees were
Source: Rates published by the Australian Taxation Office and also published in Federal Budget papers,
25-32
33-37
forwarded
to state or territory government revenue
Costello 1998–2006
and Swan 2008–12
collection offices by tobacco wholesalers; however,
*
Current dollars: the price in the applicable year; no adjustment has been made for inflation.
if retailers purchased stock from suppliers other
than licensed wholesalers, they also were required
to pay both the set and the variable licence fees. The percentage component was by far the more lucrative for
governments, and the rate of the levy was frequently increased in all jurisdictions, sometimes more than once
within the same budget period.
Table 13.2.4 shows the rates applicable in each year in each state and territory.
To cover the cost of these fees, wholesalers built in a component to the wholesale prices that charged retailers for
products.
The dollar value of the state fee component on a typical packet of cigarettes was quite small in early years—just a
few cents in 1974. However, as the rate increasedi, so did the dollar value of the fee. Figure 13.2.3 shows the dollar
i
The price of stock supplied to wholesalers also increased.
Section: 13.2.2
14
Facts and Issues
Table 13.2.4 Rates for business franchise fees on tobacco 1974–97 in each
Australian state and territory
$3.00
$2.50
$2.00
Calendar
year
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
Vic NSW SA WA Tas NT ACT Qld
Rate as % of value of total sales in preceding month
2.5
–
–
–
–
–
–
–
10 10 10
–
–
–
–
–
10 10 10 10
–
–
–
–
10 10 10 10
–
–
–
–
10 10 10 10
–
–
–
–
12 10 10 10
–
–
–
–
12 10 10 10
–
–
–
–
12 10 12.5 10 10 12
–
–
12 10 12.5 12.5 12 12
–
–
25 15 25 35 24 12
–
–
25 15 25 35 35 25
–
–
25 25 25 35 35 35 15
–
25
–
25 30 25 35 35 35 30
–
30 30 25 35 50 35 30
–
30 30 28 35 50 35 30
–
30 30 28 35 50 35 30 30
50 35 50 50 50 50 35 30
50 50 50 50 50 50 35 30
50 50 50 50 50 50 50 30
75 75
60 75 75
75 75 75 50 50 60 75 75
100
75 75 100 100 100 85 75 75
75 75 100 100 100 85 75 75
100 100 100 100 100 100 100
100 100 100 100 100 100 100 100
100 100 100 100 100 100 100 100
$1.50
$1.00
$0.50
0
1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998
Figure 13.2.3 Dollar value of the tobacco business franchise fee applicable on a
typical packet of Winfield 25s in New South Wales between 1976 and
1998
Sources: Scollo unpublished data, based on Australian Retail Tobacconist price lists, 50-52 adjusted
by the Consumer Price Index39
Note: Dollar rate expressed in 1980–90 dollars
value (in constant $ 1989–90) of the fee applicable
on a typical packet of cigarettes, Winfield 25s, in
New South Wales between 1975 and 1999.i
In New South Wales, the dollar value of the fee
doubled in real terms between 1976 and 1986.
Between 1986 and 1996, it increased by a further
400% in real terms. Similar increases occurred in
the other states and territories.
Since they were first introduced, the state business
franchise fees were somewhat controversial and
1996
several legal challenges were mounted asserting
1997
that the schemes were in breach of s. 90 of
the Australian Constitution, which prohibits
Australian states and territories from raising
Sources: Australian Tobacco Board 1987,48 Australian Tobacco Marketing Advisory Committee
revenue from the sale of productsii. The wording
49
12
50
1991 and 1994, NSW Retail Tobacco Traders’ Association 1997
of the various pieces of state business franchise
Note: Citing cigarette price lists June and September editions 1995, 1996, 1997 from the NSW
50
legislation attempted to ensure that the fees were
Retail Tobacco Traders’ Association
not regarded as excises, based as they were on the
value of sales in a previous period rather than on
the quantity or volume of products currently being
transacted. When the state business franchise fees were first introduced, the fees were quite low, arguably providing
revenue sufficient merely to cover administration costs. By 1996 however, fees in New South Wales and other
Australian states had become so high that they were clearly an important source of government revenue, and not
merely a levy to cover the cost of regulation.
When the Ngo Ngo Ha & Anor v. State of New South Wales & Ors case was lodged in the High Court in 1996, many
lawyers and government officials correctly predicted that the Court would find the fees to be unconstitutional
(memorandum from Francey N, Wentworth Chambers Sydney, 8 July 1997 to Michelle Scollo, Director Victorian
i
ii
Although state fees ended in 1997, between August 1997 and June 2000 the federal government collected additional excise duty equivalent to the amounts previously collected and
allocated the revenue collected to the states in compensation for the lost fees.
For instance Philip Morris Limited & Ors v. The Commissioner of Business Franchises (Victoria) & Anor (1989) 167 CLR 399; and Capital Duplicator Pty Ltd & Anor v. Australian Capital Territory
(1993) 178 CLR 561
Section: 13.2.2
in Australia
15
Smoking and Health Program). The High Court ruling on 5 August 199753 effectively invalidated not just business
franchise fees based on sales of tobacco in New South Wales, but also business franchise fees based on sales of
tobacco, alcohol and petroleum in all states and territories.
Several state Treasury officials, aware of the possibility of the Ngo Ngo Ha v. NSW case succeeding, had
commenced negotiations with their federal counterparts late in 1996 and had extracted an undertaking that the
federal government would increase federal excise duties on tobacco, alcohol and petroleum, and would pass back
a share of the increased revenue to the states should the case succeed. After the High Court handed down its
decision, arrangements with the states and territories to honour that commitment were rapidly set in motion—see
Technical Appendix 13.2.1 for further details.
The Commonwealth agreed to collect a surcharge on each of the three products, and then to pass on the revenue to
the states and territories.
In 1997 the federal (Coalition) government announced a comprehensive review of the tax system. It called for a
major overhaul of federal and state taxes, the abolition of state business franchise replacement fees and a raft of
state sales taxes and the introduction of a goods and services tax. It was agreed that the revenue from the new
goods and services tax (GST) would go to the states and territories to compensate for the revenue no longer to be
received from state sales taxes and business franchise fees.
On 13 August 1998, two weeks prior to calling an election, the government released its long awaited tax reform
package, titled Tax Reform: Not a New Tax; a New Tax System.54 The proposal included plans to abolish tobacco
replacement payments and to introduce a per stick system of raising customs and excise duty, with the level of the
duty to be set so that the excise payable on any brand of cigarettes would be no lower than the existing level of
duty.i The fee payable on large packets of cigarettes would increase substantially, making them much closer in price
(per stick) to cigarettes sold in smaller pack sizes.
After the government was re-elected, following a short delay reforms were implemented in November 1999.55
13.2.3
Goods and services tax
Unlike in many other countries which introduced goods and services taxes, in Australia (as requested by health
groups) the excise duty on tobacco was not adjusted downward when the 10% goods and services tax (GST) was
introduced.54 The GST came into force in Australia on tobacco and all other retail services and products excluding
grocery items on 1 July 2000.56–58
As with all other taxable products and services in Australia, the GST is calculated by adding 10% to the pre-GST
price. In this way, the GST makes up one-eleventh or 9.1% of the final price of each packet of cigarettes, cigars or
smoking tobacco.59
i
At that point this included both the excise component to be retained by the federal government and amount to cover the tobacco replacement payments to be forwarded to the states and
territories, which was an amount equivalent to the 100% state franchise fee that was applicable in all jurisdictions at the time the High Court ruling abolishing fees was brought down.
Section: 13.2.3
16
Facts and Issues
13.2.4
Tax levels in Australia compared
with overseas
0
10
20
30
40
50
Denmark
Figure 13.2.4 shows tax levels in Australia compared with
other countries for the year 2012.
Germany
80
70
90
64.45%
78.67%
Finland
79.83%
France
79.98%
74.51%
78.82%
Ireland
75.47%
Italy
Netherlands
73.13%
New Zealand
73.27%
Norway
72.80%
70.37%
Singapore
79.16%
Spain
73.83%
Sweden
Switzerland
United States of America
(excludes settlement)
100
63.10%
Australia
Canada
(average of provinces)
As indicated in Figure 13.0.1, taxes in Australia made up
about 60% of the final price of a typical packet of cigarettes
in 2012.i
60
63.60%
42.93%
Figure 13.2.4 Taxes as a percentage of average prices in Australia and comparable
English-speaking and European countries, 2012
Source: World Health Organization, Table 9.2.0 Appendix IX. Tobacco taxes and prices, in WHO
report on the global tobacco epidemic, 2013 Enforcing bans on tobacco advertising,
promotion and sponsorship 2013, WHO: Geneva. Available from: http://www.who.int/
tobacco/global_report/2013/en/index.html 60
i
The percentage is higher in brands that are cheaper per stick and where cigarettes are sold at discounted prices.
Section: 13.2.4
in Australia
17
References
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1985. Cambridge, Massachusetts: John F Kennedy School of Government, Harvard University, 1985.
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Available from: http://profiles.nlm.nih.gov/NN/B/B/X/S/
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National Bureau of Economic Research, 2010. Available from: http://www.nber.org/papers/w16287
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5. Excise Act 1901 (Cth). Available from: http://www.comlaw.gov.au/comlaw/management.nsf/lookupindexpagesbyid/IP200401597?OpenDocument
6. Department of Customs and Excise. A brief history of Australian customs activities prior to Federation. Canberra: Department of Customs and Excise, 1965.
7. Department of Customs and Excise. Excise Tariff History (since 1901). Canberra: Department of Customs and Excise, 1965.
8. James D. Coffers or coffins? Government policy on death from smoking. Information and Research Services Current Issues Brief 1998;16(1997–8) Available from: http://www.aph.gov.au/
About_Parliament/Parliamentary_Departments/Parliamentary_Library/Publications_Archive/CIB/CIB9798/98cib16
9. Excise Regulations, 1925 (Cth). Available from: http://www.comlaw.gov.au/Details/F2012C00423
10. Excise Tariff Act 1921 (Cth). Available from: http://www.comlaw.gov.au/Details/C2012C00517
11. Excise Tariff Amendment Act 1983 (Cth). Section 6.4b Available from: http://www.comlaw.gov.au/Details/C2004A05276
12. Australian Tobacco Marketing Advisory Committee. Annual Report 1994: year ended 31 December 1994 regarding the operation of the Tobacco Marketing Act 1965. Canberra: Australian
Tobacco Marketing Advisory Committee, 1995.
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Available from: http://www.pc.gov.au/ic/inquiry/39tobacc
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Centre for Tobacco Control, 2007 Last modified February 2007 [viewed 2 February 2007]. Available from: http://www.vctc.org.au/article.asp?ContentID=eco_pt_tax
15. Customs Tariff Act 1995 (Cth). Available from: http://www.comlaw.gov.au/comlaw/management.nsf/lookupindexpagesbyid/IP200401908?OpenDocument
16. Scollo M. Closing the Loophole--The Need for Action in 1997. Melbourne, Australia: Anti-Cancer Council of Victoria, 1996.
17. Scollo M. Federal excise duty on tobacco--proposals for reform. Melbourne, Australia: Anti-Cancer Council of Victoria, 1998.
18. Dawkins J. Budget speech 1992-93. 18 August, Canberra: House of Representatives, 1992.
19. Dawkins J. Budget speech 1993-94. 17 August, Canberra: House of Representatives, 1993.
20. Willis R. Budget speech 1994-95. 10 May, House of Representatives, 1994.
21. Willis R. 1995-96 Commonwealth Budget. Canberra: The Parliament of the Commonwealth of Australia, House of Representatives, 1995.
22. Costello P. Budget 1998-99. Budget paper no. 2. Health and Family Services Budget measures. Canberra: Australian Government, 1998.
23. Costello P and Fahey J. Budget 1998-99. Final budget outcome 1998-99. Table 8, Revenue replacement payments to the States. Canberra: Australian Government, 1999. Available from:
http://www.finance.gov.au/publications/final-budget-outcomes/docs/Fbo9899.pdf
24. Australian Bureau of Statistics. 6401.0 Consumer Price Index, Australia Table 11. CPI: group, sub-group and expenditure class, index numbers by capital city. Canberra: ABS, 2011. Updated
26 October 2011 [viewed 30 December 2011]. Available from: http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6401.0Sep%202011?OpenDocument
25. Costello P. Budget 2000-01. Budget paper no. 1. Budget strategy and outlook. Statement 5: Revenue. Canberra: Australian Government, 2000. Available from: http://www.budget.gov.
au/2000-01/papers/bp1/html/bs5-01.htm#P57_5844
26. Costello P. Budget 2001-02. Budget paper no. 1. Budget strategy and outlook. Statement 5: Revenue. Part II: Budget estimates of revenue. Table 6, indirect tax. Canberra: Australian
Government, 2001. Available from: www.budget.gov.au/2000-01/papers/bp1/download/prelims.pdf
27. Costello P. Budget Speech, 2004-05. Canberra: House of Representatives, 11 May, 2004. Available from: http://www.budget.gov.au/2004-05/bp4/html/index.htm
28. Costello P. Budget 2004-05. Budget overview, Strong Families and Communities Strategy: Refocus on Early Childhood. Canberra: Australian Government, 2004.
29. Costello P. Budget 2005-06. Budget paper no.1. Budget strategy and outlook 2005-06. Part 3: Revenue, expenses and budget funding; Statement 5: Revenue; Appendix B: Description of
the revenue heads.Table B3: Excise rates Canberra: Australian Government, 2005. Available from: http://www.budget.gov.au/2005-06/bp1/html/bst5-06.htm
30. Costello P. Budget 2006-07. Budget paper no. 1. Budget strategy and outlook 2006-07. Statement 5: Revenue, Estimates of revenue. Appendix C: Description of the revenue heads. Table
C4, Excise rates Canberra: Australian Government, 2006. Available from: http://www.budget.gov.au/2006-07/bp1/html/bp1_bst5-08.htm
31. Costello P. Budget 2006-07. Budget paper no. 1. Budget strategy and outlook 2006-07. Statement 5: Revenue, Estimates of revenue. Tables 4 and 9: Excise and customs revenue. Canberra:
Australian Government, 2006 Last modified May 2006 [viewed 16 October 2006]. Available from: http://www.budget.gov.au/2006-07/bp1/html/bp1_bst5-03.htm
32. Costello P. Budget 2006-07. Budget paper no. 1. Budget strategy and outlook. Statement 5: Revenue, Estimates of revenue. Canberra: Australian Government, 2007. Available from: http://
www.budget.gov.au/2007-08/bp1/html/bp1_bst5-03.htm#TopOfPage
33. Swan W. Budget 2008-09. Budget paper no. 1. Statement 5: Revenue, Revenue estimates by revenue head. Canberra: Australian Government, 2008. Available from: http://www.budget.
gov.au/2008-09/content/bp1/html/bp1_bst5-04.htm
Section: 13.2.4
18
Facts and Issues
gov.au/2010-11/content/bp1/html/bp1_bst5.htm
gov.au/2011-12/content/bp1/html/index.htm
38. Australian Taxation Office. Excise duty on tobacco products. Canberra: ATO, 2012. Available from: http://law.ato.gov.au/atolaw/view.htm?docid=PAC/BL030002/1
24 April 2012 [viewed 25 April 2012]. Available from: http://www.abs.gov.au/AUSSTATS/abs@.nsf/allprimarymainfeatures/938DA570A34A8EDACA2568A900139350?opendocument
40. Business Franchise (Tobacco) Act 1974 (Vic).
41. Business Franchise (Tobacco) Act (replaced by Tobacco Products (Licensing) Act 1986, and finally by the Tobacco Products Regulations Act 1997 1974 (SA).
42. Business Franchise (Tobacco) Act 1975 (NSW).
43. Business Franchise (Tobacco) Act 1975 (WA).
44. Business Franchise (Tobacco) Act 1980 (Tas).
45. Business Franchise (Tobacco) Act 1981 (NT).
46. Business Franchise (Tobacco) Act 1984 (ACT).
47. Business Franchise (Tobacco) Act 1988 (Qld).
48. Australian Tobacco Board. Annual Report 1987: year ended December 1987 regarding the operation of the Tobacco Marketing Act 1965. Canberra: Canberra Times Print, 1988.
49. Australian Tobacco Marketing Advisory Committee. Annual Report 1991: year ended 31 December 1991 regarding the operation of the Tobacco Marketing Act 1965. Canberra: Canberra
Times Fine Print, 1992.
50. NSW Retail Tobacco Traders’ Association. Price lists--cigarettes. The Australian Retail Tobacconist 1990s;51 to 59(February editions):x-x.
53. Ha & Anor v State of New South Wales & Ors 71 ALJR 1080 at 1082 per, 1997. Available from: http://www.austlii.edu.au/au/cases/cth/HCA/1997/34.html
54. Costello P. Not a New Tax: a New Tax System. Canberra: Australian Government, 1998. Available from: http://archive.treasury.gov.au/contentitem.asp?ContentID=167&NavID=022
55. Costello P. Explanatory Memorandum: Excise Tariff Amendment Bill (no. 1) 2000. Canberra: Australian Government, 2000. Available from: http://www.aph.gov.au/library/pubs/bd/19992000/2000bd123.htm
56. A New Tax System (Goods and Services Tax Imposition—General) Act 1999 (Cth). Available from: http://corrigan.austlii.edu.au/au/legis/cth/consol_act/antsastia1999586/
57. A New Tax System (Goods and Services Tax Imposition—Excise) Act 1999 (Cth). Available from: http://www.comlaw.gov.au/comlaw/Legislation/ActCompilation1.nsf/0/A5166EC037FE
E339CA2570260027F867/$file/ANTSGoodsServTaxImpExcisesAct1999WD02.pdf
58. A New Tax System (Goods and Services Tax Imposition—Customs) Act 1999 (Cth). Available from: http://www.austlii.edu.au/au/legis/cth/consol_act/antsastia1999634/
59. Australian Taxation Office. The New Tax System: Information for Business. Canberra: Treasury, 2001.
60. World Health Organization, Achievement continues, but much work remains, in WHO report on the global tobacco epidemic, 2013 Enforcing bans on tobacco advertising, promotion and
sponsorship 2013, WHO: Geneva Available from: http://www.who.int/tobacco/global_report/2013/en/index.html.
61. Excise Tariff Amendment Act 1997 (Cth). Available from: http://www.comlaw.gov.au/ComLaw/Legislation/Act1.nsf/asmade/bynumber/A9B1843D9F303B0BCA256F720019352C?Open
Document
Section: 13.2.4
in Australia
19
Technical appendix 13.2.1
Abolition of state franchise fees on tobacco
Each state and territory had, over the years, developed different methods of collecting licence fees, with different
levels of fees, different due dates and a variety of other arrangements to suit local needs and politics.
The Commonwealth was anxious to honour its commitment to the States to make up the revenue lost from the
abolition of state franchise fees after the High Court ruled in August 1997 that these fees were unconstitutional.
However, one of the key platforms of the (opposition Coalition) government in power prior to the previous
election had been a promise not to increase taxes. A key political objective of the federal and some of the state
governments was thus to protect consumers from possible price rises in tobacco, alcohol and particularly
petroleum products.
Frantic negotiations ensued between state and federal representatives in the wake of the 1997 High Court
decision. The first ‘deal’ that emerged involved the Commonwealth collecting revenue set to equal the highest rates
applicable to each product in any jurisdiction. This meant that the Commonwealth would collect and distribute
$6.5 billion rather than the $5 billion formerly collected by the states and territories. The states and territories, in
turn, would provide rebates to manufacturers/wholesalers in lower taxing states, to ensure that no state received
windfall revenue and no consumers faced huge price hikes. Refer to the States Grants (General Purposes) Amendment Act
No. 1, 131 of 1997.
Within days, however, complications emerged in respect of tobacco. While Treasury officials had anticipated the
High Court ruling and had prepared to compensate the States in broad terms, it seems that no-one had carefully
enough thought through the precise details of exactly how revenue would be raised by the Commonwealth
and exactly how it would be collected. Treasury officials and (relatively new) government advisers involved in
negotiations with the States may not have had a very firm understanding of the price structure of cigarettes or the
intricacies of collection.
Following the ruling, the Commonwealth announced that the federal excise duty on tobacco would be increased
by $167 per kilogram (from $84.27 per kilogram). As had been predicted in the cigarette taxes and prices model
developed by the Anti-Cancer Council of Victoria, this led to an immediate price rise in budget cigarettes, in
particular in the Wills Horizon brand—heavier than its competitors Holiday (Rothmans) and Longbeach (Philip
Morris). As a consequence, WD and HO Wills lodged the strongest possible protest with the Treasurer’s office,
suspended sales and requested that its shares be suspended on the Australian Stock Exchange (Adams, 1997). Wills
Chairman, former NSW premier Nick Greiner, appealed to the Treasurer for the increased excise to be replaced
by an ad valorem tax. Rothmans and Philip Morris were also unhappy about the increased excise duty, which would
have increased prices by as much as $1.75 per packet, and raised an additional $500 million in revenue. They
objected, however, to the Wills proposal, which would have been much more advantageous for the Wills brands.
By the end of the week, confusion reigned and further desperate rounds of negotiations were taking place between
federal Treasury officials, officials in state governments and wholesalers and retailer associations for alcohol,
tobacco and petroleum products throughout the country.
Confronted by pressure from alcohol wholesalers and retailers, the Victorian, Queensland and Australian Capital
Territory governments agreed to fund the prepaid alcohol fees, thereby protecting consumers from a large increase
in low alcohol beer and wine prices (Pinkney 1997). South Australia and New South Wales initially resisted
pressure to provide such refunds, (correctly as it turns out) asserting that they would miss out on revenue once the
Commonwealth took over responsibility for revenue collection, and collections were made on a cash rather than an
accrual basis. The Western Australian government was then very concerned about the impact on its total revenue:
it had been counting on the over-payments from alcohol and tobacco to subsidise low alcohol beer, cellar door
wine sales and petrol prices for off-road users, previously exempted from the state’s fuel levy. Western Australia,
supported by South Australia and Tasmania, boycotted talks on 25 August with tobacco companies initiated by the
Commonwealth (Washington 1997).
By the beginning of September, confusion had degenerated into chaos, and the federal Treasurer had little choice
but to threaten withdrawal of the safety net unless the states agreed to his plan. The deal that emerged was a series
of trade-offs between all the parties concerned, with the federal government more or less achieving its aims of:
Section: Technical appendix 13.2.1
20
Facts and Issues
maintaining total revenue for the states, even if revenue from individual products might be reduced; minimising
price rises particularly of low alcohol products and petrol; and in the case of tobacco, treating each of the three
manufacturers in an equitable manner.
In the end, the legislation instituted to cover the new arrangementsessentially replicated (exclusively at the federal
level rather than at federal and state level) the tax and price structure in place on cigarettes prior to the High Court
ruling.
Two pieces of legislation were passed to put these cumbersome arrangements into law.
First was the States Grants (General Purposes) Amendment Act (No. 2) 1997, which amended the States Grants (General
Purposes) Act 1994. This determined a revised share of revenue to go to each state, roughly in line with previous
expected revenue, but taking into account concerns raised by a number of the smaller states.
The second piece of legislation related to the manner in which the surcharge on tobacco was to be raised. On
17 September 1997, the government gazetted a new regime for the taxing of cigarettes, later to be instituted in the
Excise Tariff Amendment Act (No. 5) 1997.61 After lobbying by manufacturers concerned about the differential effect of
the proposed new arrangements on each company’s products, the legislation in the end was formulated in a way
that replicated the tax structure that was in place prior to the High Court decision. That is, part of the formula for
determining excise (and customs) duty was based on weight, and part on the wholesale value of the product sold.
The weight-based excise on tobacco increased from $84.27 to $86.92 per kilogram. The value-based component
increased from 100% of the wholesale value of tobacco products to about 101.3%. The new schedule stated that
the state surcharge would be based on 50.32% of the listed wholesale price, which is mathematically equivalent
to 101.3% of the pre-wholesale price, just 1.3% higheri than the level that had been applicable under the states’
business franchise legislation.
i
This component was to cover the cost of administering the new arrangement.
in Australia
21
13.3
The price of tobacco products in Australia
As in other industries, the costs of raw materials, manufacturing, promotion and distribution of tobacco products
are important in determining profits to tobacco growers, manufacturers, wholesalers and retailers. However,
because tax is such a substantial component, the level and nature of tobacco duties, fees and taxes—rather than
production and marketing factors—have generally been the main determinants of the final retail price of cigarettes
over time in Australia as in most developed countries.
This section examines the extent to which increases in tobacco taxes have resulted in rises in the price of cigarettes
and other tobacco products in Australia. It outlines efforts by manufacturers to reduce the impact of increases in
taxes, both by minimising tax liability and by encouraging discounting at the retail level.
13.3.1
Recommended retail price of tobacco products
Since 1940, the NSW Retail Tobacco Traders’ Association has been printing and distributing to small retailers
in all states and territories lists of the wholesale and recommended retail prices for virtually all cigarettes, cigars,
pipe and roll-your-own tobacco sold in Australia.1–3i Copies of the publication preserved at the National Library of
Australia and several other libraries throughout the country provide recommended prices for any tobacco product
available for sale in any state or territory since that date.
13.3.1.1
Changes over time in the recommended retail price of a standard pack
Prices for Craven A cork tip 20s, a brand of cigarettes popular in the 1940s, ’50s and ’60s in Australia, and one of
a handful of brands available in 1940 that was still available in 2012ii, are listed in Table 13.3.1. When examining
the cost of tobacco products over time, it is useful to take into account the effects of inflation—the costs of buying
all goods and services. Table 13.3.1 also indicates the price
adjusted to take into account changes in the Consumer
8
Price Index (CPI). (The CPI uses 1989–90 as the base year,
$7.45
the year when the index is set to 100, so it is convenient to
7
$6.60
express prices in 1989–90 dollars. This table also expresses
6
$5.45
the price in 2000 dollars.)
5
Figure 13.3.1 plots the price of Craven As in $1989–90 at
five-year intervals between 1940 and 2010.
4
Table 13.3.1 shows that the price of a packet of Craven As
increased 85-fold between 1940 and 2010. However, as is
evident from Table 13.3.1 and Figure 13.3.1, adjusting for
inflation, Craven As cost no more in the early 1990s than
they did in real terms during and immediately after the
Second World War. Prices increased substantially from
the early 1990s. In real terms the price in 2010 was almost
double what it was in 1940—a real price increase of 99%.
2
3
$3.75
$3.46
$3.95
$3.22
$2.40
$2.37
$2.57
$2.26
$2.34
$2.26
$2.43
$2.80
1
0
1940 1948 1950 1955 1960 1965 1970 1975 1980 1985 1990 1995 2000 2005 2010
Figure 13.3.1 Price of Craven A 20s, Australia, 1940–2010
Sources: NSW Retail Tobacco Traders’ Association 1940 and 1948;1 1950 1955, 1960 and 1965;2
1970 and 1975;4 1980 and 1985;5 1990 and 1995,6 2000 and 20057 and 201010
Note: Dollar rate expressed in 1980–90 dollars
i
ii
A small number of brands (such as Tradition, Deal, Harvest and Bayside are sold only from Coles, produced under special arrangement with a manufacturer in Germany.
Other brands available over the entire period include Ardath, Black and White, Camel, Dunhill, Du Maurier, Kool and Lucky Strike. Craven A cork-tipped was replaced by Craven A classic in
2005 and removed from retail price lists in 2006. From 2006, Craven A was only available with filters. From 2007 it was available only in packs of 25.
Section: 13.3.1.1
22
Facts and Issues
13.3.1.2
Table 13.3.1 The large pack: a peculiarly
Australian phenomenon
Price of a packet of 20 Craven As, Australia, 1940–80, selected years, then 1980–2012
Year
In response to rising awareness about health
effects and the introduction and steady
increase in state business franchise fees on
tobacco, over the 1960s, 1970s and 1980s
manufacturers introduced many new brands
and variants of existing brands that differed in
the amount of tar measured and the number of
cigarettes in each pack.
1940
1948
1950
1955
1960
1965
1970
1975
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Most cigarettes were unfiltered in the early
part of the century but by the end of the 1960s
most were sold with filters. Cigarettes in the
early part of the century were also commonly
sold in packets of 10 or 20 or in tins of 50.
These were similar in size to the tins in which
loose tobacco was commonly sold. With the
advent of plastic wrapping, however, these
tins disappeared and by 1960 the vast majority
of cigarettes were sold in packets of 20. The
increasing rate of state licence fees had a
significant impact on the price of brands that
were popular until the early 1970s. However
the tobacco industry fought back to retain its
customers and the introduction of Winfield 25s
‘5 smokes ahead of the rest’ in 1976 marked the
advent of the large pack size in Australia.
Until 1999, Australia was virtually the only
country in the world that combined an excise
based on weight and ad valorem fees based on
wholesale value of sales. Until 1999, lighter
cigarettes attracted less federal excise and
customs duty than heavier cigarettes. This
effect was amplified by the manner in which ad
valorem fees were imposed and final retail price
calculated, providing an incentive for lighter
cigarettes and for packaging many cigarettes
in the same packet.11 The introduction of
large pack sizes in Australia closely followed
the introduction in 1975 and the subsequent
doubling in about 1987 of state franchise fees
throughout Australian states. In most other
countries in the world, cigarettes are virtually
always sold in packets of 20.
While the price per stick of the most popular
brand rose quite sharply as a result of a number
of increases in duty and state licence fees on
tobacco, the price per stick of the cheapest
Section: 13.3.1.2
Price pxer pack ($)
(current dollars*)
1 shilling sixpence (15 cents)
2 shillings threepence (23 cents)
2 shillings fivepence (24 cents)
2 shillings ninepence (28 cents)
3 shillings twopence (32 cents)
3 shillings sixpence (38 cents)
0.39
0.63
1.02
1.05
1.31
1.31
1.54
1.65
1.89
2.13
2.28
2.44
2.80
3.01
3.42
4.15
4.37
4.50
5.08
5.90
6.10
6.40
6.80
7.95
8.25
8.60
8.75
9.70
10.25
10.36
10.72
11.60
12.68
15.52
10.36
Price per pack ($)
(1989–90 dollars)
3.75
3.46
3.22
2.40
2.37
2.57
2.26
2.34
2.26
2.12
2.40
2.15
2.37
2.43
2.57
2.65
2.64
2.64
2.80
2.86
3.19
3.83
3.96
3.95
4.28
4.91
5.07
5.25
5.45
6.01
6.07
6.14
6.10
6.60
6.76
6.64
6.64
6.97
7.45
8.84
6.64
Price per pack ($)
(2000 dollars)
3.86
3.99
3.84
3.62
4.09
3.67
4.03
4.14
4.38
4.51
4.50
4.49
4.77
4.87
5.43
6.52
6.74
6.73
7.29
8.35
8.64
8.95
9.28
10.24
10.33
10.45
10.39
11.24
11.51
11.30
11.31
11.87
12.68
15.05
Sources: NSW Retail Traders’ Association 1940 and 1948;1 1950 1955 1960 and 1965;2 1970 and 1975;4 and 1980 to
20125–9
*
Current price: the price in the applicable year; no adjustment has been made for inflation
23
in Australia
pack on the market (Winfield 25s in the 1970s, Peter Jackson 30s
in the 1980s, Longbeach 40s briefly in the 1990s and then Holiday
50s) increased only in line with the CPI.
Not surprisingly, large packs quickly became a dominant
component of the market (see Figure 13.3.2).
70
20s
60
25
30s to 50s
50
40
While the recommended retail prices of premium brands of
cigarettes such as Marlboro, Dunhill, Benson and Hedges and
Craven A rose steadily from the early 1980s, consumers concerned
about price have always been able to purchase cigarettes that are
substantially cheaper per stick.
Figure 13.3.3 plots in more detail the recommended retail price
of the leading brand of cigarettes over time, indicating some of
the major changes in taxation arrangements between 1940 and
2011, and some of the major innovations with which the industry
responded to those changes.
30
20
10
0
1981
1985
1987
1990
1993
1997
Figure 13.3.2 Market share for 20s, 25s and larger pack sizes in Australia, 1981 to
1997 (% of total sales)
Sources: NSW Retail Tobacco Traders’ Association;5, 6 Euromonitor International 201212
Once again Figure 13.3.3 shows that the effects of early increases
in state licence fees were mitigated by the introduction of larger
and larger pack sizes providing cigarettes at a cheaper cost per
stick than those available in smaller pack sizes.
Notes: Using Nielsen data for the months November and December (all sectors), published
irregularly in The Australian Retail Tobacconist;5,6 for the 12 months to September 1997,
grocery only Retail World, 24 December 1997
40
Increase in excise
and customs duty
35
Excise increases
30
25
20
High inflation
erodes value
of excise
15
Excise reform
Steep increases
in state fees
Health groups campaign
for excise reform
Introduction of 50s
Winfield –‘5
Introduction
Victorian Office of Prices report
smokes ahead Introduction
highlights problem of large packs
of 30s, 35s of 40s
of the rest’
10
5
0
Catch up excise
increase plus
commencement
of indexation
Introduction
of GST
1940
1955
1970
1981
1984
1987
1990
1993
1996
1999
2002
2005
2008
2011
Figure 13.3.3
Price of the most popular cigarettes in Australia, 1940–2011 (cents per stick)
Sources: NSW Retail Tobacco Traders’ Association 1940 and 1948, 1950s and 1960 to 1966, and 1966 to 2011;1–3 Australian Bureau of Statistics 2012;13 Victorian Office of Prices 199014
Note: Prices expressed in 1989–90 dollars
It was not until the very large increases in state fees and excise duty in the mid-1990s that cigarettes became
significantly more expensive.
Recommended retail prices increased steadily over the late 1990s so that, in real terms, by 2001 the recommended
retail price of cigarettes was almost three times greater than what it had been in 1948.
As outlined in Section 13.2.1, health groups argued for reform of tobacco taxes11,15–17—See technical appendix 13.3.1
for further details— and a new system was introduced between 1999 and 2001, after which time the price per stick
of cigarettes in large pack sizes became much closer to the price per stick in smaller pack sizes.
Section: 13.3.1.2
24
Facts and Issues
Figure 13.3.4 plots price movements since 1990, reflecting
the effects of increases in excise duty and state fees
throughout the 1990s and the impact of the implementation
between November 1999 and February 2001 of the
government’s new tax system. Note that in this index,
all prices are set to 100 in the base year (1990), so that
increases are relative to 1990 prices for the same brand.
Figure 13.3.4 shows that between 1990 and 2001 cigarette
prices increased well above the inflation rate. The biggest
increases occurred in the cheapest and most popular brands
corresponding with the change to the per stick system in
1999 and the introduction of the GST in July 2001. Between
1998 and 2001, prices of value brands of cigarettes increased
between 30% and 40%.20
While prices of cheapest and premium brands rose in
parallel in the early 1990s, from 1999 the cheapest brands
increased to a much larger extent than the premium brands,
thus demonstrating the effectiveness of the November 1999
tax reforms.
800
700
600
500
400
300
200
100
0
1990 1993 1996 1999 2002 2005 2008 2011
Figure 13.3.4 Cigarette price movements in Australia, 1990–2011 (NB: this is an
index rather than actual prices, with all notional prices set to 100 at
1990)
Sources: Australian Bureau of Statistics 2021 13 Table 18; NSW Retail Tobacco Traders Association
2000s and 19997,19
With the pack price for Horizon and Holiday 50s
approaching $30 in April 2012 (Table 13.3.2 and Figure
13.3.5), it seems that the dominance of large packs in
Australia may have ended. In February 2012, it cost almost
$13 more to buy a pack of 50s than a pack of 25s.
35
30
25
20
15
Sales of larger pack sizes in Australia in 2010 were lower
than they had been since any time before they first emerged
in the mid-1980s—refer Table 13.3.3.
20s
25
30s to 50s
60
50
40
5
Feb Jan Jan Feb Feb Feb Feb Feb Feb Feb Feb Feb Feb Feb
72 75 78 81 84 87 90 93 96 99 02 05 08 11
Figure 13.3.5 Recommended retail price of top five-selling brands of cigarettes,
February 1970 to February 2012
Sources: NSW Retail Tobacco Traders’ Association 1990s6 and 2000s7,10,8,9 and author
calculations
In current dollars: the price in the applicable year; no adjustment has been made for
inflation
the proportion of regular student smokers using 40s and
50s—see Figure 13.3.7.
20
10
0
0
*
30
Winfield 25s
Peter Jackson 30s
Benson & Hedges 25s
Longbeach 40s
Horizon 50s
Holiday 50s
10
Use of packs of 30s and 35s also declined among secondary
school students although there has been little change in
70
Price per stick,
cheapest brand, cents
Price per stick,
most popular brand, cents
Price per stick,
premium brand, cents
CPI
Tobacco price index
1981 1985 1987 1990 1993 1997 2001 2004 2007 2010
Figure 13.3.6
Percentages of sales of each pack size of cigarettes in Australia 1981
to 2010—20s, 25s, 30s and 35s, 40s and 50s
Sources: Nielsen data for sales in November and December, published irregularly in The
Australian Retail Tobacconist;5,6 12 months to September 1997, Grocery only, Retail
World 24 December 1997, Eurormonitor 201021 and 201212
Section: 13.3.1.2
Between 1999 and 2002, during the period of reform of the
tax system, the percentages of secondary school students
using large packs declined by about 18%, which included
a 29% reduction in the percentage of teenage smokers
preferring 40s, and a 32% reduction in the percentage
preferring 50s.
in Australia
25
Table 13.3.2 Retail prices of leading brands, Melbourne, Australia, April 2012: recommended retail price and supermarket price per pack, and per stick and per pack price
differential between largest and smallest pack size
Winfield 25s
Peter Jackson
30s
Benson &
Hedges 25s
2.94
3.08
3.57
4.45
4.72
5.11
6.47
6.53
6.70
7.05
7.35
8.70
9.10
9.50
9.85
10.30
10.70
11.25
11.70
12.40
12.95
16.45
17.15
3.14
3.32
3.87
4.85
5.22
5.66
7.15
7.22
7.4
7.81
8.41
9.95
10.45
10.85
11.25
11.7
11.99
12.6
13.1
13.85
14.45
18.25
18.9
3.20
3.68
4.56
4.84
5.20
6.57
6.70
6.90
6.90
7.50
8.95
8.95
9.35
9.80
10.15
10.60
11.05
11.55
12.00
12.70
13.40
16.85
17.95
Longbeach 40s
Horizon 50s
Holiday 50s
% largest pack
size cheaper per
stick
$ difference
highest to
lowest cost
3.08
3.47
4.25
5.86
6.39
7.01
9.01
8.76
9.00
9.51
10.81
12.75
13.25
13.70
14.25
14.95
15.25
15.95
16.70
17.50
18.10
23.10
24.80
4.68
6.75
7.42
8.25
10.39
10.52
10.80
11.45
13.13
15.42
16.10
16.65
17.35
17.95
18.60
19.45
20.30
21.30
22.10
27.75
29.80
3.57
4.56
6.65
7.19
7.91
9.70
9.65
9.90
10.55
12.75
15.00
15.60
16.15
16.40
17.50
18.15
19.00
19.85
21.25
21.90
27.55
29.80
–51
–50
–31
–31
–40
–28
–30
–28
–30
–29
–16
–17
–18
–19
–17
–18
–18
–17
–16
–18
–18
–17
0.60
0.99
2.30
2.70
3.14
3.92
3.99
4.10
4.40
5.78
6.72
7.00
7.15
7.50
7.65
7.90
8.20
8.60
8.90
9.15
11.30
12.65
$*
Feb-90
Feb-91
Feb-92
Feb-93
Feb-94
Feb-95
Feb-96
Feb-97
Feb-98
Feb-99
Feb-00
Feb-01
Feb-02
Feb-03
Feb-04
Feb-05
Feb-06
Feb-07
Feb-08
Feb-09
Feb-10
Feb-11
Feb-12
Sources: NSW Retail Tobacco Traders’ Association 1990s6 and 2000s7–10 and author calculations
*
In current dollars: the price in the applicable year; no adjustment has been made for inflation
Table 13.3.3. Percentages of sales of each pack size of cigarettes in Australia 1981 to 2010—20s, 25s, 30s and 35s, 40s and 50s
1981
1985
1987
1990
1993
1997
2001
2004
2007
2010
20s
37.3
22.6
13
6.7
4.6
2.1
11.5
13.5
15
15.9
25s
62.1
47.1
48.3
41.8
35.2
29.8
37
39.5
43.5
44.7
30s and 35s
40s
50s
29.1
37.1
37.3
20.7
21.5
23
22
21.5
21.0
14.2
19.1
23.3
15.5
14.5
11.5
10.6
19
23.3
13
10.5
8.5
7.8
30s to 50s
0
29.1
37.1
51.5
58.8
68.1
51.5
47
42.5
39.4
Source: Nielsen data for sales in November and December, published irregularly in The Australian Retail Tobacconist;5,6 12 months to September 1997,
Grocery only, Retail World 24 December 1997, Euromonitor 201021 and 201212
Section: 13.3.1.2
26
Facts and Issues
20s
45
25s
30s to 35s
40s
50s
40
50
35
30
51.1
48.5
39.6
40
25
35.0
35.7
2005
2008
32.3
30
20
20
15
10
10
5
0
60
1996
1999
2002
2005
2008
2011
Figure 13.3.7
2002, 2005, 2008 and 2011 (%)
Sources:White V personal communication, using data from surveys of secondary school students
reported in Hill, White and Effendi;22 and White and Hayman 2004,23 2006,24 White
and Smith 200925 and White and Bariola 201226 [multiple responses allowed]
0
1996
1999
2002
2011
Figure 13.3.8
2002, 2005, 2008 and 2011(%)
Sources:White V personal communication, using data from surveys of secondary school students
reported in Hill, White and Effendi;22 and White and Hayman 2004,23 2006,24 White
and Smith 200925 and White and Bariola 201226
13.3.2
Prices at which tobacco products are sold/purchased
Working out the price of cigarettes and other tobacco products is by no means a straight-forward matter. The
prices at which cigarettes are offered for sale may differ significantly from those recommended by manufacturers.
Many different brands of cigarettes are sold—more than 50 in Australia in 20129—from many different
outlets—there were more than 35 000 outlets in Australia in 2004.27,28 Some types of outlets are more likely to
sell at discounted prices, but not all brands are discounted to the same extent within the same periods of time.
Obtaining a representative sample of prices for even a single brand over time would be a costly exercise. Obtaining
a representative sample of prices for a large number of brands is simply not feasible.i Many researchers attempt
to address this difficulty by using prices of just the brand of cigarettes most popular in the population they are
studying, but this may not give a picture representative of the entire cigarette market due to consumers seeking to
minimise costs by shifting to cheaper brands or pack sizes, bulk purchasing, or shopping at lower-cost outlets.
In the study by Ross and Chaloupka29 discussed in Section 13.1.5 above, the average cost of cigarettes in a
particular state (as calculated by industry sales records) correlated only weakly with the cost (in their local store)
of the brand of cigarettes preferred by secondary school students. The study found that consumption fell much
more dramatically in response to changes in prices reported by teenagers than to changes in state-average cigarette
prices. The choice of indicator for price may critically affect the outcome of research on price effects, and, as
demonstrated in Section 13.3.1.2, the pricing policies adopted by companies may undermine the effectiveness of
tax policy as a means of discouraging tobacco consumption.
13.3.2.1
The Cigarettes and Tobacco Sub-group of the Consumer Price Index
The longest-running indicator available of the actual price of cigarettes for sale in Australian shops is provided
by the component of the Tobacco and Alcohol Sub-Index of the CPI that covers tobacco products.ii The CPI and
its sub-indexes are constructed each quarter by the Australian Bureau of Statistics in in-shop surveys monitoring a
‘basket’ of goods that might be purchased by a typical Australian household.30 Table 13.3.4 shows the average index
i
ii
In the US, tobacco companies publish detailed information on the average price of each brand based on sales data.
Cost-of-living surveys published at various times have tracked the price of a single brand of cigarettes, but none of these has been regular and long-running.
Section: 13.3.2.1
in Australia
27
figure for the Cigarettes and Tobacco Sub-group of the Tobacco and Alcohol Sub-index of the CPI for each year
since it was first published in 1973.
Table 13.3.4
Cigarettes and Tobacco Sub-group of the Tobacco and Alcohol Sub-index of the CPI, average all capital cities, all quarters, 1973–2011 (annual average index figure)
Year
ending
June
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
Cigarettes and
Tobacco Sub-group
of CPI
14.8
16.3
19.4
24.2
26.5
27.3
31.0
33.7
35.4
38.4
Year
ending
June
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
Cigarettes and
Tobacco Sub-group
of CPI
45.0
54.5
59.7
66.7
74.8
81.0
88.7
100.0
112.8
124.0
Cigarettes and
Tobacco Sub-group
of CPI
Year
ending
June
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
Year
ending
June
2003
2004
2005
2006
2007
2008
2009
2010
2011
149.4
171.0
186.1
222.8
232.1
239.8
249.3
268.2
320.1
343.5
Cigarettes and
Tobacco Sub-group
of CPI
358.5
374.3
388.5
405.35
423.1
438.1
464.3
496.2
608.6
Sources: Australian Bureau of Statistics 201230
Note: Cigarettes and Tobacco Sub-group averaged for each year
Figure 13.3.9 plots the Cigarettes and Tobacco Sub-group of
the CPI against the overall index since 1973.
It is evident from Table 13.3.4 and Figure 13.3.9 that prices
as determined in the Australian Bureau of Statistics price
survey have risen significantly over time, and have been
well above increases in other goods and services since the
early 1990s. Prices rose above CPI even between 2001 and
2009, during which time the excise and customs duty on
tobacco products was increased only in line with the CPI,
indicating increased margins to manufacturers and retailers
(and also to state governments in GST revenue).
13.3.2.2
Discounting in the tobacco market
700
600
Tobacco CPI
500
400
300
200
Annual CPI
100
0
Jun-73 Jun-78
1983
1988
1993
1998
2003
2008 2011
Figure 13.3.9 The Consumer Price Index, 1973–2011: Cigarettes and Tobacco
Sub-group compared with overall index
Sources:Australian Bureau of Statistics 201213
Note: Consumer Price Index and CPI Cigarettes and Tobacco Sub-group18
While many small retailers such as proprietors of local
corner storesi and fast-food outlets sell cigarettes at the
recommended prices, the majority of cigarettes in Australia are sold at considerably lower prices. As well as selling
single packets of cigarettes at well below the recommended prices, most supermarkets and tobacconists also
sell cigarettes in cartons at a discounted rate. In its 1994 report on the cigarette industry, the Prices Surveillance
Authority noted various common forms of discounting, including lower prices for stock bought in high volumes,
and the phenomenon of ‘specialling’ where manufacturers encourage high-volume retailers (especially tobacconists
and supermarkets) to discount one or two of that company’s brands for a week or longer periods.31
An in-shop study undertaken through the period May 1997 to February 2001 by the Centre for Behavioural
Research in Cancer32 indicated significant discounting of cigarettes over that period. The study surveyed the pack
i
Known in various Australian states as milk bars, dairies or delicatessens
Section: 13.3.2.2
28
Facts and Issues
and carton prices of the five most popular brands of cigarettes in each state in a selection of all the major types of
stores in a sample of suburbs in each major urban centre throughout Australia. On average, cigarettes in Australia
were sold at 5.75% lower per stick than the recommended retail price, with considerable variation between brands
and outlet types. Average discounting ranged from 4.4% for Benson and Hedges 25s to 6.8% for Horizon 50s.
Petrol stations tended to sell
Table 13.3.5 cigarettes at slightly higher
Retail prices of leading brands, Melbourne, Australia, April 2012: recommended retail price and supermarket
than the recommended
price per pack, per carton and per stick
retail price (about 0.3%
higher across the study
period) but discounting was
Recommended
common in supermarkets and
Supermarket price
retail price
tobacconists (with an average
Selection of most popular
% by which
discount of 9.3% and 10.9%
Per stick
brands in Australia
Per
Per
Per
supermarket carton
Per stick
price in
respectively). Per stick prices
pack
pack
carton price is cheaper per
cartons
of cigarettes sold in cartons
stick stick/carton
were about 14% lower than
$*
those sold in single packs.
Winfield Blue 25s, hardpack
0.6900 17.15
17.11 0.6633 132.65
–3.9
Table 13.3.5 sets out the
retail prices of a number of
popular brands, comparing
the recommended retail
price with pack and carton
prices as at April 2012 at
one of Australia’s major
supermarkets.
Peter Jackson Rich 30s hardpack
Benson & Hedges Smooth 25s hardpack
Dunhill Distinct 25s hardpack
Longbeach Rich 40s hardpack
Marlboro Gold 25s
Horizon Blue 50s
0.6300
0.7200
0.7200
0.6200
0.7200
0.6000
18.9
17.95
17.95
24.8
17.95
29.80
16.11
17.67
17.63
25.12
17.77
28.03
0.6065
0.7267
0.6786
0.6044
0.6862
0.5382
109.17
145.34
135.72
96.71
137.24
107.64
–3.7
0.9
–5.8
–2.5
–4.7
–10.3
Sources: Convenience and Impulse Retailing 2009,33 NSW Retail Tobacco Traders’ Association 2012,9 and Woolworths 201234
*
In current dollars: the price in the applicable year; no adjustment has been made for inflation
13.3.2.3
Prices paid as reported by smokers
An alternative approach to calculating prices of tobacco products is to ask smokers what they paid for their last
packet of cigarettes or smoking tobacco. While not suitable for all research purposes, such data do provide very
accurate information about price as actually experienced by consumers.
Studies based on interviews with US tobacco users have indicated significant recent increases in the percentages
of smokers turning not just to cheaper brands, but also to cheaper forms of tobacco (roll-your-own and chewing
tobacco); cartons in preference to packets; discount outlets; and, where this is convenient, duty-free and illicit
tobacco products.35 In Australia, following the abolition of state business franchise fees on tobacco, there was
a similar shift to roll-your-own including illicit ‘chop-chop’ (see Section 13.7), and to cartons and to discount
outlets.36 Changes to tobacco taxes in 1999 made it much less attractive for smokers to turn to larger pack sizes and
budget brands as a means of cushioning themselves from tax increases, and as intended, following introduction
of reforms, smokers shifted back to smaller pack sizes with a lower up-front purchase price.20 An annual survey
undertaken to track the effects of the National Tobacco Campaign provides data on prices paid by Australian
smokers between 1997 and 2000.32 Comparing the results of this survey with the data collected in the price
monitoring survey, it is clear that a significant proportion of smokers in Australia must be purchasing cigarettes at
discounted prices.
Figure 13.3.10 plots the recommended retail price of Peter Jackson 30s, one of the top-selling brands, against
the average reported prices paid by a representative sample of consumers. It also plots the average price of Peter
Jackson 30s observed in the price monitoring survey when purchased in packs from convenience stores and when
purchased in cartons in discount stores.
Section: 13.3.2.3
in Australia
As is evident from Figure 13.3.10, the actual price that
consumers report they pay is significantly lower than
the recommended retail price and the average price
of packets of cigarettes sold in convenience stores. It
is much closer to the average price of packets sold in
cartons from discount outlets.
Technical attachment 13.3.2 sets out data on prices paid
for nine different brands of cigarettes collected from
Australian smokers interviewed as part the International
Tobacco Control Policy Evaluation Study for the years
2002–10.37 Figure 13.3.11 plots the average reported
prices paid for all brands (weighted by brand share)
against average recommended retail prices (weighted for
brand share and not weighted).
Between 2002 and 2010, the prices reported paid by
consumers continued to be substantially lower than those
recommended by retail trade associations.
While it is possible that consumers misremember and
round down prices, clearly the recommended retail
prices overestimate the actual prices paid by consumers.
Indexes such as the CPI based on price monitoring
surveys may also significantly overestimate prices
experienced by consumers unless sampling is adjusted
to take account of changing sales patterns, in particular
those reflecting consumer efforts to seek lower prices.
13.3.3
International comparisons of the
price of tobacco products
To accurately assess the pricesi of Australian cigarettes
compared with those sold in other countries, it is
important to use consistent methods for collecting
price data. Estimated prices for a single country will
vary widely depending on the brand and brand variant
selected and the sorts of retail outlets from which data
are collected.
29
35
30
25
20
Recommended
Monitored packs,
convenience sector only
Reported
Monitored price cartons
only discount sector only
15
10
5
0
Nov Mar Jul Nov Mar Nov Mar Jul Nov Mar Jul Nov
1996 1997 1997 1997 1998 1998 1999 1999 1999 2000 2000 2000
Figure 13.3.10 Price of one Peter Jackson 30s cigarette, 1997–2000, Australia:
recommended retail price, monitored price and price reported paid by
smokers
Sources: NSW Retail Tobacco Traders’ Association 1990s and 2000s;6, 7 Scollo et al 200320
Note: In current dollars: the price in the applicable year; no adjustment has been made for inflation
0.7
0.6
0.5
0.4
0.3
Average RRP, unweighted
RRP weighted by use
Weighted reported average
0.2
0.1
0.0
2002
2003
2004
2005
2006
2007
2008
2009
2010
Figure 13.3.11 Recommended retail prices per cigarette of leading brands in 2002–10
versus reported prices paid by consumers (cents per stick)
Sources: NSW Retail Tobacco Traders’ Association 2000s;7 Email to Michelle Scollo, Cancer Council
Victoria, 2006, from Li Q, Roswell Park Cancer Institute Buffalo, NY, on prices of Australian
cigarettes from Waves 2 to 4 of the International Tobacco Control Policy Evaluation Study and
by Timea Partos, Cancer Council Victoria, Waves 5 to 10, 2012
13.3.3.1
International comparisons of cigarette prices
Many different brands of cigarettes are sold in any country, but Philip Morris’ Marlboro is one brand that is sold
in just about every country in the world. Figures 13.3.12 and 13.3.13 show data from the Economist Intelligence
Unit, which surveys the price of a range of consumer products twice each year in most major cities throughout the
world. Figure 13.3.12 shows the price (expressed in US dollars) of a typical pack of cigarettes sold in a sample of
moderately priced stores in 33 major capital cities in 2010. In many countries, Marlboro is seen as a luxury brand,
i
This section concentrates on prices only. For a full understanding of the costliness of cigarettes in Australia compared to cigarettes in other countries, see also Section 13.4.3. This assesses
the relative affordability of cigarettes in different countries, examining prices relative to the cost of other goods and to income-earning capacity.
Section: 13.3.3.1
30
Facts and Issues
and the majority of smokers regularly use much cheaper
locally produced brands. Figure 13.3.13 shows the prices
in 2011 of Marlboros in moderately priced stores and the
price charged by supermarkets for the most popular brand
of cigarettes in each of a number of cities comparable with
major Australian capital cities.
Marlboro cigarettes in Australia were among the most
expensive in the world in 2011, cheaper only than
Marlboros sold in the Oslo. The most popular brand of 20s
sold in Australia also appears to be more expensive that
the most popular brand in every other country other than
Norway.i
Oslo
Sydney
London
Ireland
Toronto
Auckland
Singapore
Paris
Geneva
Iceland
New York
Stockholm
13.3.3.2
International comparisons of prices paid
The International Tobacco Control Policy Evaluation
Study provides ongoing data for the countries involved in
the study, on a range of tobacco-control policy indicators,
including the type of venue from which smokers purchased
cigarettes and what they paid.41 Analysis of data from the first
two waves of the study (between October and December
2002, and then May to July 2003) shows that, while
Australian smokers were much less likely to purchase from
untaxed sources, they were much more likely to purchase
from groceries and other discount stores in preference to
petrol stations and other convenience stores. The average
price per stick paid by smokers in each country in phase
two of the study—excluding prices paid for untaxed
cigarettes—adjusted to 2002 US dollars—were 35c in the
UK, 23c in Canada and the US, and 20c in Australia.
Helsinki
Amsterdam
Brussels
Copenhagen
Berlin
Rome
Luxembourg
Madrid
Tokyo
Prague
Johannesburg
Warsaw
Budapest
Kuala Lumpur
Bangkok
Mexico City
Beijing
Moscow
Cairo
Buenos Aries
Jakarta
Manilla
$0.00
$2.00
$4.00
$6.00
$8.00
$10.00
$12.00
$14.00
$16.00
typical local brand, 20s, as sold in supermarkets
Sources: Eriksen, Mackay and Ross 201238 using data from Economic Intelligence Unit 201039
Note: In current US dollars: the price in the applicable year; no adjustment has been made for
inflation
i
The price of the top-selling brand of cigarettes in Sydney, Melbourne, Perth and Brisbane is probably somewhat overstated in this survey, because it is based on the price of a pack of 20s.
In Australia, the vast majority of smokers would be buying cigarettes in packets of 25 or 30 rather than 20 which, even after the excise reforms in 1999, would still be somewhat cheaper
per stick than cigarettes sold in 20s.
Section: 13.3.3.2
in Australia
31
Los Angeles
Stockholm
Helsinki
Reykjavik
Paris
New York
Toronto
London
Auckland
Dublin
Brisbane
Perth
Sydney
Melbourne
Oslo
0
5
10
15
20
standard pack of Marlboro 20s in moderately priced stores and typical
local brand, 20s, as sold in supermarkets
Source: Economic Intelligence Unit 201240
Note: In current US dollars: the price in the applicable year; no adjustment has been made for
inflation
Section: 13.3.3.2
32
Facts and Issues
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33
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Section: 13.3.3.2
34
Facts and Issues
Why health groups were concerned about large pack
sizes
Budget brands in Australia were on average about 10%
lighter per stick than premium brands, however they
attracted almost 20% less tax and were more than 20%
cheaper.11 Table TA13.3.1 sets out the recommended
price per stick for Rothmans brands in Victoria
between 1980 and 1993, together with the weighted
average price of all brands in each year, taking into
account the actual prices for which cigarettes were
sold and the market share of each brand.
Figure TA13.3.1.1 plots the recommended prices for
each price category.
Table TA 13.3.1 Recommended price per stick, Rothmans brands Melbourne, Australia,
1980–81 to 1992–93: cigarettes in pack sizes 20, 25, 30, 35, 40 and 50 and
weighted average price
1980–81
1983–84
1986–87
1987–88
1988–89
1989–90
1990–91
1991–92
1992–93
Recommended price per stick: recommended
retail price divided by number of sticks in pack (cents)*
Weighted
20s 25s 30s 35s 40s 50s
average price
5.50 4.70
–
–
–
–
4.67
7.50 6.50 5.50
–
–
–
6.70
10.90 9.00 7.50
–
–
–
8.68
12.10 9.90 8.00 8.10
–
–
9.42
12.90 10.70 9.00 8.20 7.30
10.12
14.10 11.76 9.90 9.10 7.80
–
16.15 13.72 11.50 10.71 9.42 7.94
12.53
16.95 14.40 12.30 11.50 10.80 9.70
13.33
20.75 17.00 16.17 14.86 14.85 13.30
16.42
As can be seen from Table TA13.3.1.1 and Figure
TA13.3.1.1, while the recommended retail price of
premium cigarettes sold in packs of 20 rose sharply,
manufacturers such as Rothmans were able to cushion
consumers by providing cigarettes in larger pack sizes
that were substantially cheaper per stick. Each year,
when increases in state fees caused a rise in prices,
manufacturers introduced a larger pack size that
provided more cigarettes at a cost only slightly higher
Source: Beirot 199342 Table 5.2 (p32)
per stick than that of cigarettes in smaller pack sizes
*
In current currency: the price in the applicable year; no adjustment has been made for inflation
prior to the tax increase. Thus the immediate effects of
the introduction of and increases in state fees was largely offset by the introduction of larger and larger pack sizes
providing cigarettes at a cheaper price per stick.
The same picture can be told in another way, looking at the price of the leading brand, a premium brand and the
cheapest brand (cheapest per stick) available on the market (Figure TA 13.3.1.2).
25
1200
20
1000
15
800
10
600
20s
5
25s
0
Price per stick,
cheapest brand, cents
Price per stick,
most popular brand, cents
Price per stick,
premium brand, cents
CPI
Tobacco price index
35s 40s
30s
50s
400
200
1980–81
1986–87
1988–89
1990–91
1992–93
0
1973 1975 1977 1979 1981 1983 1985 1987 1989 1991
Figure TA13.3.1 Recommended retail price Rothmans brands, Melbourne, Australia,
1980–81 to 1992–93: cigarettes in pack sizes 20, 25, 30, 35, 40 and 50
(cents per stick)
Source: Beirot C 199342 Table 5.2 (p32)
Figure TA13.3.2 Recommended retail price most popular brands, cheapest brand per
stick, Melbourne 1973 to 1992 (using 1973 as index year, = 100 for all
indicators)
Source: Updating Beirot 199342
in Australia
35
Health groups believed that using large pack sizes may have been a significant factor in the transition from
occasional to regular, addicted smoking.
Data from household surveys indicated that smokers of 50s tend to smoke, on average, 60% more cigarettes per
week than smokers of 25s (25 compared with 16 cigarettes per day). In their regular survey of secondary school
children, Hill and colleagues found that children smoking the large pack sizes smoked about twice the amount
smoked by children preferring the smaller pack sizes.43
The degree of risk posed by smoking depends not so much on the weight of tobacco, but rather on the level of
dangerous constituents delivered and the duration of smoking.
People who smoke light cigarettes inhale harder to get the same delivery of nicotine and, in the process, also receive
more of the substances that cause disease, in particular tar and carbon monoxide. Although they may consume less
tobacco in each cigarette, the exposure of budget-brand smokers to carcinogens and other dangerous carcinogens
is likely to be higher than that of premium-brand smokers, due both to compensatory smoking and to the greater
number of cigarettes consumed. For each cent of tax paid, budget cigarette smokers were receiving much higher
exposure levels than were premium-brand smokers.
Duration of smoking has an even greater impact than amount smoked on the risk of dying prematurely. People
who smoke light cigarettes in large budget packs handle the pack, light up and draw back more often: the more
often these behaviours are repeated, the stronger the smoking habit and the harder it will be to quit. Budget-brand
smokers may therefore have been more likely to smoke for a long period, and be at much higher risk of dying
prematurely.
Large packs fit less easily into small casual handbags and pockets, so they are often carried in the hand and are
therefore much more visible to children. Children’s estimates about the prevalence of smoking among young adults
are a very strong predictor of them taking up smoking themselves. Large packs are also more likely to be shared
among young people, thus increasing the risk of children being pressured to try or even buy cigarettes from their
peers.
What was lobbied for? How? What was achieved?
Starting in 1990 when the Victorian Office of Prices first highlighted this problem,14 Australian health agencies
argued that the simplest way of reducing the affordability of budget brands would be to levy excise simply on the
basis of the number of sticks, with automatic excise increases each six months in line with CPI, with a slightly
higher level of duty payable on heavy cigarettes, and with a mechanism for maintaining the relative price of rollyour-own tobacco.15–17
In a shift to a per stick system, there would be small immediate impact on total population tobacco consumption.
Once the new system was in force, price-sensitive smokers would no longer have the option of switching to cheaper
brands. In the longer term even greater reductions could be expected in response to future tax increases.
Changing the excise duty on tobacco from a weight—to a stick-based system would lead to increases in the price of
popular children’s brands, and a reduction in differential between budget and premium brands.
Each year between 1991 and 1998, health agencies submitted a proposal to the Federal Treasurer calling for
introduction of a per stick system. A per stick system, it was argued, was preferable on health grounds and, along
with tobacco tax increases, would raise substantially higher levels of tobacco revenue, even taking into account
predicted drops in consumption in budget brands.
In the early 1990s, health group proposals were drafted and submitted to the Federal Treasurer and several of his
key Cabinet colleagues, by the Perth-based Australian Council on Smoking and Health.
Limited funds were available for personal representations with politicians or for wider lobbying for the proposal
among key party and parliamentary figures.
In 1996, further work was done by the Anti-Cancer Council of Victoria, quantifying the predicted drops in
children’s consumption of budget brands, and the predicted increases in government revenue.11
36
Facts and Issues
During 1996 and 1997 a handful of visits were made to key politicians in support of the proposals, funded mainly
by the Australian Cancer Society and the National Heart Foundation of Australia.
Feedback from several politicians and government departmental officials indicated that several key policy
personnel had doubts about the likely health impact of this measure. Considerable effort was put into meeting with
officials and providing information related to their queries.
At the end of 1997, a significant opportunity arose.
The Coalition government announced that it intended to go to the next election on a platform of major tax reform,
the central plank of which would be introduction of a goods and services tax (GST).
The government set up departmental and parliamentary task forces and the business and welfare sectors
established several independent and joint committees to help define principles for and build community support
for tax reform.
In late 1997, the Victorian Smoking and Health Program developed a comprehensive proposal to put to the
government’s tax reform task force.44
The proposal was submitted by heart and cancer charities on behalf of almost 60 health and medical groups around
the country. In addition to a shift to a per stick tax on cigarettes, the proposal called for imposition of the GST on
top of the per stick excise. Adding a GST to the retail cost of tobacco products—with no compensatory decrease in
excise duty—would prevent tobacco products becoming more affordable. A GST on tobacco would help to prevent
any decrease in consumption (and revenue flow) from any items for which cigarettes acted as a substitute.
in Australia
37
Recommended retail price per stick of leading
brands in Australia compared with reported prices
paid—Australia 2002 to 2010
Table 13.3.2.1
Recommended prices per stick (cents) top selling Australian cigarette brands 2002 to 2010
Winfield 25s
Longbeach 40s
Peter Jackson 30s
Horizon 50s
Benson & Hedges 25s
Holiday 50s
Alpine 35s
Dunhill 25s
Marlboro 25s
Escort 35s
Average all brands (unweighted for RRPs)
2002
2003
2004
2005
2006
2007
2008
2009
2010
0.3700
0.3350
0.3533
0.3260
0.3800
0.3160
0.3800
0.3840
0.3800
0.3443
0.3569
0.3860
0.3475
0.3667
0.3390
0.3980
0.3280
0.3940
0.4040
0.3980
0.3571
0.3718
0.4000
0.3625
0.3800
0.3510
0.4120
0.3420
0.4060
0.4200
0.4140
0.3714
0.3859
0.4200
0.3750
0.3950
0.3640
0.4320
0.3550
0.4220
0.4400
0.4320
0.3886
0.4024
0.4380
0.3888
0.4083
0.3800
0.4500
0.3710
0.4380
0.4580
0.4500
0.4057
0.4188
0.4560
0.4038
0.4250
0.3930
0.4680
0.3840
0.4560
0.4760
0.4680
0.4257
0.4355
0.4800
0.4300
0.4500
0.4180
0.4920
0.4080
0.4820
0.5020
0.4920
0.4529
0.4607
0.5020
0.4425
0.4650
0.4310
0.5140
0.4270
0.5020
0.5280
0.5140
0.4629
0.4788
0.6300
0.5563
0.5867
0.5360
0.6480
0.5320
0.6300
0.6480
0.6480
0.5557
0.5971
2003
2004
2005
2006
2007
2008
2009
2010
Source: NSW Tobacco Traders ART cigarette price lists August2002 to 201045,46,47,48,49,50,51,52,53
Table 13.3.2.2
Reported prices per stick (cents) paid by smokers, Australian arm of ITC cohort study
2002
Winfield 25s
0.3635 0.3622 0.3843 0.3952 0.4047 0.4268 0.4473 0.4593 0.5760
Longbeach 40s
0.3109 0.3198 0.3354 0.3548 0.3597 0.3768 0.4035 0.4147 0.5345
Peter Jackson 30s
0.3393 0.3402 0.3523 0.3735 0.3841 0.4029 0.4278 0.4446 0.5392
Horizon 50s
0.3041 0.3128 0.3285 0.3406 0.3585 0.3680 0.3754 0.3973 0.4850
Benson & Hedges 25s
0.3719 0.3715 0.3867 0.4050 0.4166 0.4439 0.4609 0.4904 0.5983
Holiday 50s
0.2909 0.3000 0.3178 0.3337 0.3495 0.3528 0.3807 0.3735 0.4704
Alpine 35s
0.3580 0.3620 0.3772 0.4025 0.4193 0.4108 0.4439 0.4726 0.5710
Dunhill 25s
0.3730 0.3832 0.4023 0.4200 0.4445 0.4512 0.4918 0.4739 0.6009
Marlboro 25s
0.3628 0.3889 0.3812 0.4006 0.4299 0.4288 0.4113 0.4775 0.6134
Escort 35s
0.3355 0.3462 0.3623 0.3700 0.3789 0.4066 0.4414 0.4125 0.5081
Weighted averages all brands
0.3546 0.3687 0.3829 0.3970 0.4103 0.4289 0.4520 0.4677 0.5877
2002
2003
2004
2005
2006
2007
2008
2009
2010
Average RRP, unweighted
0.3965 0.4131 0.4288 0.4471 0.4653 0.4839 0.5119 0.5320 0.6634
RRP weighted by use
0.3546 0.3687 0.3829 0.3970 0.4103 0.4289 0.4520 0.4677 0.5877
Weighted reported average
% by which reported price different to RRP weighted
% by which reported price different to RRP unweighted
0.3391 0.3430 0.3589 0.3742 0.3844 0.4015 0.4235 0.4400 0.5370
-4.4% -7.0% -6.3% -5.7% -6.3% -6.4% -6.3% -5.9% -8.6%
-5.0% -7.8% -7.0% -7.0% -8.2% -7.8% -8.1% -8.1% -10.1%
38
Facts and Issues
Table 13.3.2.3
Percentage by which reported average weighted price is different to recommended price (unweighted)
2002
2003
2004
2005
2006
2007
2008
2009
2010
Winfield
-1.8%
-6.2%
-3.9%
-5.9%
-7.6%
-6.4%
-6.8%
-8.5%
-8.6%
Longbeach
-7.2%
-8.0%
-7.5%
-5.4%
-7.5%
-6.7%
-6.2%
-6.3%
-3.9%
Peter Jackson
-4.0%
-7.2%
-7.3%
-5.4%
-5.9%
-5.2%
-4.9%
-4.4%
-8.1%
Horizon
-6.7%
-7.7%
-6.4%
-6.4%
-5.7%
-6.4% -10.2% -7.8%
-9.5%
Benson & Hedges
-2.1%
-6.7%
-6.1%
-6.3%
-7.4%
-5.1%
-6.3%
-7.7%
Holiday
-7.9%
-8.5%
-7.1%
-6.0%
-5.8%
-8.1%
-6.7% -12.5% -11.6%
Alpine
-5.8%
-8.1%
-7.1%
-4.6%
-4.3%
-9.9%
-7.9%
Dunhill
-2.9%
-5.1%
-4.2%
-4.5%
-2.9%
-5.2%
-2.0% -10.2% -7.3%
Marlboro
-4.5%
-2.3%
-7.9%
-7.3%
-4.5%
-8.4% -16.4% -7.1%
Escort
-2.6%
-3.1%
-2.5%
-4.8%
-6.6%
-4.5%
-5.9%
-9.4%
-5.3%
-2.5% -10.9% -8.6%
Source: International Tobacco Control Policy Evaluation Study, unpublished data provided by Timea Partos 2012
-4.6%
39
in Australia
13.4
The affordability of tobacco products
The affordability of cigarettes is affected not just by their price and not just by their price compared to the costs of
buying other goods and services. Affordability of cigarettes is also affected by the amount of disposable income
people have to buy them. As Blecher and van Walbeek put it, ‘affordability considers the simultaneous effect of
income and price on a person’s buying decision’(p167).1
13.4.1
Changes in affordability of cigarettes over time in Australia
The World Health Organization has suggested that the affordability of cigarettes can best be assessed by examining
prices relative to earning capacity.2 Figure 13.4.1 shows the time taken by an Australian worker on average wages in
minutes to earn a day’s worth of cigarettes in the most popular brand category sold at recommended retail prices
since 1984. Table 13.4.1 shows detailed calculations.
220
200
180
160
140
120
100
80
60
40
20
0
209
134
102
66
70
74
83
82
82
75
70
73
126 126
132
146
162
161
177
174 175
215
175 175 176 180 176
107
83
1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 May 2011
2010
Figure 13.4.1 Time (in minutes) needed on average weekly earnings to earn enough to buy one day’s worth of leading brand of cigarettes (between 15 and 21 cigarettes
per day), 1984–2011
Sources: Australian Bureau of Statistics 1983, 1985, 1986, 1987, 1988, 1989, 1990, 1991, 1992, 1993,3–12 ABS 1995, 1996, 1998, 1999, 2001, 2003, 2005, 2009, 2011;13–21 ABS 2011;22 NSW Retail Tobacco Traders’
Association, 1980s, 1990s, 2000s, 2010, 201123–28
Notes: ABS 6306.0 Distribution and contribution of employee earnings and hours,3–12 ABS Employee earnings and hours;13–21 ABS 6302.0 Average weekly earnings, February 1984 to 2011;22 Australian Retail
Tobacconist price lists, February for each year23–28
In 1984, it was possible for a 20-cigarette-per-day smoker to earn enough money to purchase a week’s supply of
cigarettes in just over one hour. By 1998 it took two hours to buy the same number of cigarettes, and by February
2005, more than two and a half hours. In February 2011 it took three hours and 36 minutes. Clearly cigarettes have
become significantly less affordable to Australian workers over the past 25 years.
13.4.2
Affordability of cigarettes to Australian children
As with adults, young people’s perceptions of the costliness of cigarettes are affected not just by recent price
changes and the price of other goods and services but also by the amount of money they have available to spend on
themselves. A study by the National Centre for Research into the Prevention of Drug Abuse29 demonstrated that
the probability of children having smoked in the last month was clearly related to the amount of pocket money
they had at their disposal. The study showed further that between 1992 and 1994 increases in pocket money
Section: 13.4.2
40
Facts and Issues
Table 13.4.1 Time needed on average weekly earnings to earn enough to buy leading brand of cigarettes, Australia, 1984–2011: per cigarette, per 20 cigarettes, per week
@ average number of cigarettes smoked per day
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
May-10
2011
Average weekly
earnings for all
earnings* Persons
(males and females)
321.30
340.10
364.10
381.30
408.80
436.30
464.80
496.90
507.90
518.30
529.00
549.20
563.80
582.20
597.70
607.90
625.00
658.40
684.60
713.90
749.80
783.20
816.50
857.10
886.60
921.10
973.80
977.10
1011.80
Average number of
Price of a single
hours worked nonSeconds to earn a Minutes to earn
cigarette, leading
managerial, all hours,
single cigarette
20 cigarettes
brand (cents)*
all persons, May*
39.25
6.40
28
9
39.35
7.16
30
10
39.70
8.08
32
11
39.90
9.40
35
12
40.10
9.92
35
12
39.90
10.64
35
12
39.50
10.47
32
11
39.40
10.47
30
10
39.70
11.07
31
10
39.90
12.90
36
12
39.90
16.17
44
15
39.80
17.53
46
15
39.80
22.53
57
19
39.80
21.90
54
18
39.80
22.50
54
18
40.05
23.78
56
19
40.30
27.03
63
20.9
39.90
31.88
70
23.2
39.50
33.13
69
22.9
39.50
38.00
76
25.2
39.50
39.40
75
24.9
39.60
41.20
75
25.0
39.70
42.80
75
25.0
39.70
45.00
75
25.0
39.70
46.80
75
25.1
39.70
49.60
77
25.7
39.40
51.80
75
25.1
39.40
61.80
90
29.9
39.40
65.80
92
30.7
Minutes per
Minutes required
week to earn 20
to earn 15
cigarettes per
cigarettes per
day
day
66
9
70
10
74
11
83
13
82
13
82
13
75
11
70
10
73
11
83
11
102
14
107
15
134
18
126
17
126
17
132
15
146
17
162
19
161
18
177
20
174
19
175
19
175
19
175
19
176
19
180
19
176
19
209
22
215
23
Sources: Australian Bureau of Statistics 1983, 1985, 1986, 1987, 1988, 1989, 1990, 1991, 1992, 1993,3–12 ABS 1995, 1996, 1998, 1999, 2001, 2003, 2005, 2009, 2011;13–21 ABS 2011;22 NSW Retail Tobacco Traders’
Association, 1980s, 1990s, 2000s, 2010, 201123–28
Notes: ABS 6306.0 Distribution and contribution of employee earnings and hours,3-12 ABS Employee earnings and hours;13–21 ABS 6302.0 Average weekly earnings, February 1984 to 2011;22 Australian Retail
Tobacconist price lists, February for each year23–28
*
Current dollars and cents: the price in the applicable year; no adjustment has been made for inflation
resulted in cigarettes becoming more rather than less affordable to students in Perth and Sydney, despite increases
in cigarette prices (see Section 5.22 for further discussion of factors affecting uptake).
Table 13.4.2 shows the recommended retail price of the most popular brand of cigarettes among children in selected
years between 1996 and 2011. It also indicates the average amount of pocket money that Australian teenagers
reported having to spend on themselves in each of the years of the Cancer Council’s triennial survey of smoking
among secondary school students. Based on these data, Figure 13.4.2 plots the number of cigarettes that could have
been purchased by a teenager aged 15 years on average levels of pocket money as determined in the surveysi.
i
The average is calculated using mid-points of the ranges in which students nominated the usual level of pocket money they received: $0; $1 to $10; $11 to $20; $21 to $30; and $31 to
$40; in 1996, also $41 to $60; in 1999 to 2008 also $60 to $79 and $80
Section: 13.4.2
in Australia
41
Table 13.4.2 and Figure
Table 13.4.2 13.4.2 make it clear
Affordability of cigarettes for students aged 15 years in
that cigarettes became
Australia, 1996, 1999, 2002, 2005, 2008 and 2011
significantly less costly
to young people between
105
102
1996 and 1999 relative to
Recommended Average money ‘to
100
the amount of money they
retail price of a spend on myself’
95
Year
92
had available to spend on
packet of Peter
among students
91
90
Jackson
30s
aged
15
years
themselves. This reversed
86
85
83
$*
$*
markedly after 1999,
80
1996
7.20
22.00
since which time pocket
75
73
1999
7.96
27.00
money has increased
70
2002
10.60
32.00
1996 1999 2002 2005 2008 2011
enough to almost keep
2005
11.85
34.00
pace with rising cigarette
2008
13.50
37.31
prices. On average pocket
Figure 13.4.2
2011
18.70
45.48
money, a person aged 15
Affordability of cigarettes for students aged 15 years
years could afford to buy
in Australia, 1996, 1999, 2002, 2005, 2008 and 2011
29 fewer Peter Jackson
(number of cigarettes that could have been purchased
Sources: NSW Retail Tobacco Traders’ Association 1984, 1987, 1990, 1993,
cigarettes each week in
1996, 1999, 2002, 2005, 2008;30 V White, Secondary School Survey
on average pocket money)
of Smoking and Alcohol, 1996 to 2011, CBRC, unpublished data from
2011 compared with 1999,
Sources: NSW Retail Tobacco Traders’ Association 1984, 1987, 1990, 1993,
the Australian Secondary School Survey of Smoking, Alcohol and
a decline of almost 30%.
1996, 1999, 2002, 2005, 2008, 2011;30 V White, Secondary School
Drug Use (ASSAD)
Survey of Smoking and Alcohol, 1996 to 2011, CBRC, unpublished
Some commentators have
*
Current dollars: the price in the applicable year; no adjustment has
data from the Australian Secondary School Survey of Smoking,
speculated that greater
been made for inflation
Alcohol and Drug Use (ASSAD)
spending on mobile phone
calls, messages, ring-tones
and so on may have contributed to declining smoking rates among teenagers, providing both an alternative item to
denote social status, and resulting in less disposable pocket money for cigarettes.i
13.4.3
International comparisons in cigarette affordability
Cigarettes tend to cost more in high-income than in middle-income and low-income countries. This is not
surprising given that people also earn more in high-income countries.31 While Guindon and colleagues showed
that cigarette prices in relation to earnings (of 12 monitored occupations) rose between 1990 and 2000 in 19 of 25
developed countries and 7 of 11 low-income and middle-income countries,32 Kan showed in an analysis of
60 countries in 2006 that cigarettes remained highly affordable to people even in the lowest-paid jobs.33
To compare the relative affordability of cigarettes in a range of counties Blecher and van Walbeek have calculated
the cost of 100 packs of cigarettes as a percentage of per capita gross domestic product (GDP) for 1997–2006.1
They have also compared this measure of affordability with simple comparisons of the price per standard pack in
US dollars, and minutes of labour measures such as those described in Section 13.4.1, and those used in the work
of Guindon and colleagues32 and Kan.33 Australia ranked seventh of 32 high-income countries (and well above
all the middle and low-income countries) in terms of the price per pack as measured in the Economist Intelligence
Unit’s cost of living survey (Figure 1 in Blecher and van Walbeek). It ranks sixth of the 32 high-income countries
in terms of price as a percentage of annual per capita GDP required to buy 100 packs of cigarettes (Figure 2 in
Blecher and van Walbeek). Interestingly, on this measure, most of the upper–middle income countries and all
but one of the lower–middle and low-income countries rate higher (i.e. less affordable) than Australia and other
high-income countries. Using median income of all occupations, Australia rated 10th of 32, behind Singapore,
Hong Kong, Norway, the UK, New Zealand, Portugal, Czech Republic, France and Ireland (Figure 3 in Blecher and
van Walbeek). Between 1990 and 2006, relative income price (price of 100 packs as a percentage of GDP) increased
more in Australia than in most middle and low-income countries and than in any other high-income country
except France and Chinese Hong Kong (Figure 4 in Blecher and van Walbeek).
i
This conclusion was hotly disputed by many letter-writers commenting on the piece.
Section: 13.4.3
42
Facts and Issues
Blecher and van Walbeek found that affordability measures correlated reasonably well for high-income countries,
but not for low and middle-income countries. They argue that affordability measures are superior to price-based
measures, particularly in low and middle-income countries experiencing rapid economic growth.1 34
In 2010, cigarettes in Australia became less affordable in relation to per capita GDP than in all high-income
countries other than Norway.35
13.4.4
On a lighter note
The Big Mac Index of Cigarette Affordability was
proposed in 1996 as another, more light-hearted way
of assessing the relative affordability of cigarettes
internationally.36 The index calculates the number of
cigarettes that can be bought for the price of a Big Mac
hamburger in each country. The index uses figures
from the Big Mac index published every few years by
The Economist magazine,37 which lists the price of a
Big Mac in US dollars in a range of countries. Despite
distortions caused by trade barriers on beef and other
differences in input costs, several academic studies
have concluded that the Big Mac index provides a
good indicator of purchasing power in each country,
and an unexpectedly accurate predictor of exchange
rates in the long run.38 39
A comparison of the Big Mac Index of Cigarette
Affordability for 1996 and 200240 showed that 15 of the
16 countries included in both analyses reported declines
in this indicator of affordability over the period. A
further update showed that 12 of the 20 countries for
which data were collected in both periods showed
declines between 2002 and 2006.41 42
Figure 13.4.3 shows relative affordability for 40
countries for which data were available in 2011 on
both Big Mac and cigarette prices.
Figure 13.4.3 indicates that in 2011 Australia ranked
fourth in the Big Mac Index of Cigarette Affordabilityi
meaning that cigarettes in Australia were much less
affordable relative to the price of McDonald’s fast
foods than cigarettes and McDonald’s fast foods in
most other countries.
Philippines
Argentina
Costa Rica
Columbia
Pakistan
Brazil
Indonesia
UAE
Saudi Arabia
Ukraine
Egypt
Peru
Russia
South Korea
Uruguay
China
Mexico
Chile
Thailand
Latvia
Lithuania
Switzerland
Turkey
India
Czech Republic
Israel
Japan
Denmark
Sweden
Hungary
Malaysia
Sri Lanka
United States
Poland
South Africa
Norway
Canada
Australia
Singapore
New Zealand
Britain
72.4
55.6
52.5
51.9
47.0
41.6
35.1
34.2
34.0
33.5
30.4
29.3
29.3
28.5
25.7
21.7
21.6
21.3
19.2
18.0
17.1
16.4
16.2
16.0
15.9
15.7
15.6
15.5
15.3
14.8
14.2
14.1
13.2
13.1
11.8
9.0
8.8
8.1
8.1
7.8
7
0
10
20
30
40
50
60
70
80
Figure 13.4.3 The Big Mac Index of Cigarette Affordability for 2011 (number of cigarettes
that can be purchased for price of a Big Mac)
Source: The Economist 2012; 43 Eriksen et al35 using data collected from Economic Intelligence Unit 201244
i
Australia also ranked fourth in 2002 and 2006.
Section: 13.4.4
in Australia
43
References
1. Blecher E and Van Walbeek C. Cigarette affordability trends: an update and some methodological comments. Tobacco Control 2009;18(3):167-75. Available from: http://tobaccocontrol.
bmj.com/cgi/content/abstract/tc.2008.026682v1
2. World Health Organization. Guidelines for controlling and monitoring the tobacco epidemic. Geneva: WHO, 1998.
3. Australian Bureau of Statistics. 6306.0 Distribution and Composition of Employee Earnings and Hours-Australia, May 1983, Table 11 Average Weekly Ordinary Time and Total Earnings and
Hours of Full-Time Non-Managerial Employees in Major and Minor Occupational Groups. Canberra: ABS, 1983.
4. Australian Bureau of Statistics. 6306.0 Distribution and Composition of Employee Earnings and Hours-Australia, May 1985, Table 11 Average Weekly Ordinary Time and Total Earnings and
Hours of Full-Time Non-Managerial Employees in Major and Minor Occupational Groups Canberra: ABS, 1985.
5. Australian Bureau of Statistics. 6306.0 Distribution and Composition of Employee Earnings and Hours-Australia, May 1986, Table 11 Composition of average weekly earnings and average
weekly hours paid for Non-Managerial Employees, Industries. Canberra: ABS, 1986.
weekly hours paid for Non-Managerial Employees, States and Territories. Canberra: ABS, 1993. Available from: http://www.abs.gov.au/AUSSTATS/abs@.nsf/allprimarymainfeatures/8CB8
0109549F3A69CA25722E001B039B?opendocument
13. Australian Bureau of Statistics. 6306.0 Employee Earning and Hours, Australia, May 1995, Table 24 Earnings and Hours, Full-time Adult Non-Managerial Employees, Occupation. Canberra:
ABS, 1995. Available from: http://www.abs.gov.au/AUSSTATS/abs@.nsf/allprimarymainfeatures/5C1FEAB47E5BB381CA25722E001B0399?opendocument
ABS, 1996. Available from: http://www.abs.gov.au/AUSSTATS/abs@.nsf/allprimarymainfeatures/7BA0CD3439BA16A9CA25722E001B0065?opendocument
ABS, 1998. Available from: http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6306.0May%201998?OpenDocument
16. Australian Bureau of Statistics. 6306.0 Employee Earnings and Hours Australia May 1998, Table 16 Average wages earned and hours full-time adult non-managerial employeesoccupation. ABS, 1999. Available from: http://www.abs.gov.au/AUSSTATS/abs@.nsf/allprimarymainfeatures/385FEBEB9F731E4ACA2570AC007A4AD5?opendocument
17. Australian Bureau of Statistics. 6306.0 Employee Earnings and Hours, Australia May 2000 Table 10 Average wages earned and hours full-time adult non-managerial employees-industry.
Canberra: ABS, 2001. Available from: http://www.ausstats.abs.gov.au/ausstats/subscriber.nsf/0/89ECABCEB337529FCA256A1C0002A76E/$File/63060_may%202000.pdf
18. Australian Bureau of Statistics. 6306.0 Employee Earnings and Hours, Australia, May 2002 Table 9 Average wages earned and hours full-time adult non-managerial employees-industry.
2003. Available from: http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6306.0May%202002?OpenDocument
19. Australian Bureau of Statistics. 6306.0 Employee Earnings and Hours, Australia, May 2004 Table 7 Average wages earned and hours full-time adult non-managerial employees-industry.
16 November 2006. ABS, 2005. Available from: http://www.ausstats.abs.gov.au/ausstats/subscriber.nsf/0/8E4BD3FCFF3FB769CA256FCC0073A69D/$File/63060_may%202004.pdf
20. Australian Bureau of Statistics. 6306.0 Employee earnings and hours, Australia, August 2008 Table 1a: Average weekly cash earnings and hours paid for, full-time adult non-managerial
employees - Detailed occupation (ANZSCO). Canberra: ABS, 2009. Available from: http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6306.0Aug%202008?OpenDocument
21. Australian Bureau of Statistics. 6306.0 Employee earnings and hours, Australia, May 2010 Table 1a: Average weekly cash earnings and hours paid for, full-time adult non-managerial
employees - Detailed occupation (ANZSCO). Canberra: ABS, 2011. Available from: http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6306.0May%202010?OpenDocument
22. Australian Bureau of Statistics. 6302.0 Average Weekly Earnings, February. Canberra: ABS, 2011 Last modified 23 February 2012 [viewed April 2012]. Available from: http://www.abs.gov.
au/ausstats/abs@.nsf/mf/6302.0/
26. NSW Retail Tobacco Traders’ Association. Price lists-cigarettes. The Australian Retail Tobacconist 2010;75(no. 2 Feb-Mar):2-3.
27. NSW Retail Tobacco Traders’ Association. Price lists-cigarettes. The Australian Retail Tobacconist 2010;76(no. 3 Apr-May):2-3.
28. NSW Retail Tobacco Traders’ Association. Price lists-cigarettes. The Australian Retail Tobacconist 2011;80(no. 1 Feb-Mar-Apr):1-2.
29. Chikritzhs B, Stockwell TF, Dyskin E and O’Connor J. The Impact of Tobacco Control Legislation on a cohort of Perth and Sydney Schoolchildren 1992-1994. Perth: National Centre for
Research into the Prevention of Drug Abuse, Curtin University, 1997.
Section: 13.4.4
44
Facts and Issues
30. NSW Retail Tobacco Traders’ Association. Price lists--cigarettes. The Australian Retail Tobacconist 1984, 1987, 1990, 1993, 1996, 1999, 2002, 2005, 2008, 2011 (August editions)
31. Blecher EH and van Walbeek CP. An international analysis of cigarette affordability. Tobacco Control 2004;13(4):339-46. Available from: http://tc.bmjjournals.com/cgi/content/
abstract/13/4/339
32. Guindon G, Tobin S and Yach D. Trends and affordability of cigarette prices: ample room for tax increases and related health gains. Tobacco Control 2002;11(1):35–43. Available from:
http://tobaccocontrol.bmj.com/cgi/content/full/11/1/35
33. Kan M-y. Investigating cigarette affordability in 60 cities using the cigarette price-daily income ratio. Tobacco Control 2007;16(6):429–32. Available from: http://tobaccocontrol.bmj.
com/cgi/content/abstract/16/6/429
34. Blecher E. Targeting the affordability of cigarettes: a new benchmark for taxation policy in low-income and-middle-income countries. Tobacco Control 2010;19:(4):325-30. Available
from: http://tobaccocontrol.bmj.com/content/19/4/325.abstract
tobaccoatlas.org/
36. Scollo M. The Big Mac index of cigarette affordability. Tobacco Control 1996;5(1):69. Available from: http://tobaccocontrol.bmj.com/cgi/reprint/5/1/69a
37. The Economist. Big Mac index. The Economist Magazine, 2006 Last modified 12 January 2006 [viewed 12 October 2006]. Available from: http://www.economist.com/markets/Bigmac/
Index.cfm
38. The Economist. Big MacCurrencies. 2002. Available from: http://www.economist.com/finance/displaystory.cfm?story_id=E1_PDVTGS
39. Ong L. Burgernomics: the economics of the Big Mac standard. Journal of International Money and Finance 1997;16(6):865–78. Available from: http://www.ingentaconnect.com/
content/els/02615606/1997/00000016/00000006/art00032
40. Lal A and Scollo M. Big Mac index of cigarette affordability. Tobacco Control 2002;11(3):280-82. Available from: http://tobaccocontrol.bmj.com/cgi/reprint/11/3/280-b
41. Scollo M. The Big Mac index of cigarette affordability: results from 2006, Unpublished data. 2006.
42. Scollo M. Chapter 13. The pricing and taxation of tobacco products in Australia. In: Scollo, M, and Winstanley, M, ed. Tobacco in Australia: Facts and Issues. Melbourne, Australia: Cancer
Council Victoria, 2008 Available from: www.TobaccoInAustralia.org.au
43. The Economist online. Big Mac index. Graphic detail, charts, maps and infographics. The Economist, 2012 Last modified 12 January 2012 [viewed 8 May 2012]. Available from: http://
www.economist.com/blogs/graphicdetail/2012/01/daily-chart-3
44. Economic Intelligence Unit. Cigarette prices in selected cities, 2010. London: The Economist, 2011. [viewed 2011]; Available from: http://www.eiu.com/
Section: 13.4.4
45
in Australia
13.5
Impact of price increases on tobacco consumption in
Australia
Apparent consumption of tobacco products has been shown in many countries to be negatively associated with
the price or affordability of tobacco products. Figure 13.5.1 shows a clear pattern of declines in sales of cigarette
products in the US when prices increase but also a clear pattern of increases in sales when prices decline in real
terms.
A similar pattern is evident in South Africa.2
Australia has had strong tobacco-control measures in place for several decades and there have been no periods
over that time when tobacco consumption has increased. Nevertheless, in line with the findings of price elasticity
studies in numerous other countries,3–6i substantial real increases in the price of tobacco products in Australia have
been followed by larger-than-usual declines in apparent and reported tobacco consumption.
During the period when there were many increases in state franchise fees on tobacco and following the largest
increases in excise and customs duty on tobacco products in 1999 and 2010, the prevalence of smoking in Australia
also declined substantially—see Introduction, Figure I.3.
The following four sections summarise evidence from Australian studies of the effects of increases in taxes and
prices of tobacco on tobacco consumption, reported smoking-related behaviours and smoking prevalence in this
country.
Figure 13.5.1 Tobacco sales compared with price of a pack of cigarettes, US
1970–2007
Figure 13.5.2 Tobacco sales compared with price of a pack of cigarettes, South Africa,
1961–2008
Source: Chaloupka 20091
Source: Blecher 20102
Note: Pack price expressed in April 2008 dollars
Note: Pack price expressed in April 2008 dollars
i
Between 1980 and 1982 the real price of tobacco products in the UK rose 17%. Consumption fell by 16%. In New Zealand between 1987 and 1990, the real price of tobacco products rose by
26% and consumption fell by 16%. In Sweden, a tobacco tax increase from December 1992 raised tobacco product prices by 30%. Consumption per adult fell 19% in 1993, giving Sweden
the lowest per capita rate of tobacco consumption among OECD countries. In South Africa, the real (inflation-adjusted) price of cigarettes increased by 115% between 1993 and 2003. Over
the same period, aggregate cigarette consumption decreased by about a third and per capita consumption has decreased by about 40%.7 In Canada, even taking into account the increase in
smuggling of cheaper cigarettes destined for the US, consumption of cigarettes fell significantly over the 1980s and early 1990s following substantial increases in excise rates.8
Section: 13.5
46
Facts and Issues
13.5.1 Declining excise and customs receipts following price increases in
Australia
Figure 13.5.3 plots the real price of tobacco products against tobacco consumption in Australia between 1973 and
2011. The Cigarettes and Tobacco Sub-group of the Alcohol and Tobacco Sub-index of the Australian Consumer
Price Index (which has been available since 1973) is used as an indicator of real changes in price. Per capita tobacco
consumption is calculated using Australian Bureau of Statistics population figures on the number of persons
15 years of age and over, and data on the weight of tobacco products dutied.9
Figure 13.5.3 shows that the weight of dutied tobacco products fell in line with real increases in the price of tobacco
and cigarettes. Looking at the 20 years since 1991 in closer detail, it is evident from Figure 13.5.4 that the biggest
declines occurred in periods with the largest real price increases.
The relationship between apparent consumption and affordability is particularly clear over the 12 years from 1998,
with major declines in the numbers of cigarettes subject to excise and customs duty following reforms of tobacco
taxes in 1999 to 2001 and the increase in excise and customs duty in 2010 (Figure 13.5.5).
3500
700
Tobacco products excised
per person 15 years and over, gms
3000
Tobacco CPI
600
2500
500
2000
400
1500
300
1000
200
500
100
0
1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
0
Figure 13.5.3 Real tobacco prices and tobacco consumption in Australia, 1972–73 to 2010–11
Sources: ABS 2012,10 Scollo 20129
2500
2500
2000
Tobacco products excised
per person 15 years and over, gms
700
Tobacco CPI
600
500
2000
1500
1000
1500
400
1000
300
500
200
0
500
0
100
1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011
0
2010–11
Sources: ABS 2012,10 Scollo 20129
Note: Based on estimates of weight of tobacco dutied9
Section: 13.5.1
220
200
Minutes required
180
160
Cigarette equivalents
per person 15 years and over 140
120
100
80
60
40
20
0
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Figure 13.5.5 Affordability of cigarettes and apparent tobacco consumption in
Australia, 1998–99 to 2010–11
Sources: Refer to sources for Figure 13.4.1; and Scollo 20129
Notes: Figure 13.4.1 Time (in minutes) needed on average weekly earnings to earn enough to
buy one week’s worth of leading brand of cigarettes (20 cigarettes per day), 1984–2011;
Scollo estimates of numbers of cigarettes dutied based on reports from the Australian
Bureau of Statistics and Australian Taxation Office9
in Australia
47
13.5.2 Declining prevalence following price increases in Australia:
changes in reported cessation and consumption and other
smoking and product-related behaviours among adults
Many smokers and recent ex-smokers report that high
prices of tobacco products are a key factor motivating
their attempts to quit or cut down smoking. Data from
the National Drug Strategy Household Survey shows high
levels of agreement that price was an important factor
in 2001 shortly after the 1999–2001 reforms in tobacco
taxation. Levels fell in the subsequent surveys and then
increased again following the large increase in excise and
customs duty in April 2010—see Figure 13.5.6.
13.5.2.1
Smoking cessation
60
54.0
50
44.1
43.9
40
35.8
30
20
10
0
2001
2004
2007
2010
Figure 13.5.6 Percentages of smokers and recent ex-smokers agreeing that tobacco
A study in New South Wales used data from the Cancer
prices were an important factor motivating their recent attempts to
Institute NSW Tracking Survey (which interviews 50
change smoking behaviour
smokers and recent quitters each week by telephone) to
Sources: AIHW 2002,11 2005,12 200813 and 201113
examine rates of recent quitting activity (stopping smoking
or trying to quit within the previous one month period)
in the three months before and the five months after the
increase in tobacco excise duty on 30 April 2010. These
were compared with quitting activity in the same months in 2009. The proportion of New South Wales smokers
and recent quitters who reported quitting activity in May 2010 was 22% compared with 13% in the preceding
month and 12% in May 2009. Respondents interviewed in the three months following the tax increase (May–July)
were significantly more likely to report quitting activity than those interviewed in the three months prior to the
tax increase (OR = 1.84; 95% CI1.26–2.69, p<.01).14 Rates of monthly quitting activity among the New South Wales
population returned to previous levels three months after the tax increase.
13.5.2.2
Smoking and product-related behaviour
Another study in New South Wales also using the Cancer Institute NSW Tracking Survey aimed to quantify a
broader range of possible responses to price increases.15 Responses to the price increase included smoking-related
changes (trying to quit, cut down) and product-related changes (changing to lower priced brands, started using
loose tobacco, bought in bulk). Recent quitters were asked how much the increasing price of cigarettes influenced
their smoking behaviours. Overall, 47.5% of smokers made smoking-related changes and 11.4% made productrelated changes without making smoking-related changes. Multinomial logistic regressions showed that younger
smokers (vs. older) were more likely to make product-related changes and smoking-related changes in comparison
to no changes. Low or moderate income smokers (vs. high income) were more likely to make smoking-related
changes compared to no changes. Highly addicted smokers (vs. low addicted) were more likely to make productrelated changes and less likely to make smoking-related changes. The proportion of smokers making only productrelated changes decreased with time since the price increase, while smoking-related changes increased. Recent
quitters who quit after the tax increase (vs. before) were more likely to report that price influenced them.14
A study in Victoria used data from the Victorian Smoking and Health Survey conducted in November 2010 to
assess smokers’ reported changes in smoking habits following the 25% increase in duty in April 2010.16 Of all
Section: 13.5.2.2
48
Facts and Issues
smokers surveyed (recent quitters were not asked such questions), 45% reported that they had changed their
smoking behaviour in response to the price increase, either by trying to quit (28%) or by smoking fewer cigarettes
(34%). Younger smokers were most likely to report that they tried to quit as a result of the price increase (37% tried
to quit, compared with 27% of mid-aged and 23% of older smokers.) Approximately half of smokers from the low
socio-economic status (SES) group who were still smoking reported trying to change their behaviour compared
with 45% of mid-SES and 37% of high-SES smokers (p=0.04). In 2010, 48% of smokers had changed their
purchasing behaviour in at least one way following the price increase. More than 20% had looked for a cheaper
source for their regular brand, while 15% switched to a cheaper brand or bought in bulk. Small proportions
reported having bought loose tobacco since the price increase—9% had bought roll-your-own tobacco, and 3%
reported that they had purchased unbranded tobacco. Only 18% of smokers changed their purchasing behaviour
without attempting to change their smoking behaviour (Table 13.5.1).
Table 13.5.1 Smokers’ self-reported changes to smoking and purchasing behaviours following the 2010 price increase, Victoria
Switched
Changed
Smoked Changed
Tried
to a
smoking
fewer purchasing
to quit
cheaper
behaviours
cigarettes behaviour
brand
All (n=604)
Sex
Males (n=294)
Females (n=349)
Age group
18 to 29 yearsa (n=162)
30 to 49 yearsb (n=279)
50 plus (n=163)
SEIFA
Low SESc (n=223)
Mid SES (n=253)
High SES (n=128)
Looked for Bought
Changed
cheaper
smaller
Bought
Bought
purchasing
Bought
source of number of cigarettes
unbranded
behaviour
R.Y.O.
regular cigarettes in bulk
tobacco
without
brand
in one go
smoking change
21.0
21.4
13.8
9.0
3.0
18.0
45.0
28.2
33.7
48.2
14.5
42.6
47.8
28.2
28.2
28.9
39.3*
45.7
51.1
10.4
19.3*
17.0
25.6t
20.4
22.5
13.6
14.1
9.6
8.3
3.5
2.5
18.8
17.1
49.7
44.0
42.1
36.5
26.5at
22.7a*
31.4
33.7
35.8
66.8
39.4a**
44.9a**
22.5
10.8a*
12.9at
26.7
17.3at
21.6
26.8
17.6at
22.5
18.4
11.1at
13.8
19.0
5.6a**
4.9a**
3.0
3.1
3.0
27.2
12.9a**
17.6at
50.5
44.5
36.7ct
33.4
26.1
23.2ct
37.8
32.4
29.0
48.9
48.7
46.1
13.4
17.1
11.4
20.2
22.2
19.9
24.8
17.6
22.8
14.5
12.1
16.1
8.7
9.7
8.1
3.3
3.4
1.9
17.8
16.1
22.1
Source: Hayes 201116
Notes: t = p<0.05 *=p<0.01 **=p<0.001; a b c= reference categories for logistic regression
Another study in Victoria tracked smoking and purchasing behaviour before and after the April 2010 tax increase
among a cohort of 491 smokers identified in the 2009 Victorian Smoking and Health Household Survey.17 This
study found that 15% of smokers from the baseline survey were no longer smokers at follow-up (nine months
after the 2009 survey and three months after the increase in excise duty). Based on annual quit rates from another
comparable cohort survey running in Australia since 200218 it was estimated that between one-third and one-half
of the people who had quit would have done so as a result of the tax increase. About 40% of those who were not
smoking at the time of the follow-up survey claimed that they had tried to quit specifically in response to the tax
increase. Another 17.9% of respondents reported having tried to quit in response to the tax increase but were
smoking again at follow-up. Also, 35.8% of respondents at follow-up indicated that they had tried to cut down on
consumption in direct response to the tax increase. The average reported number of cigarettes smoked per day
among those who smoked either factory-made or roll-your-own cigarettes regularly in both years declined from
15.45 per day to 15.02, with the decline most pronounced among the heaviest smokers. While 42% of the cohort
responded to the increase in duty by engaging in some form of price-minimising behaviour (such as buying bulk
or switching to a cheaper brand), the average price paid per stick still increased by 22.8% , in line with the 20%
increases in recommended retail prices following the increase.
Section: 13.5.2.2
in Australia
49
13.5.3 Declining consumption following price increases in Australia:
reported prevalence and consumption in children
Analysis of prices and reported consumption following the
reform of tobacco taxes between 1999 and 2001 also shows
evidence of reduced tobacco consumption corresponding
with significant declines in the affordability of cigarettes
and other tobacco products, both among adults19 and
among children.
300 Consumption per student
Affordability
250
60
150
40
100
20
50
0
100
80
200
Figure 13.5.7 plots reported consumption per student
against the affordability of cigarettes for young people.
Affordability is calculated by dividing the average amount
of pocket money reported among students aged 15 years by
the cost per stick of the leading brand of cigarettes among
the same group.
Figure 13.5.7 shows that the reported number of cigarettes
smoked per secondary school student in Australia
increased between 1990 and 1996 in line with increases in
affordability. It dropped between 1996 and 1999 despite a
small increase in affordability. (The hard-hitting National
Tobacco Campaign was most prominent between May
1997 and December 1998.) It then dropped even more
dramatically between 1999 and 2005 in line with a further
big drop in affordability following the reforms to Australia’s
tax system between 1991 and 2001 (see Section 13.2).
120
350
1990
1993
1996
1999
2002
2005
2008
2011
0
Figure 13.5.7 Reported consumption per secondary school student in Australia per
year vs. affordability, 1990–2011 (number of cigarettes affordable per
week to an average 15-year-old)
Sources: Chikritzhs et al 1997,20 NSW Retail Tobacco Traders’ Association 1990s,21 Hill and Alcock
1999,22 Hill, White and Effendi 2002,23 White and Hayman 200424 and 2006,25 White
and Smith 2009,26 and White and Bariola 201227
Note: reported consumption for those who smoke weekly is divided by all secondary school
students to calculate per capita consumption.
13.5.4 Quantifying the contribution of price increases to declining
consumption
Econometric studies that tease out the impact of numerous factors are required to quantify the contribution of
price increases to declines in consumption
compared with the contribution of other
Alchin 1992
policies implemented over the same period.
Harrison, Chetynd 1990
A number of economic studies were
published in the 1970s to early 1990s
attempting to quantify price elasticity of
demand in Australia. These were summarised
by economist Terry Alchin in 199228—see
Figure 13.5.8.
All these estimates were very close to the
–0.4% international approximate mean for
developed country established by the World
Bank in 1999.29
In a University of Melbourne study
examining factors affecting sales of tobacco
products in Australia published in 1999,30
Herington 1990
Chetwynd et al 1989
McLeod
Johnson 1986
Clements, McLeod, Slevanathan 1985
Salter 1980
Koutoyannis 1963
-0.7
-0.6
-0.5
-0.4
-0.3
-0.2
-0.1
0.0
Figure 13.5.8 Early price elasticity of demand estimates for Australia
Source: Alchin 199228
Section: 13.5.4
50
Facts and Issues
economists Peter Bardsley and Nilss Olekalns concluded that virtually all the reduction in tobacco consumption in
Australia between 1962–63 and 1995–96 could be attributed to increases in price resulting mainly from increases
in tax levels. In line with international estimates, for the earlier period of the study they found short-run price
elasticity of demand for tobacco products of between –0.2 and –0.3% and long-run estimates of between –0.5 and
–0.6.i
In a seminal study using time series analysis to examine the effects of various tobacco control policies on monthly
smoking prevalence,33 Wakefield and colleagues found that real price increases and reductions in affordability of
tobacco products was the most significant of seven policy interventions examined. Anti-smoking advertising also
had a measurable impact, but the effects were nowhere near as strong as the effects of price.33 They concluded,
based on their analysis of data over the period 1995–2006, that prevalence of smoking could be reduced by 0.3 of
a percentage point by either exposing the population to televised anti-smoking ads for an average of almost four
times per month (390 GRPs) or by increasing the costliness of a pack of cigarettes by 0.03% of gross average weekly
earnings.
i
The size of estimates for the later period (–1.2 for the short-run and –3.0 for the long-run) and the authors’ conclusion that price was the only significant factor were contested by several
commentators, who pointed out that tax levels are merely the most easily quantified of all the tobacco-control policies.31,32 Using sales rather than consumption or prevalence data, this
study would have been detecting the very close relationship between price increases and shifts to cheaper products.
Section: 13.5.4
in Australia
51
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Research into the Prevention of Drug Abuse, Curtin University, 1997.
22. Hill D and Alcock J. Background to campaign. In: Hassard, K, ed. Australia’s National Tobacco Campaign: evaluation report vol. 1. Canberra: Commonwealth Department of Health and
Aged Care, 1999. Available from: http://www.health.gov.au/internet/main/publishing.nsf/Content/health-pubhlth-publicat-document-metadata-tobccamp.htm
23. Hill D, White V and Effendi Y. Changes in the use of tobacco among Australian secondary students: results of the 1999 prevalence study and comparisons with earlier years. Australian and
New Zealand Journal of Public Health 2002;26(2):156–63. Available from: http://www.ncbi.nlm.nih.gov/pubmed/12054336
24. White V and Hayman J. Smoking behaviours of Australian secondary school students in 2002. National Drug Strategy monograph series no. 54. Canberra: Australian Government
Department of Health and Ageing, 2004. Available from: http://www.nationaldrugstrategy.gov.au/internet/drugstrategy/publishing.nsf/content/mono54
25. White V and Hayman J. Australian secondary school students’ use of alcohol in 2005. Report prepared for Drug Strategy Branch, Australian Government Department of Health and Ageing.
National Drug Strategy monograph series no. 58. Melbourne: Centre for Behavioural Research in Cancer, Cancer Control Research Institute, The Cancer Council Victoria, 2006. Available
from: http://www.nationaldrugstrategy.gov.au/internet/drugstrategy/publishing.nsf/Content/mono58
26. White V and Smith G. 3. Tobacco use among Australian secondary students. Australian secondary school students’ use of tobacco, alcohol, and over-the-counter and illicit substances in
2008. Canberra: Drug Strategy Branch Australian Government Department of Health and Ageing, 2009. Available from: http://www.nationaldrugstrategy.gov.au/internet/drugstrategy/
Section: 13.5.4
52
Facts and Issues
27. White, V. and E. Bariola, 3. Tobacco use among Australian secondary students in 2011, in Australian secondary school students’ use of tobacco, alcohol, and over-the-counter and illicit
substances in 20112012, Drug Strategy Branch Australian Government Department of Health and Ageing: Canberra http://www.nationaldrugstrategy.gov.au/internet/drugstrategy/
28. Alchin T. Tobacco taxation in Australia [Conference presentation]. The 21st Conference of Economists, 8 to 11 July, 1992. Melbourne, Australia: The University of Melbourne, 1992.
30. Bardsley P and Olekalns N. The impact of anti-smoking policies on tobacco consumption in Australia. Health Promotion Journal of Australia 1999;9(3):202–5. Available from: http://
search.informit.com.au/documentSummary;dn=458489558583424;res=IELHEA
31. Chapman S. Commentary: if you can’t count it... it doesn’t count: the poverty of econometrics in explaining complex social and behavioural change. Health Promotion Journal of Australia
1999;9:206-7. Available from: http://tobacco.health.usyd.edu.au/assets/pdfs/tobacco-related-papers/HPJAEconometrics.pdf
32. Borland R. On apparent consumption and what goes up in smoke: a commentary on Bardsley & Olekalns. Health Promotion Journal of Australia 1999;9(3):208–9. Available from: http://
search.informit.com.au/documentSummary;dn=458452292640908;res=IELHEA
33. Wakefield M, Durkin S, Spittal M, Siahpush M, Scollo M, Simpson J, et al. Impact of tobacco control policies and mass media campaigns on monthly adult smoking prevalence: time series
analysis. American Journal of Public Health 2008;98:1443-50. Available from: http://www.ajph.org/cgi/content/abstract/98/8/1443
Section: 13.5.4
in Australia
53
13.6
Revenue from tobacco taxes in Australia
For most forms of taxation, revenue can be expected to increase over time due to increases in population and
consequently the number of people from whom tax may be collected. As outlined in Section 13.1, smokers are
only moderately price sensitive, and—as outlined in Section 13.2—duties have been indexed and duties and fees
on tobacco products have been periodically increased over the past 30 years. The increasing number of potential
smokers and increased level of tax might lead one to expect tobacco tax revenue to have risen significantly since
the 1970s. However, offsetting the effects of population growth and increased tobacco taxes, population use of
tobacco has been falling steadily since the 1980s due to the combined impact of increased costliness, awareness
about health risks, declining social acceptability of
smoking, campaigns encouraging quitting, improved
Table 13.6.1 treatments for tobacco dependence, and greatly reduced
Federal excise revenue on tobacco: total tobacco dutied and excise duty,
opportunities for smoking. This section examines the
selected years 1964–65 to 1999–2000, Australia
changes in revenue from tobacco products that result from
the combined impact of increased population, increased
tax rates and steadily falling consumption.
Total tobacco
Year ended dutied (customs
plus excise)
30 June
million kg
13.6.1
Federal revenue from tobacco
products to June 2000
1965
1970
1975
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
As described in Section 13.2.1, the value in real terms of
the federal duty payable on tobacco products remained
fairly steady in the early part of the century but fell in
the late 1970s and the early 1980s due to the effects
of inflation. The value of the duty was restored with
indexation in 1983 and once again remained steady until a
series of increases in the early 1990s.
Table 13.6.1 shows the total revenue received by the federal
government from excise duty on tobacco products for
selected years until 1980 and then for every year until 2000.
It shows the amount of tobacco dutied in each year, the
total revenue from excise duty collected in current dollars,
and the same total expressed in constant 1989–90 dollars.
Figure 13.6.1 plots excise collected per person (Australians
of all ages) in $1989–90 for every fifth year since 1965.
Total revenue increased in current dollars in every year
apart from 1993, 1998 and 1999. In real terms, revenue
fell between 1980 and 1986 and fluctuated between 1987
and 2000. Revenue from federal duty was highest in real
and per capita terms in the mid-1970s, the period when
smoking prevalence in Australia was at its highest (see
Chapter 1). Federal revenue paid per capita gradually
declined in real terms until, by 1999–2000, it was just a
little over half of what it had been at its peak in 1975.
The large real reduction in per capita federal revenue
between 1965 and 2000 results from an 85% increase in
the population,5 and a 20% reduction in the total amount
26.89
29.61
33.09
31.46
31.53
31.90
30.37
29.83
29.32
29.17
28.12
27.85
27.43
28.01
26.44
26.76
24.01
23.70
23.48
21.18
21.52
20.26
20.42
n/a
Duty paid
(excise only)
Excise duty
paid in constant
dollars
$,000*
$,000†
188 980
245 860
472 914
703 214
706 812
724 410
794 039
856 245
889 017
961 072
1 009 203
1 091 776
1 145 787
1 262 427
1 274 043
1 330 278
1 299 711
1 347 842
1 509 058
1 614 386
1 713 085
1 648 740
1 633 736
1 658 906
1 259 867
1 429 419
1 758 045
1 555 783
1 430 070
1 327 366
1 304 912
1 316 794
1 311 235
1 307 581
1 256 009
1 265 827
1 237 685
1 262 427
1 210 205
1 240 063
1 199 272
1 221 425
1 324 897
1 359 769
1 424 307
1 371 094
1 341 051
1 330 051
Sources: Amounts dutied: Australian Bureau of Statistics, as for Table 2.2.1 in Chapter 2, Section
2.2.1; CPI: Australian Bureau of Statistics 20061; Revenue: Australian Tobacco Marketing
Advisory Board 1994,2 Willis1995,3 Australian Taxation Office 20064
*
Current rate: the rate in the applicable year; no adjustment has been made for inflation
†
Expressed in 1989–90 dollars
Note: Figures include only revenue from excise duty. Revenue from customs duty would have
added a further 5% to 10% to these figures—for instance an extra $92 million in
1998–99.
Section: 13.6.1
54
Facts and Issues
of tobacco consumed (as can be seen in column 2, Table 13.6.2), but only a 40% real increase in the level of duty
payable (see Section 13.1, Figure 13.1.2).
13.6.2
140
State revenue from tobacco
products to June 2000
120 $111
$114
$127
$106
100
$83
80
$74
$73
1990
1995
$69
60
Over the late 1980s and early 1990s, licence fees on tobacco
wholesalers or retailers were an increasingly important
source of revenue for state and territory governments.
Table 13.6.2 shows the revenue to each jurisdiction between
1974, when business franchise fees on tobacco were first
introduced in Victoria, and 1997, when the fees were
effectively invalidated by the High Court ruling (see Section
13.2.2 for a full explanation). It also shows revenue from
1997–98 to June 2000i from tobacco replacement fees.
Tobacco replacement fees ended in July 2000 under the
terms of the Intergovernmental Agreement on the Reform
40
20
0
1965
1970
1975
1980
1985
2000
Figure 13.6.1 Excise collected per person, 1965 to 2000, Australia
Sources: Australian Bureau of Statistics 2010 Australian Bureau of Statistics, as for Table 13.6.1;
3201.0 Population by Age and Sex, Australia, States and Territories5
Note: Excise duty revenue expressed in constant 1989–90 dollars
Table 13.6.2 Revenue collected from Australian state and territory tobacco licence fees, 1975 to 1997, and from tobacco replacement arrangements from 1997–98 to
1999–2000
Year ended
30 June
NSW Vic
Qld
WA
SA
Tas
ACT
NT
Total
$million*
Year ended
30 June
NSW Vic
Qld
WA
SA
Tas
ACT
NT
Total
788
$million*
1975
1976
1977
1978
1979
1980
–
19
31
36
39
42
1
12
25
26
30
35
–
–
–
–
–
–
–
4
8
8
9
10
1
6
7
8
10
12
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
2
41
71
78
88
98
1990
282
174
126
93
55
33
11
13
1991
297
224
136
111
85
34
11
17
916
1992
388
268
159
108
92
34
16
18
1 058
1993
585
360
271
129
145
41
22
22
1 568
1994
633
446
367
212
192
63
31
31
1 971
1981
45
38
–
10
11
2
–
–
106
1995
647
439
403
248
185
76
33
36
2 067
1982
46
42
–
12
15
4
–
1
120
1996
871
591
501
282
212
83
39
43
2 622
1983
51
48
–
17
16
5
–
2
139
1997
947
651
554
293
236
86
41
48
2 855
1984
70
84
–
47
29
10
–
2
241
1985
78
105
–
50
39
14
–
5
291
1986
113
107
–
57
39
19
5
9
349
1987
157
113
–
62
41
19
8
10
410
1988
170
113
–
65
44
26
8
10
436
1989
204
127
50
71
51
27
9
11
548
1998a
82
59
48
24
21
7
4
4
2 497
1998b
811
544
476
277
224
80
36
47
249
1998 total
894
604
524
301
245
88
40
51
2 746
1999
1044 701
613
357
289
104
47
60
3 214
2000
1083 727
635
370
299
108
49
62
3 332
12
7
6
2
1
1
64
2001
21
14
Sources: Australian Tobacco Marketing Advisory Committee 1994,2 Appendix Q, to 1993–94; ABS199978, p20,21; Victorian State Revenue Office, Compilations of state franchise fees on tobacco, all states and territories,
electronic file provided to M Scollo, The Cancer Council Victoria August 19979; Costello 199810 and 1999,11 Table 8, Revenue replacement payments to the states; Costello 200012 Table 28, Revenue replacement
payments to the states; Costello 200113 Table 28, Revenue replacement payments to the states and territories
*
Current dollars: the price in the applicable year; no adjustment has been made for inflation
†
Residual revenue that was received after the end of the 1999–2000 financial year
i
Plus a small amount of residual revenue that was received after the end of the 1999–2000 financial year
Section: 13.6.2
in Australia
55
of Commonwealth–State Financial Relations6 that put into place the reforms to the tax system including the
introduction of a goods and services tax (GST).7
Between 1975 and 1997 revenue from state and territorial tobacco taxes increased (without adjustment for
inflation) more than one thousand-fold from just under $2.5 million in 1975 to just over $2.85 billion in 1996–97.
Revenue to states and territories peaked in 1999–2000. Between 1988–89 (by which time all jurisdictions had
instituted fees) and 1999–2000 (at which time tobacco replacement payments were phased out) revenue to states
and territories from this source increased by 500%—by 350% in real terms.
13.6.3
Federal revenue from tobacco products since July 2000
Excise revenue received from tobacco following the introduction of new tax arrangements implemented between
November 1999 and February 2001 is set out in Table 13.6.3.
Between 2001 and 2010, federal excise revenue on tobacco products increased by about 24% in current dollar
terms, a real decline of just under 4%. The increase between 2001 and 2011 was 38%, an increase of just under 4%
in real terms.
Customs revenue received on tobacco following the introduction of the 1999–2001 tax reforms is set out in Table
13.6.4.
Customs revenue has increased substantially
since 1999 in line with increasing quantities
Table 13.6.3 Table 13.6.4 Annual customs revenue from tobacco products, Australia, 1999–2000 to 2010–11:
cigarettes, cigars, other tobacco products and total
Annual excise revenue from tobacco products, Australia,
2000–01 to 2010–11
Year
ending
June
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
Total excise revenue Total excise revenue
from cigarettes,
from cigarettes,
cigars, smoking
cigars, smoking
tobacco and other tobacco and other
tobacco products
tobacco products
$million*
$million†
4 637.48
4 376.10
4 840.58
4 441.09
5 212.26
4 638.78
5 240.00
4 556.19
5 293.00
4 492.66
5 290.00
4 350.95
5 387.00
4 300.98
5 657.00
4 352.18
5 711.00
4 237.36
5 742.00
4 140.33
6 420.00
4 560.69
6 449.00
Sources: Australian Taxation Office 2006,4 201114 and Swan 201215
*
Current rate: the rate in the applicable year; no adjustment has been made
for inflation
†
Expressed in 2000 dollars
**
Listed as $6 387 in the Final Budget Outcomes released six months earlier
in October 2011
Customs revenue Total customs revenue
Customs
Customs
from smoking from cigarettes, cigars,
Year
revenue from revenue from
tobacco and
smoking tobacco and
ending
cigarettes
cigars
smokeless tobacco other tobacco products
June
$million*
1999
63.48
22.27
168.59
254.34
2000
132.58
22.82
130.94
286.34
2001
174.31
24.09
178.05
376.45
2002
170.34
25.54
203.46
399.34
2003
205.97
27.56
216.75
450.28
2004
147.14
27.89
272.94
447.17
2005
194.45
31.05
293.23
518.74
2006
209.26
28.24
302.76
540.26
2007
237.4
28.26
317.74
583.40
2008
238.75
22.98
345.17
606.91
2009
291.04
23.02
332.72
646.80
2010
334.60
26.16
352.31
713.07
2011
620.87
30.00
446.52
1097.37
Sources: Australian Bureau of Statistics unpublished data16 and ABS 2005,17 200718 and 201119
Notes: ABS reports drawn from data published in several sources including:
1233.0 – Australian Harmonized Export Commodity Classification (AHECC), Jan 2007
5368.0 – International Trade in Goods and Services, Australia
5372.0.55.001 – International Merchandise Trade: Confidential Commodities List
5439.0 – International Merchandise Imports, Australia
5487.0 – Information Paper: International Merchandise Trade Statistics, Australia: Data Confidentiality, 1999
5489.0 – International Merchandise Trade, Australia, Concepts, Sources and Methods, 2001
5498.0.55.001 – Information Paper: Ensuring International Trade Data Quality, 2008
*
Section: 13.6.3
56
Facts and Issues
cigarettes produced offshore since the merger of Rothmans Holdings and WD and HO Wills Holdings and the
entry into the market of Imperial Tobacco, which does not operate production facilities in Australia (see Section
10.4.3).
13.6.4
Total federal and state revenue
from tobacco products
Table 13.6.5 Federal and state/territory revenue arising from excise duty, tobacco
licensing fees, tobacco replacement fees and GST, 1974–75 to
Table 13.6.5 sets out total excise revenue from tobacco
products combined with total revenue from state fees and
tobacco replacement payments until 2000.i
Year
ending
June 30
From July 2001 under the new tax system tobacco
replacement payments to states and territories ceased, and
all federal excise duty on tobacco products was retained
by the federal government. All revenue from the GST has
been distributed to states in line with the terms of the
Intergovernmental Agreement.6 Revenue from the GST
on tobacco products is not reported separately from other
GST revenue but can be calculated based on information
about revenue from tobacco sales. Estimated total revenue
from the GST on tobacco products is also set out in
Table 13.6.6. The proportion of revenue going to each
state and territory is adjusted for various demographic
and economic factors as per the Intergovernmental
Agreement,6 spelled out in detail each year in Part IV of
the Federal Financial Relations sections of Final Budget
Outcome reports.19ii
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
Data on revenue from excise and customs duty (from
Tables 13.6.3 and 13.6.4) are provided in Table 13.6.6
along with estimates of GST revenue from the sale of
cigarettes and other tobacco products since 2000–01. This
represents total tax revenue from sales of tobacco products
in Australia for the 11 years to 2010–11.
Total revenue in 2010 was no higher than it was in
2001. Revenue has increased by about 13% in real terms
between 2001 and 2011.
Increases in state and territory licence fees resulted
in considerable real increases in state and territory
income from this source, in contrast to the much more
limited growth in federal income.iii Between 1984–85 and
1999–2000, revenue to the federal government almost
doubled, but revenue to states and territories increased
10-fold. Revenue to both the federal government and to
i
ii
Federal excise
revenue*
Total federal and
Total state/
state tax revenue
territory revenue
from tobacco
$,000†
472 914
541 537
561 310
559 228
653 409
703 214
706 812
724 410
794 039
856 245
889 017
961 072
1 009 203
1 091 776
1 145 787
1 262 427
1 274 043
1 330 278
1 299 711
1 347 842
1 509 058
1 614 386
1 713 085
1 648 740
1 633 736
1 658 906
2 496
40 922
70 533
77 890
88 209
98 223
105 968
120 374
138 906
241 386
290 908
348 880
410 025
435 583
548 297
788 323
916 050
1 057 781
1 568 203
1 971 223
2 067 000
2 622 000
2 855 684
‡2 746 353
3 213 700
3 332 200
475 410
582 459
631 843
637 118
741 618
801 437
812 780
844 784
932 945
1 097 631
1 179 925
1 309 952
1 419 228
1 527 359
1 694 084
2 050 750
2 190 093
2 388 059
2 867 914
3 319 065
3 576 058
4 236 386
4 568 085
4 395 093
4 847 436
4 991 106
Sources: Australian Tobacco Marketing Advisory Council 1994,2 Appendices O and Q; ABS 19978 and
200621Table 4, 1999–2000, Table 5, 2000–01; Victorian Office of Revenue Compilations
1997;9 Willis3 1998,10 (and Fahey) 1999,11 200012 and 2001;13 Australian Taxation Office
2007;21 Costello 200722
*
Revenue from customs duty is not included in these figures.
†
‡
The revenue going to state and territories between 1997–98 and 2000–01 is in the form of
tobacco revenue replacement grants.
Revenue from customs duty is not included in this table.
In 2005–06 the shares were as follows: New South Wales 27.9%, Victoria 21.1%, Queensland 20.7%, Western Australia 10.2%, South Australia 9.3%, Tasmania 4.0%, Australian Capital
Territory 1.9% and Northern Territory 4.9%.
iii Large price increases resulting from increases in state fees were accompanied by significant declines in consumption over the 1980s. The effects of reduced consumption were offset for
state and territory governments by the increase in state fees, but, because levels of excise and custom duty were subject only to indexation, federal revenue did not increase in real terms.
Section: 13.6.4
in Australia
Table 13.6.6 states and territories has also increased
since 2000–01 in current dollar terms.
Annual revenue from tobacco products, Australia, 2000–01 to 2010–11: excise revenue,
customs revenue and estimated GST revenue
Total revenue per capita (federal and state
combined) in constant dollar terms is
plotted in Figure 13.6.3.
Total excise and
Estimated
Total estimated
Total estimated
customs revenue from GST revenue
revenue from
revenue from
Year
cigarettes, cigars,
from sales excise and customs excise and customs
ending
smoking tobacco and of tobacco duties and GST on duties and GST on
June
other tobacco products products
tobacco products tobacco products
$million*
$million 2010†
2001
5 013.93
783.27
5 797.21
7 469.37
2002
5 239.93
821.18
6 061.11
7 984.58
2003
5 662.54
862.90
6 525.45
7 929.25
2004
5 687.96
875.81
6 563.78
7 794.34
2005
5 811.73
932.81
6 744.64
7 816.35
2006
5 830.27
940.00
6 770.27
7 602.88
2007
5 970.40
956.36
6 926.76
7 558.08
2008
6 263.91
989.09
7 253.00
7 654.13
2009
6 357.79
997.45
7 355.24
7 526.50
2010
6 455.07
1 037.18
7 492.25
7 492.254
2011
7 517.37
1 225.36
8 742.74
8 480.07
As can be seen from Figure 13.6.3, in real
terms total revenue per head of population
increased sharply between 1990 and 1995
and then again between 1995 and 2000.
Total revenue per head of population in
2010 was lower in real terms than it was in
2000 and 2005.
13.6.5
Revenue from tobacco
taxes as a proportion
of total government
revenue
Sources: Excise and customs revenue data to 2003 provided by email by the Australian Taxation Office to K Lindorff of The Cancer
Council Victoria 2006; Australian Taxation Office 200721; GST revenue calculated from the value of retail sales on tobacco
products, Australian Bureau of Statistics 2011 ABS 5206.0 Australian National Accounts, Private Final Consumption23
It is sometimes said that governments
are reluctant to tackle tobacco use in the
community because of reliance on income
from tobacco taxes. Table 13.6.7 sets
out revenue from tobacco products as a
percentage of total government revenue in
1998–99 before reforms to the tax system,
in 2003–04 and in 2010–11.
Federal
State/
Territorial
7000
6000
*
†
Expressed in 2010 dollars
$6,455
$5,812
250
$209
200
150
$3,332
3000
2000
1000
0
$703
$473
$98
$2
1975
1980
$889
$1,262
$788
$225
$197
$174
5000
4000
57
$120
$121
1975
1980
$110
$120
100
$2,067
$1,059 $1,659
$933
$1,037
50
$291
1985
1990
1995
2000
2005
2010
0
1985
1990
1995
2000
2005
2010
Figure 13.6.2 Figure 13.6.3 Federal and state/territory revenue: 1975 to 2010, Australia
Total revenue from tobacco per capita (federal and state/territory
combined): 1975 to 2010, Australia
Sources: As for tables 13.6.5 and 13.6.6
Notes: Federal data prior to 2000 is excise revenue only. Data for 2000, 2005 and 2010 includes
revenue from customs duty. Customs duty prior to 2000 was very low.
Sources: As for Table 13.6.6
Note: Revenue expressed in 1989–90 dollars
Section: 13.6.5
58
Facts and Issues
Table 13.6.7 As can be seen from Table 13.6.7, tobacco tax revenue
as a percentage of total government revenue declined
sharply for states and territories following introduction
of the reforms associated with the new tax system.7
Tobacco tax revenue as a percentage of total revenue
increased significantly for the Australian government
but still represents only a very small percentage of total
government revenue—less than 2.5% in 2010–11.
Tobacco tax revenue as a percentage of total government revenue: Australian
government and state and territory governments combined, 1998–99,
2003–04 and 2010–11
1998–99 2003–04 2010–11
$million*
Australian government
Tobacco tax revenue (customs and excise) 1 888.1 5 688.0 7 517.37
Total government revenue
137 222.0 209 560.0 288 075.0
Tobacco tax as a % of total revenue
1.4
2.7
2.6
State and territory governments combined
†
Tobacco tax revenue
3 213.6
875.8
1 225.4
34 426.0 40 394.0 58 121.0
Tobacco tax as a % of total revenue
9.3
2.2
2.1
Total Australian and state and territory governments
Tobacco tax revenue
5 101.8 6 563.8 8 742.7
171 648.0 249 954.0 346 196.0
Tobacco tax as a % of revenue
3.0
2.6
2.5
13.6.6
International comparisons
in tobacco tax revenue as a
proportion of total government
revenue
Table 13.6.8 lists tobacco excise tax revenue as a
proportion of total tax revenue for a number of
countries for which data were available in 2005.
Sources: Table 13.16 and Australian Bureau of Statistics 200024 and ABS 200620
At the time this analysis was prepared, the contribution
of revenue from tobacco to total government revenue
was comparable in percentage terms in Australia
compared with most other high-income countries
for which data are available, but lower than for most
middle-income and low-income countries.
*
†
This figure is from the Final Budget Outcomes Statement. The figure listed in the ABS publication
was $3 217.0, possibly a transcription error.
Table 13.6.8 Tobacco excise tax revenue as a proportion of total tax revenue, selected countries, 2005
Sweden
Slovenia
Denmark
Finland
Netherlands
Belgium
Lithuania
Ukraine
Austria
France
United Kingdom
Italy
Latvia
Ireland
Germany
% tobacco excise made up of
total government revenue in
EU member states and other
selected countries
0.7
0.8
0.9
1.2
1.5
1.8
1.8
1.8
2.0
2.1
2.2
2.3
2.3
2.6
2.8
Source: European Commission 200825
Section: 13.6.6
% tobacco excise made up of
total government revenue in
EU member states and other
selected countries
Spain
2.9
Hungary
3.2
Estonia
3.4
Cyprus
3.6
Portugal
3.7
Slovakia
4.0
Czech Republic
4.0
Poland
4.8
Malta
4.9
Greece
5.6
Romania
5.8
Bulgaria
6.8
Luxembourg
7.3
Indonesia (2007)
8.4
in Australia
59
References
1. Australian Bureau of Statistics. 6401.0 Consumer Price Index, Australia, Table 1B CPI: All groups, Index numbers and percentage changes. Canberra: ABS, 2006. [viewed 23 October 2006].
Available from: http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6401.0Sep%202006?OpenDocument
2. Australian Tobacco Marketing Advisory Committee. Annual Report 1994: year ended 31 December 1994 regarding the operation of the Tobacco Marketing Act 1965. Canberra: Australian
Tobacco Marketing Advisory Committee, 1995.
3. Willis R. 1995-96 Commonwealth Budget. Canberra: The Parliament of the Commonwealth of Australia, House of Representatives, 1995.
4. Australian Taxation Office. Taxation Statistics 2003-04: A summary of tax returns for the 2003–04 income year and collections for the 2004–05 financial year. Canberra: ATO, 2006.
Available from: http://www.ato.gov.au/corporate/content.aspx?menuid=35310&doc=/content/70906.htm&page=18#P1198_58931
5. Australian Bureau of Statistics. 3201.0 Population by age and sex, Australian states and territories, Jun 2010; Table 9. Estimated resident population by single year of age, Australia
Canberra: ABS, 2010. Available from: http://www.abs.gov.au/AUSSTATS/abs@.nsf/allprimarymainfeatures/B52C3903D894336DCA2568A9001393C1?opendocument
6. Commonwealth of Australia, The States of NSW, Victoria, Queensland, Western Australia, South Australia, et al. Intergovernmental agreement on the reform of Commonwealth-State
financial relations. Commonwealth of Australia, 1999. Available from: http://www.treasury.qld.gov.au/office/clients/commonwealth/intergovernmental/agreement.shtml
8. Australian Bureau of Statistics. 5506.0 Taxation Revenue, Australia 1996-97. Canberra: ABS, 1997. Available from: http://www.abs.gov.au/AUSSTATS/abs@.nsf/allprimarymainfeatures/4
EC77F42306CAD94CA25722E001A8037?opendocument
9. Victorian Office of Revenue, Melbourne, Australia. Compilations of state franchise fees on tobacco, all states and territories (personal communication). Electronic file Michelle Scollo of The
Cancer Council Victoria, 1997.
10. Costello P. Budget 1997-98. Final budget outcome. Table 12, Revenue replacement payments to the states, p 17. Australian Government, 1998. Available from: http://www.finance.gov.
au/archive/archive-of-publications/commonwealth-financial-transactions/docs/Final_Budget_Outcome1997-98.pdf
11. Costello P and Fahey J. Budget 1998-99. Final budget outcome 1998-99. Table 8, Revenue replacement payments to the States. Canberra: Australian Government, 1999. Available from:
http://www.finance.gov.au/publications/final-budget-outcomes/docs/Fbo9899.pdf
12. Costello P. Budget 1999-2000. Final budget outcome. Part IV: Federal financial relations. Table 28, Revenue replacement payments to the States and Territories. Canberra: Australian
Government, 2000. Available from: http://www.budget.gov.au/1999-00/finaloutcome/html/Part4.html
13. Costello P. Budget 2000-01. Final budget outcome. Part IV: Federal financial relations. Table 28, Revenue replacement payments to the states and territories. Canberra: Australian
Government, 2001. Available from: http://www.budget.gov.au/2000-01/finaloutcome/download/05Part4.pdf
14. Australian Taxation Office. Taxation Statistics 2008-09: a summary of income tax returns for the 2008-09 income year and other reported tax information for the 2009-10 financial year.
Canberra: ATO, 2011 Last modified May 2011 [viewed May 2011]. Available from: http://www.ato.gov.au/content/00268761.htm
15. Swan W. Budget 2011-12. Final budget outcome. Part 1: Australian government budget outcome. Canberra: Australian Government, 2012. Available from: http://budget.gov.au/201112/content/fbo/html/index.html/part_7.html
16. Australian Bureau of Statistics. Customs quantities and value for tobacco products for 1993-94 to 2001-02, Unpublished data. Canberra: ABS. Electronic files provided annually to 1994 to
2003.
17. Australian Bureau of Statistics. International trade, customised report. Australian clearance data on tobacco products by quantity, by customs value, 2002-03 to 2003-04. Canberra: ABS,
2005.
2007.
2011.
20. Costello P. Budget 2005-06. Final budget outcome. Canberra: Australian Government, 2006. Available from: http://www.budget.gov.au/2005-06/fbo/html/index.htm
21. Australian Bureau of Statistics. 5506.0 Taxation Revenue Australia 2004-05. ABS, 2006. Available from: http://www.ausstats.abs.gov.au/ausstats/subscriber.nsf/0/0CDCE5E2AE7C553BCA
25713F0016F74C/$File/55060_2004-05.pdf
22. Costello P. Budget 2006-07. Final budget outcome. Revenue. Canberra: Australian Government, 2007. Available from: http://www.budget.gov.au/2006-07/fbo/html/02_part_1-01.htm
23. Australian Bureau of Statistics. 5206.0 Australian National Accounts: national income, expenditure and product, Table 8. Household final consumption (HFCE) Australia. Canberra: ABS,
2011. Updated 7 December 2011 [viewed ][10 December 2011]. Available from: http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/5206.0Sep%202011?OpenDocument
24. Australian Bureau of Statistics. 5506.0 Taxation Revenue, Australia 1998-99. ABS, 2000. Available from: http://www.ausstats.abs.gov.au/ausstats/subscriber.nsf/0/D92BA555CF1237BAC
A2568C100083B8B/$File/55060_1998-99.pdf
25. European Commission. European Commission taxation and customs union: tobacco products legislation. Brussels: EC, 2008. Updated 8 May 2012 [viewed 9 May 2012]. Available from:
http://ec.europa.eu/taxation_customs/taxation/excise_duties/tobacco_products/legislation/index_en.htm
Section: 13.6.6
60
Facts and Issues
13.7
Avoidance and evasion of taxes on tobacco products
The issue of tax evasion in the tobacco market was brought to the attention of the tobacco control community in
the mid-1990s in two articles by Joossens and Raw.1,2 Frequently cited since that time and among the most wellknown in the British Medical Journal’s specialist journal, Tobacco Control,3 the articles suggested that smuggling of
cigarettes was occurring on a ‘massive’ scale across the globe and was costing government treasuries thousands of
millions of dollars in lost revenue. On the basis of the 30% difference between total global imports and total global
exports apparent at the time in the US Department of Agriculture reports on world markets and trade, the authors
claimed that the international contraband market must be worth 30% of the value of world tobacco exports.1 The
authors argued that it was this form of tax evasion rather than simple avoidance of taxes through cross-border
shopping between European countries with widely varying tax rates that was the main cause of lost revenue for
governments. It was further argued that the extent of illicit trade in a country had much more to do with the
tolerance for corruption in that country than with its rate of taxes on tobacco products.1
The nature of the market for illicit tobacco products post-2010 appears to differ markedly from the picture painted
in the Joossens and Raw articles from the 1990s.4 The value of global tobacco exports internationally is now largely
in step with the value of imports.5 And a number of forms of evasion of taxes on tobacco products not described in
the 1990s’ papers appear to be apparent in many countries across the globe since the early-to-mid-2000s.6
Quantifying the extent of use of illicit tobacco products is extremely difficult and all current estimates of the size
of the illicit market should be regarded with caution. The major tobacco companies appear to be exploiting fears
about the potential loss of revenue and alleged involvement of criminal organisations to discourage governments
in many countries from adopting measures likely to significantly reduce consumption of tobacco products. Most
industry-sponsored estimates of the extent of illicit trade appear to be highly exaggerated.
This section describes the various ways by which taxes on tobacco products can be avoided. It describes attempts to
quantify the extent of illicit trade both internationally and in Australia. Industry estimates put the illicit market in
Australia at about 13% of the legal market, but estimates based on data from the National Drug Strategy Household
Survey would suggest that it is more like 2–3% of the total market.
This chapter also summarises policy measures proposed at the international and national level to minimise illicit
trade, in particular the Protocol developed for the Conference of Parities for the WHO Framework Convention on
Tobacco Control, and recent lowering of limits for import of tobacco products for travelers to Australia.
13.7.1
What constitutes avoidance and what constitutes evasion of taxes
on tobacco products?
Terms
Duty-free
Free zone
Definitions as used in this section
Purchases that have no federal excise or import duties applied to the sale price. Purchases without duty payment are subject to restrictions on volume
A part of the territory … where goods introduced are generally regarded, insofar as imports duties and taxes are concerned, as being outside the Customs
territory7
Tax avoidance Legal activities to pay less tax or no taxes
Tax evasion
Illegal activities to pay less tax or no taxes
Illicit tobacco Any tobacco product on which required duties and taxes have not been paid. This may include: processed or unprocessed tobacco; smoking tobacco or
cigarettes; products grown or produced locally or smuggled from over borders; products that are counterfeit or ‘genuine’.
Section: 13.7.1
in Australia
Terms
Illicit trade
61
Definitions as used in this section
Any practice or conduct including growing, production, shipment, receipt, possession, distribution, sale or purchase, including any practice or conduct intended
to facilitate such activity, that facilitates the illegal evasion of taxes.
NB: By definition ‘illicit trade’ does not include legal duty-free sales or cross-border shopping. However it seems that many commentators on this topic often
use the term ‘illicit’ as a convenient but incorrect shorthand when they are really talking about avoidance as well as evasion of taxes.
‘Black market’ Another term for illicit trade, with emphasis on final sales to customers.
Contraband Products on which legally required taxes have not been paid
Smuggling
Evasion of tax involving the movement of products across borders
‘Bootlegging’ Often used by commentators to refer to small-scale smuggling
‘Chop-chop’ Roughly processed tobacco either sold loose or pre-rolled into cigarettes, and supplied to distributors and customers without payment of duties or taxes. More
precisely referred to as unbranded illicit tobacco (and unbranded illicit cigarettes). Has been the main form of evasion of tobacco taxes in Australia, mainly
grown and produced locally until 2006, and more recently mostly smuggled from overseas.
Counterfeiting Production of manufactured products which bear a trademark without the consent of the owner of the trademark. Counterfeit cigarettes are also known as ‘fake
cigarettes’. If duty is not paid on counterfeited cigarettes then they can also be considered ‘contraband’.
13.7.1.1
Legal avoidance versus illegal evasion
The distinction between legal avoidance and illegal evasion is not a completely clear one, with a considerable
area of grey in the middle. Taxes on tobacco products can be circumvented in many different ways. Joossens,
Chaloupka, Merriman and Yürekli (2000)8 and the International Agency for Research on Cancer in handbooks
published in 20089 and in 20116 provide useful distinctions between: legal and illegal circumvention; products for
personal use versus commercial resale; and products in small versus large quantities.8
<< Legal circumvention occurs frequently in Europe, North America and other parts of the world through:
<< legal cross-border shopping
<< legal tourist shopping
<< legal duty-free sales
<< ‘distance selling’ previously through mail order and in recent years predominantly through the Internet,
where smokers in high-taxing jurisdictions might order cigarettes from vendors in low-taxing jurisdictions
including other states, other countries or from tax-free jurisdictions such as Native American reservations
where residents are not required to pay duties.10
Efforts by tobacco companies to reformulate or rebrand products so that they are classified in
a category or band that attracts a lower level of tax might also be thought of as a form of legal
circumvention.6
<< Joosens et al use the term ‘Quasi-legal circumvention’ to describe behaviour that may not be in breach of any
particular legislation as it currently stands, but are not condoned because they are not in line with its purpose
and can be deemed as ‘schemes’ designed specifically to avoid taxes. They use the example in the US of:
<< grey-market sales involving export of cigarettes to wholesalers in one country who import them back to
the country of origin, exploiting differences in taxes applicable to cigarettes destined for export and those
destined for domestic consumption.11
Such activity may be clearly legal or illegal in other countries depending on the way that
legislation is drafted.
<< Illegal circumvention includes:
<< illicit growing and rudimentary manufacturing of roughly processed tobacco sold to consumers for use in
roll-your-own cigarettes or pre-rolled into cigarettes.12 This form of illegal circumvention has been a notable
problem in both Australia—commonly referred to as ‘chop-chop’13,14— as well as in New Zealand15 and has
also been detected in Canada16
Section: 13.7.1.1
62
Facts and Issues
<< bootlegging by individuals or small-time operators or groups purchasing tobacco products in low-tax
jurisdictions in amounts that exceed limits set by customs regulations, and then reselling them to others in
high-tax jurisdictions
<< large-scale smuggling, involving the illegal transportation across borders of large consignments of products
(including illegally grown tobacco, counterfeit cigarettes and genuine cigarettes diverted from the legal
market) often reputed to involve highly organised criminal organisations
<< production of cigarettes that appear very similar to brands produced by licensed tobacco manufacturers but
which are produced without the permission of the trademark holders. These are sold to suppliers who make
them available either within their own countries or overseas at lower cost than the ‘genuine’ products, and
are a concern to tobacco control in instances where distributors avoid payment of local duties and taxes.6
13.7.1.2
Contraband ‘versus’ counterfeit cigarettes
The tobacco products distributed through the first three forms of illegal circumvention described above could be
regarded as ‘contraband’, in that duties and taxes are not paid in the countries where the products are purchased. In
the case of counterfeit cigarettes, duties and taxes may or may not be paid.17
Counterfeit cigarettes are sometimes declared to Customs as genuine ones at the point of entry.
In this way, counterfeit cigarettes are introduced into the licit market and, even though duties
and taxes are paid, a substantial profit is still made by the criminals who no longer incur the
additional costs associated with concealing the cigarettes.
World Customs Organization, 201217
The overlapping definitions of ‘contraband’ and ‘counterfeit’ cigarettes have created considerable confusion among
those writing and talking about illicit trade in cigarettes, with double counting apparent in estimates of use of such
products in reports prepared for Australian companies—see Section 13.7.3 for further details.
13.7.1.3
Involvement of licensed tobacco manufacturers
Examination of industry documents released as part of settlements of legal action between US state attorneys
general and major US tobacco companies revealed that several of the major international tobacco companies were
involved in supply of cigarettes in the 1980s and 1990s to the ‘duty not paid’ market in the UK,18 Canada,19,20 and in
Africa21 and Asia, where smuggling appeared to play an important component in companies entry strategies into
markets which were previously closed to them due to restrictive trade policies.6 After initiation and settlement
of legal action against companies by several countries under provisions of the US Racketeering Influenced and
Corrupt Organizations Act (commonly referred to as ‘RICO’) the European Union entered into agreements
with several major companies to improve controls and reduce diversion of manufactured cigarettes to the illicit
market—see Technical appendix 13.7.1 for further detailsi.
It is believed that an increasing percentage of the seizures made by authorities since the early 2000s in the
European Union (EU) and elsewhere comprise counterfeit cigarettes,22 with companies claiming that this form of
smuggling had become a large and growing problem in Europe4,23 and beyond.
The country of origin of cigarettes seized by customs authorities suggest that large quantities of counterfeit
cigarettes in recent years have been manufactured in China12,24 which is a major producer of tobacco with many
small growers and manufacturing plants throughout the country. Reports based on interviews with tobacco
industry respondents suggest that traders may source products from factories that produce legitimate products
for manufacturers and use this activity as cover for ‘overrun’ production of counterfeits.22 The World Customs
Organization in its annual report for 2011 however notes a ‘remarkable decrease of cases involving consignments
i
For details on the agreements between the European Commission’s European Anti-Fraud Office and tobacco companies Philip Morris International (2004), Japan Tobacco (2007), British
American Tobacco (2010) and Imperial Tobacco Limited (2010, see http://ec.europa.eu/anti_fraud/investigations/eu-revenue/cigarette_smuggling_en.htm
Section: 13.7.1.3
in Australia
63
departing from China.’25 p5 A network of East European companies headquartered in Kalinigrad, a Russian territory
between Poland and Lithuania and annexed by the Soviet Union after World War II, is also alleged to be involved
in large-scale production of a brand of cigarettes called Jin Ling which resembles US brand Camel cigarettes and is
made exclusively for the illicit market.26
It should be noted that customs authorities are mostly relying on intelligence and assessments by tobacco
companies to determine whether goods are counterfeit. The licensed manufacturer may be able to detect whether
cigarettes bearing the trademarks and other design features of their brands are counterfeit or not. However
counterfeit products are often so close in appearance to the brands they are copying, that customs officials and
consumers may not be able to distinguish ‘counterfeit’ from ‘genuine’ products. From the point of view of revenue
collection authorities, the distinction matters not. Such agencies need only be concerned with whether or not
revenue has been paid.
13.7.2
What factors drive or facilitate avoidance and evasion of tobacco
taxes?
The review of tobacco tax policy by the International Agency for Research on Cancer (IARC)6 provides a helpful
discussion on the factors motivating the (legal) avoidance of taxes and the (illegal) supply and use of illicit tobacco
products.
13.7.2.1
What drives (legal) tax avoidance?
It is evident that (legal) cross-border and tourist shopping are primarily motivated by the relative price differences
between adjacent geographical areas that result from differing excise duties and differing rates of value added (or
goods and services) tax.27 The extent to which consumers engage in these forms of tax avoidance depends on the
amount of money they can save compared with the costs involved in making these forms of purchase (including
transport, mailing costs and time) and the opportunity to engage in this kind of purchasing (for instance frequency
of interstate or overseas travel for work or holidays). The IARC report reviews several studies (Vedder, 1997,
Cnossen, 2005, Goel, 2008, De Cicca, 2010 and Merriman, 201028) that have demonstrated that differences in tax
rates between proximate jurisdictions reduces the efficiency of tax policy, with evidence of responsiveness declining
in line with proximity to borders with lower-taxing jurisdictions. Cross-border shopping in the UK increased
substantially once the saving to be gained in buying cigarettes in France started to substantially outweigh the cost
of the ferry trip between the two countries.6
The IARC review also concluded that purchase of products via the Internet is also much more likely to occur
among residents in high-taxing jurisdictions than among residents in low-taxing jurisdictions. People who
purchase cigarettes through the Internet are primarily motivated by lower prices which are possible because on-line
vendors rarely pay excise taxes. One survey of US smokers who had purchased on-line found that consumption
by such smokers increased compared to purchasers paying full-price for cigarettes from bricks-and-mortar retail
outlets. Remote purchasing of tobacco products has increased greatly over the 2000s with ever-increasing numbers
of people regularly engaging in on-line shopping. The number of websites selling US cigarettes increased from 88
in 2000 to 772 in 2006. In 2003, 10% of vendors were based outside the US, out of the reach of US law enforcement
agencies; by 2006 this had increased to 45%.6,29
(Legal) avoidance of taxes occurs in many countries regardless of levels of organised crime and corruption.30
Section: 13.7.2.1
64
Facts and Issues
13.7.2.2
What drives (illegal) tax evasion?
Relative costs of various products available to consumers are a key driver of tax avoidance, and must also be
important in small-scale bootlegging. However the factors determining the extent of illegal circumvention of
tobacco taxes in any country would appear to be much more complex. Many people prepared to engage in legal
avoidance are simply not willing to engage in illegal evasion as a matter of principle. For potential suppliers who
are willing to consider trading in illicit tobacco products and have the means to do so, the decision about whether
or not to actually engage in such activity is still not an automatic one. Individuals are likely to consider not simply
the price they could charge for products in the illicit market but rather the profit that they could expect to make
once costs are deducted from income. The greater the expected rewards and the lower the costs, the more likely an
individual prepared and able to be involved in illegal activity is to actually engage in such activity.6,22
The prices that suppliers can charge consumers for illicit products are determined partly by the prices of products
in the legal market. But the prices suppliers can charge are also affected by the perceived consistency of quality
and supply of the illicit goods and the costs to the consumer in terms of time and travel and any perceived risks
associated with purchase (e.g. contact with those involved in crime, fear of detection by authorities and so on).31
The costs for the supplier to be involved in the illicit tobacco market include
<< direct costs such as money required to bribe officials or other operators in the illicit trade
<< opportunity costs such as salary forgone from other possible employment and other potential use of capital
(growing land, equipment, factory space, boats and the like)
<< a judgement about the probability of detection in relation to the magnitude of penalties and social opprobrium
of being prosecuted.
These three considerations are likely in turn to be affected by factors relating to the nature of international trade,
transport and distribution channels, cultural norms relating to bribery and corruption, government diligence in
record keeping, investment in law enforcement and the individual’s attitude to the prospect of jail time.6
Nature of international trade
Illicit trade can be more attractive in situations where
<< restrictions on the supply of imported tobacco (through the imposition of quotas, tariffs and other non-tariff
barriers) lead to significant price differentials
<< cigarettes intended for export are significantly cheaper than those intended for local consumption.
Detection of illicit cigarettes is more difficult where there is a large volume of international trade with only a small
percentage of cargo subject to checks.
It is believed that cigarette smugglers often take advantage of free trade zones. (IARC 20116 citing World Customs
Organization 200732) The Financial Action Taskforce of the Organization for Economic Co-operation and
Development (OECD) estimated that there were about 3000 free-trade zones in 135 countries in 2009.33 The
International Consortium of Investigative Journalists documented cases of smuggling through free-trade zones on
the island of Aruba, and in Colombia (Beelman 2000 cited in the IARC report6) and the US Financial Action Task
force indentified smuggling through China to the US through a free-trade zone in Hawaii.33
Logistical factors
Evasion can sometimes occur in situations where people suddenly find themselves under financial pressure and in
possession of the immediate means to be involved in the illicit market. This occurred in Australia when tobacco
companies reduced prices paid and then stopped buying from Australian growers some of whom then turned to
growing chop-chop.34 It also occurred after China joined the World Trade Organization and the products of small
regional factories in China were no longer competitive.24
Section: 13.7.2.2
in Australia
65
Costs of production of cigarettes are quite small, and technological advances in printing make counterfeiting easier
in recent times. However, obtaining raw materials (particularly the tobacco) and moving stock out of premises
would be difficult to conceal in most locations.
Products that need to be cleared through major shipping ports are more likely to be scrutinised by customs officials
than are products travelling by road or rail.
Distribution of illicit products is likely to be easier in countries with highly developed black markets for other illicit
products and a well-developed network of street sellers and small market stall holders.
Poor record keeping
A loose export–import recording system and lax work practices and supervision reduce the likelihood of detection.
Law enforcement perceived as lax
Evidence reviewed in the IARC report6 suggests that the relationship between perceived risk of prosecution and
likelihood of engaging in the illicit tobacco trade is not a linear one. Rather there may be a threshold interception
rate beyond which the rate of smuggling rapidly declines.
Poverty
As pointed out by Staake et al in their analysis of business strategies in the counterfeit market,31 those involved
in the supply of illicit cigarettes are generally very anxious to avoid detection by authorities and therefore must
be extremely careful to hide their operations. This makes it difficult for large numbers of consumers to be aware
of and purchase their products. While threat of seizures is unlikely to be a major concern, fine and jail times for
individuals is likely to reduce the supply of people willing to be involved and increase the costs demanded by those
who are involved, thus increasing the likely cost of the product. In some developing countries and among some
impoverished groups in high income countries, some smugglers may be undeterred by very high levels of risk if
the return from smuggling exceeded the likely lost earnings due to time in jail. However in wealthier countries the
economics of tax evasion are much more precarious.
Political instability, corruption, war and organised crime
Criminal networks involved in smuggling operate more easily in countries where corruption is high or government
controls are eroded by war or political instability, and such groups are well placed to become involved in the illicit
tobacco trade. Black market cigarettes were an important source of income for people during periods of war in the
Balkans.35 Using indicators of corruption based on an index created by international non-government organisation
Transparency International, Merriman et al36 observed that contraband sales tend to increase not with tax levels or
cigarette prices but rather with the degree of corruption in any country.37
13.7.3
How can the extent of avoidance and evasion be quantified?
Given the illicit nature of tax evasion, developing accurate measures of such activities is extremely challenging if
not impossible.
Section: 13.7.3
66
Facts and Issues
13.7.3.1
Methodological approaches to quantifying avoidance and evasion
The International Agency for Research on Cancer’s (IARC) Handbook on the evaluation of tobacco control
strategies9 outlines six possible approaches to quantifying the extent of avoidance and evasion. These are outlined
below together with comments about the validity of estimates provided by each source.
1. Expert opinion:
People who may be regarded as having expertise about the evasion of taxes on tobacco
products would include:
<< investigators hired by tobacco companies to identify wholesalers and retailers selling illegally
manufactured tobacco or counterfeit products
<< customs and other law enforcement officials
<< professionals employed in health and welfare agencies whose extremely disadvantaged clients may be
more likely to be using such products
Such experts can provide invaluable qualitative information about the sort of products being
used and some of the characteristics of the individuals they have encountered who are involved
in the illicit market. However none of these people has any particular ability or knowledge that
allows them to judge the extent of use beyond what they have observed.
Customs officials and customs records can provide valuable information about trends in
interceptions of smuggled goods. Customs departments generally report on the number of
interceptions and the quantities of good seized.
Investigators and law enforcement officials are likely to have focused on high risk areas
or groups or to have based their searches on tip-offs. Professionals working in welfare
organisations are likely to be in contact only with the most disadvantaged members of the
area their agency services. All three are likely to over-estimate use because they are prone
to extrapolate through the prism of their day-to-day ‘worst case’ experience to the entire
population. All three are likely to be affected by second- and third-hand stories from original
sources who may themselves be biased or misinformed.
2. Comparison of import and export statistics:
The basis of the claimed 30% size of the global market for large-scale smuggling of legally
manufactured cigarettes has never been seriously examined. It is not known for instance,
whether global exports during the 1990s were recorded and reported on in ways that
systematically differed to the ways that imports were recorded and reported on.i
3. Comparisons of tax-paid sales and individually reported consumption measures:
The United Kingdom is one of the few countries in the world to produce regular yearly
estimates of illicit trade, with a methodology based on the discrepancy between trends in legal
sales and smoking habits as quantified in household surveys.38
Tax paid sales generally reflect shipments at the factory or wholesale level rather than
individual consumption. These can vary considerably from actual sales both because they
occur at an earlier point in time than purchase and consumption, and because refunds of taxes
can be obtained on stock supplied to shops but returned unused. It is therefore highly likely
that reported consumption will differ from levels of manufactured tobacco, even if there were
no illicit trade. Reported consumption in Australia is substantially lower than the extent of
consumption suggested by tax receipts—see Chapter 2, Section 2.2. This would likely reflect
i
Cigarette imports in some countries, for instance, are dutied according to the quantity of cigarettes, and in other countries customs duty is charged on the basis on the weight or the value
of the product. International research agencies for convenience often assume that one gram of any tobacco product is equivalent to a single cigarette. However in reality cigarettes weigh
considerably less than one gram. In Australia, any measure of cigarettes imported based on a standard conversion of tobacco weight would be underestimating the number of cigarettes
imported by 25 to 30%.
Section: 13.7.3.1
in Australia
67
under-reporting of consumption by smokers. It is unknown whether the extent of such underreporting may be fluctuating over time.
4. Modelling of demand for tobacco products:
Researchers in the US and European Union have undertaken several research projects which
attempt to estimate the extent of evasion by developing models that include estimates of price
elasticity and differences in prices between state (or Member states) and tax-free jurisdictions
such as Native American reservations.
This work is interesting and helpful in assessing the likely and observed increases in legal
and quasi-legal circumvention following tax increases or in the presence of price differences.
However, trends in legal circumvention may not be an accurate predictor of trends in illegal
circumvention given that illegally manufactured and smuggled products are likely to be less
readily and reliably available (and harder to find), and given concerns about illegality.
5. Survey of tobacco users’ purchase behavior:
Representative surveys of tobacco users that collect information on purchase location and
prices paid can be helpful in determining the extent of various forms of avoidance of tax
including cross-border shopping, direct purchase via the Internet and duty-free purchases.6
Surveys where respondents are confident about confidentiality can also generate estimates
of use of tobacco products that are quite clearly illicit such as illegally manufactured tobacco
(known in Australia as chop-chop). The accuracy of estimates will be crucially affected by
the representativeness of such surveys. Market research companies running surveys for
commercial clients typically suffer from very low response rates, with a likelihood that those
who are most interested in such products (likely to be those who have used them) will be most
likely to agree to participate. Large surveys conducted for government agencies or charities are
likely to be more representative. Both sorts of surveys are likely to miss highly disadvantaged
individuals such as those who are homeless or who suffer mental health problems who may be
more likely to use these considerably cheaper products.
Assessing the use of illicit branded cigarettes through surveys is another matter altogether. It
is doubtful that respondents could accurately judge whether they have purchased counterfeit
cigarettes. Reproductions of packaging can be highly convincing and small variations in
the taste of tobacco products can occur for a variety of reasons—variations in tobacco leaf,
variations or changes in manufacturing proceduresi, freshness of the stock depending on
age, deterioration of the product due to sun or heat damage, tooth decay, gum disease and
fluctuations in the bacterial profile of the smokers’ mouth and nose. Fluctuations in the taste
of the product are therefore not a failsafe guide as to whether that product is likely to be
counterfeit.
The price of tobacco products is also not necessarily a guide to their legal status. Contraband
(including counterfeit) tobacco products are not necessarily substantially cheaper than the
cheapest products sold in the legal the market or the popular brands sold ‘on special’ at
discount outlets.
Consumers’ likelihood of agreeing that cigarettes they purchased were counterfeit or
contraband is also likely to increase substantially after major stories in the media reporting
that such products are readily available.
6. Observational data collection:
Relatively untested but potentially quite promising approaches to assessing several dimensions
of tax avoidance and evasion is the direct observations of vendors selling illicit tobacco
products, and the direct observation of packs provided by smokers or observed directly by
researchers. This has been helpful in several European countries where interviewers were
i
In Australia, manufacturers recently had to change production procedures required to comply with regulations aiming to reduce ignition propensity
Section: 13.7.3.1
68
Facts and Issues
trained to recognise the various health warnings, tax markings and tax stamps required in each
country.9
Ayers, Ribisl and Brownstein reported in an article published in PLos One in 2011 on tracking
Google keyword searches as a useful method of quantifying consumer interest in purchasing
reduced-tax or tax free cigarettes following tax increases in the United States.39
‘Mystery shopper’ studies could provide useful information in the future, but such studies pose
quite a few practical difficulties—would retailers sell contraband stock while any person other
than the purchaser was in the store? There are no reports in the literature of any such studies
having been conducted to date.
Littered cigarette packs have been used in Chicago in the US where most states require statespecific tax stamps to be affixed to cigarettes28 and New Zealand where cigarettes have carried
pictorial health warnings larger than those in many other countries.40 The Chicago study
provided a useful estimate of the extent of purchases of packs from the areas adjacent to the
Chicago tax zone. The New Zealand study was less informative: packs purchased outside New
Zealand (a tourist destination very popular for its spectacular natural scenery) may have been
purchased by tourists or locals recently arrived back from overseas bringing in small quantities
of tobacco for personal use.
The adoption of ever-widening restrictions on smoking in outdoor places and strictly applied
anti-littering laws would make it difficult to collect packs in many jurisdictions. As noted in
the IARC review,6 it is likely that the sort of people who litter—despite strong social norms
against and laws fining people for littering—may well be significantly more likely than the rest
of the population who smoke to purchase illicit tobacco products.
7. Composite models:
In 2004 the European Anti-Fraud Office (OLAF) of the European Commission contracted
professional services company Klynveld Peat Marwick Goerdeler (KPMG) to undertake a
detailed assessment of likely market penetration of avoided and evaded cigarettes throughout
the European Union.41 The reported estimated that approximately 8–9% of cigarettes fell
into that category, and that rates were substantially higher in Estonia, Hungary, Lithuania,
Poland and Slovakia. Since 2005, Philip Morris International has funded KPMG42 to continue
this initiative known as Project Star.43 Project Star uses a combination of consumer surveys,
discarded pack studies, analysis of sales data, import and export data, duty-free sales
data, customs seizures and interviews with industry and customs officials to produce its
estimates. Project Star is a highly elaborate model which provides a great deal of detail on the
characteristics of the market in each country. The work has not been subject to peer review
and relies on data provided by tobacco companies but not publicly available, so the extent to
which it accurately quantifies both avoided and evaded taxes on tobacco products is difficult to
assess.
13.7.3.2
A note on global compilations
Market research companies such as Euromonitor International44 and ERC Statistics45 provide estimates of the
extent of illicit trade in country-by-country reports and several reports produced for health agencies46,47 have used
such studies as a basis for global estimates.48 Reports provided by commercial market research agencies—no doubt
because they rely on subscriptions for income and wish to discourage subscribers from going to primary sources—
rarely provide a detailed account of how these estimates are derived. It should also be remembered these reports
are not subject to the kind of peer review that occurs in academic papers, nor to the kind of auditing to which
government departments are subjected, or to the kind of regulatory scrutiny that tobacco companies themselves
receive from national securities and investment agencies concerned to ensure appropriate disclosure to potential
investors.
Section: 13.7.3.2
in Australia
69
As is clear from the discussion above and in Section 13.7.7.3 below, while representative surveys of consumers
provide a reasonable estimate of the extent of legal tax avoidance and of clearly illicit products such as illegally
manufactured tobacco, there would seem to be no good methods for quantifying use of contraband cigarettes
other than those known to be designed specifically for the illicit market. It is likely that researchers are relying on
anecdotal information from tobacco company executives and those involved in running anti-smoking education
campaigns. The former has information on sales but cannot interpret whether declines in sales are due to
reductions in consumption or a shift to illicit products. The latter sometimes have access to results of surveys in the
process of publication, but these are unable to shed light on the extent of any use of contraband products for the
reasons outlined above.
Estimates of counterfeit trade globally produced by organisations such as the OECD22 are based on analysis of
interceptions, trends in trade in goods likely to be counterfeited and overall volumes and trade trends. While they
are helpful in providing an indication of the global scale of the problem, they are too blunt a measure to be useful
in quantifying use in individual countries over time.
13.7.4
Extent of illicit trade internationally—a real concern, or scaremongering?
There is little doubt that revenue authorities in many parts of the world are greatly concerned about the scale
of (legal) avoidance of taxes. Regulations regarding duty-free and cross-border shopping appear to have been
designed for a world prior to the Internet where international travel was infrequent. Long-standing trade
agreementsi make it difficult to end or even scale-down the current concessions which were envisaged to apply only
to a very small component of sales but now constitute quite a large component of sales in many jurisdictions. This
is a real concern for governments relying on revenue from tobacco taxes to fund important government services
and policy initiatives.49,50 It is also a concern because the availability of cheap products can reduce the effectiveness
of tax policy in reducing consumption.51
Similarly it is clear that (illegal) evasion of taxes on tobacco products also occurs in many countries.6,12 It
could be that smuggling is a particular problem in countries experiencing war, extreme poverty and political
instability.6,35,52–55 Evasion of tobacco taxes can be regarded as a law-and-order as well as a health issue. The large
volume of counterfeit goods emanating from China has been an ongoing source of tension between China and
the US and other trading partners, who feel that China has not done enough to protect the business interests of
US-based companies.22
While (legal) avoidance of taxes is commonplace, the conditions that facilitate the (illegal) evasion of taxes on
tobacco are, however, simply not applicable in many countries. Most developed countries quite tightly regulate
the sale of tobacco products, and the vast majority of citizens have nothing to do with people involved in criminal
activities. This, combined with the discussion in Section 13.7.3 about the difficulties of quantifying illicit trade,
raises the question of whether tax evasion is a serious problem at all for some countries.56
British American Tobacco (BAT) has sponsored the production of reports that have produced alarmingly high
estimates of the extent of illicit trade in Australia57–60 as well as in New Zealand15 and the UK.61 All of these have
been a crucial component of campaigns opposing vigorous government action to discourage tobacco use through
measures such as tax increases62–65 changes in tax arrangements for roll-your-own cigarettes66,67 and plain packaging
of tobacco products.68–70 Tobacco companies and company-sponsored lobby groups frequently release news
statements following documented customs seizures to raise alarm about the problem of illicit trade.
i
These include
1.
The Convention Concerning Customs Facilities for Touring as amended 5 September 1966 the ‘New York Convention’ (New York, 4 June 1954).
2.
The International Convention of the Simplification and Harmonization of Customs Procedures of 18 May 1973 (as amended by the Protocol of Amendment to the International
Convention on the Simplification and Harmonization of Customs Procedures of 18 May 1973, Brussels, 26 June 1999) ‘the Kyoto Convention’ and
3.
OECD Decision–Recommendation on International Tourism Policy 1985
Section: 13.7.4
70
Facts and Issues
‘Two big busts a sign of things to come’, Alliance of Australian Retailers Media Release
1 August 2011
BAT in Europe has produced highly emotive video clips suggesting that well-meaning politicians wanting to
increase tobacco taxes may be inadvertently promoting the influence of powerful criminals and increasing the
likelihood of childhood prostitution.i
A number of academic papers,71 reports produced by US government research agencies,49 political parties and
research services72–75 and newspaper articles76–79 allege that powerful and dangerous criminal gangs and terrorist
groups are involved in counterfeiting activities on a ‘massive’ scale. An advisory from the US Department of
Treasury Financial Crimes Enforcement Network warned its overseas partner institutions in December 2005:
As published in the Federal Register on September 20, 2005, we found Banco Delta Asia SARL
(‘Banco Delta Asia’), which is headquartered in the Macau Special Administrative Region
of China, to be a financial institution of ‘primary money laundering concern’. As stated in
this Federal Register notice, Banco Delta Asia has provided financial services for over 20
years to North Korean government agencies and associated front companies that are known
to have engaged in illicit activities. North Korean entities are known to have engaged in
currency counterfeiting, narcotics trafficking, the production and dissemination of counterfeit
cigarettes, and the laundering of related proceeds, as well as weapons of mass destruction and
missile proliferation.80
Such reports have been embraced enthusiastically by conservative parties and think tanks with a political agenda
of opposing tax increases.73,75 When assessing the validity of these highly emotive, alarmist reports, it should always
be remembered that it is in the interests of tobacco companies to ‘talk up’ the problem of illicit trade in general and
counterfeit cigarettes in particular. Concerns about loss of revenue might discourage governments from adopting
effective tobacco control policy.81 As pointed out by Leverett et al,82 cigarettes confiscated and destroyed by law
enforcement authorities increase demand for replacement cigarettes and therefore sales by tobacco companies.
Raising alarm about counterfeit cigarettes at worst for the companies may reduce the use of ‘fakes’ and may have
the spin-off effect of discouraging consumers from shifting to competing overseas-made brands which (it could be
surmised) might have some of the same problems with quality as counterfeit cigarettes. Involvement in cooperative
arrangements with government agencies such as those established between the European Union and the major
international tobacco companies effectively leverages the resources of government enforcement agencies to
advance the tobacco industry’s interests in protecting its intellectual property. Best of all for the tobacco industry,
feigned concern about revenue and law-and-order allows tobacco companies to position themselves as legitimate
and concerned corporate citizens ready and able to undertake research83 and work with governments in the pursuit
of ‘reasonable’ regulation.84
Estimates of the extent of tax avoidance and evasion internationally based on a variety of sources have been
included in a recent study by Joossens, Merriman, Ross and Raw,46 summarised in the report by the International
Agency for Research on Cancer (IARC).6 Estimates from this body of studies have also been included in the World
Lung Foundation and American Cancer Society’s 2012 Tobacco Atlas47 which uses estimates compiled by ERC,
Euromonitor and industry funded studies, as well as those commissioned by government agencies or undertaken
by academics.ii The estimates are drawn from a variety of sources including academic articles, official government
publications, estimates from market research companies (commissioned in some instances by government agencies
but in most instances by tobacco companies), tobacco trade journals articles, newspaper articles and estimates
from customs officials. As the authors acknowledge, the methodological quality of sources varies greatly, and in
the case of the reports by international market research groups, do not provide any methodological detail at all.
Estimates for individual countries vary from 1% to as much as 50% of the market.46 Putting to one side reservations
about methodological quality, Joossens et al estimate that illicit trade makes up about 17% of total global cigarette
consumption among low-income countries, 12% in middle-income countries and 10% in high-income countries.6,46
They go on to extrapolate these figures to suggest that governments could gain an additional $31.3 billion in
revenue and that 164 000 premature deaths could be avoided if illicit trade were to be eliminated.6
i
ii
See YouTube clip at http://www.bat.com/group/sites/UK__3MNFEN.nsf/vwPagesWebLive/DO6TNKVW?opendocument&SKN=1&TMP=1
See Section 19 http://www.tobaccoatlas.org/uploads/Images/PDFs/TA4_pdf_sourcesandmethods.pdf
Section: 13.7.4
in Australia
71
How confident can we be in estimates such as these? The IARC report states ‘… a combination of methods,
including informed expert judgement, is often necessary to cross-validate estimates.’ It is possible however,
that within any country, many of the estimates are based largely on previous estimates and are not in reality
independent enough of each other to allow such validation.
Estimates of tax-free trade very commonly conflate estimates of legal and illegal circumvention—that is, they
include not just illegal counterfeiting and large scale smuggling but also small-scale illegal bootlegging and entirely
legal cross-border and duty-free shopping. Tobacco industry discussion of threats to tobacco tax revenue typically
highlights illegal evasion:
‘Monday, 20 October 2008 British American Tobacco today warned that governments
worldwide, many increasingly indebted due to the global financial crisis, will this year lose
around US$20 billion in unpaid tobacco taxes at the hands of smugglers and counterfeiters.’
‘Taxpayers lose $1 billion while criminals make millions {Media release}. Sydney: 1 March
2011’.
Reports by government agencies and health groups that discuss or attempt to quantify avoidance and evasion
of tobacco products similarly also often use the term ‘illicit’ to cover both forms of evasion. The US General
Accountability Office in its report to Congressional Committees in 2011 for instance was titled ‘Illicit Tobacco:
various schemes are used to evade taxes and fees’ when much of the focus of the report was actually about
avoidance of taxes through (what is arguably legal) cross-border trade.
In many countries it is likely that legal circumvention makes up a large component of estimates of quantities of
non-taxed tobacco or levels of revenue forgone.
While the topic of illicit trade appears to attract a great deal of hyperbole and moral panic, it is interesting to note
that reported seizures across the globe are declining despite greatly increased surveillance activities throughout
Europe and elsewhere. Reporting on analysis of 2 550 pieces of information on cigarette seizures with a minimum
of 100 000 pieces carried out in 2010 and 2011 by 64 Members of the World Customs Organization, the WCO
comments in its annual report released July 2012:
‘The relevant figures recorded in the CEN database come to a total of 1 524 seizures in 201
and 1 026 in 2011 accounting for 3.2 billion pieces in 2010 and 1.9 billion pieces in 2011.
The figures show a remarkable decrease in both the number of seizures and the amount of
contraband seized in 2011.’
World Customs Organization, July 2012 25
The next three sections describe what is known about the extent of three forms of evasion of tobacco taxes that have been documented
in Australia: bootlegging between Australian states and territories which was a major form of evasion in the 1980s and early 1990s;
sale of untaxed, unprocessed tobacco (known as chop-chop), a form of evasion that emerged in the late 1990s when state fees were
abolished and which remains a serious challenge for the Australian Taxation Office; and smuggling of cigarettes, a large problem in
some regions of the world, and instances of which have been documented in Australia.
13.7.5
‘Butt-legging’ between Australian states and territories
Between 1972 and 1998, Australian states and territories charged tobacco wholesalers and/or retailers licence
fees based on a percentage of the value of sales in the previous months. The percentage which applied varied
widely over time and between states. The variability in licence fees—see Table 13.4 in Section 13.2.2— resulted
in considerable differences between states in the retail cost of cigarettes, with fees in Queensland substantially
lower than in other states until 1992–93. Differences in legislation in each jurisdiction resulted in differences in
definitions and treatment of stock transferred within companies between states and licence holders. A variety of
schemes emerged in the early 1990s that enabled tobacco sellers to minimise payment of fees, or to avoid paying
them altogether.
An internal report produced by the National Crime Authority,85 indicated that various schemes for bootlegging (or
‘butt-legging’ as it was dubbed in newspaper headlines at the time) included:
Section: 13.7.5
72
Facts and Issues
<< failing to renew licences, thereby avoiding fees on stock sold in the previous month
<< forging of documents to obtain a proportion of stock free of licence fees
<< transferring of stock within companies to interstate warehouses, thereby avoiding fees in either the origin or
destination states
<< transporting of tobacco across several borders, allowing lawful sale to unlicensed wholesalers or to retailers who
would dispose of products in undeclared sales
<< purchasing of stock from jurisdictions with lower licence fees
<< false representation of interstate sales
<< non-disclosure of transactions involving unlicensed merchants.
In 1994 the Victorian Revenue office estimated that it had lost approximately $39 million per year due to schemes
such as the above, which amounted to 15.6% of revenue collected in 1990–91 and 9.2% in 1992–93. The NSW
Office of State Revenue estimated a revenue gap of approximately 3% in 1994 after state licence fees had increased
in Queensland (personal communication State Revenue Office, Victoria).
The abolition of state business franchise fees brought these schemes to an abrupt end, however a new form of illicit
trade very quickly emerged to fill the void.
13.7.6
The problem of chop-chop
With the end of the state business franchise fees after a High Court ruling that these were unconstitutional—refer
Section 13.2.2—all excise duty in Australia was collected directly from manufacturers and so sources of cheap
cigarettes evaporated.86 Faced with lower prices paid by manufacturers and the phasing out of purchases from
Australian growers,87–89 several operators began to work with landholders with spare capacity to distribute
illegally grown, unbranded, minimally processed tobacco known as ‘chop-chop’, suitable for use in roll-your-own
cigarettes.34,90 Producers of chop-chop evade regulations on tobacco growing, processing and sales in order to avoid
excise and GST.91 In a report of prosecution of one such operator in August 1998, the Customs Minister claimed
that authorities were aware of several factories cutting and packing illicit tobacco run by major crime syndicates.92
Anecdotal reports suggested that a large number of smokers experimented with chop-chop when it first emerged
in Australia.13,93 A telephone survey of NSW smokers late in 2004 reported in the Australian and New Zealand Journal
of Public Health14 that about 3% of respondents always used chop-chop and that 2.6% used it occasionally. The study
found that chop-chop smokers were more likely to be male, smoke more heavily and be less well educated.
However, it seems that the majority of people who experimented did not persist in using this form of tobacco. The
2004 National Drug Strategy Household Survey found that 38% of all Australians aged 14 years and over were
aware of chop-chopi, and of the 8.8% of this group who had ever smoked it (about 3.3% of the total population),
about 21.7% (0.4% of the total population) smoked it half the time or more.
Tobacco manufacturers and retailers were highly vocal in their concern about chop-chop,86,94 and argued vigorously
that the problem resulted from increases in tobacco taxes.95
In a report prepared for British American Tobacco Australasia in 2005, consulting company
PricewaterhouseCoopers estimated that 1 in every 17 cigarettes smoked in Australia in 2004 was illegal. This
amounted to between $300m and $450m in lost tax revenue.58,94 A report published by the Australian National
Audit Office in 2006 however put the estimated loss in excise revenue much lower, at about $98 million in 2004–05,
but still a 56% increase in estimated losses since 2001–02.96 This estimate was much more consistent with the data
from population surveys.
Since 2005, British American Tobacco (BAT) sponsored five further reports claiming to quantify the extent of illicit
trade in Australia; two reports by PricewaterhouseCoopers59,60 and three by Deloitte.97–99 These put the estimates
for use of unbranded tobacco in Australia at about 15.7% of the total legal market. Reports by Quit Victoria100,101
analysing the Deloitte reports suggest that surveys on which these estimates that would seem to be based are
i
Up from 28.7% in 2001
Section: 13.7.6
in Australia
unlikely to be representative.
They also suggest that consultants
have prepared estimates based
on quantities purchased by
frequent users rather than all
users. The estimates fail to take
account of the trends reported in
Australian National Drug Strategy
Household Surveys102,103 showing
that the majority of people
who have ever used unbranded
tobacco no longer use it and that
among those that do still use it the
majority use it only occasionally.
73
Table 13.7.1 Estimates of the quantities of tobacco grown, diverted to the illegal market and seized by the Australian
Taxation Office, 2000–01 to 2004–05, (kgs)
Legally grown tobacco, kgs
Estimate of diverted tobacco, kgs (rounded to nearest
thousand)
Total seized illegal tobacco, cut and leaf, kgs:
2000–01 2001–02 2002–03 2003–04 2004–05
4 068 180 3 808 148 3 496 505 3 598 880
129 554
243 000
295 000
313 000
347 000
33 637
59 525
68 205
22 444
Source: The Auditor General, 200696
The Australian Taxation
Office (ATO) put considerable resources
into pursuing growers and distributors
of chop-chop and its annual reports
suggest that it believed that these activities
successfully prevented any major growth in
diversions of tobacco to the illegal market
in Australia— see Technical Appendix
13.7.2 for further details. The Australian
Taxation Office’s estimates of the quantities
of tobacco grown and the quantities diverted
to the illegal market are presented in Table
13.7.1. The table also includes records of the
quantities seized by the ATO and other law
enforcement agencies.
In its 2007 report on compliance
activities,34 the ATO stated:
‘The end of Australia’s legal tobacco
growing industry in 2006 has
meant that the mischief involved in
illicit tobacco has changed from the
diversion of legally grown tobacco
to illicit importation and growing.
We are monitoring this issue and
will undertake enforcement action
with the Australian Customs
Service as required.’
Reports on seizures of tobacco products
by the Customs and Border Protection
Service since 2006–07 are set out in Table
13.7.2.
Table 13.7.2 Number of detections and quantities of tobacco and numbers of cigarettes seized by
Australian customs authorities, 2006–07 to 2010–11
2006-07 2007-08 2008-09 2009-10 2010-11
No. detections loose tobacco
Quantity of loose tobacco, ‘000 kgs
Total number of seizures:
28
311
67
287
180
15
14
42 000
107 000
50 176
68 728
82 000
19
58
33
42
55
No. detections cigarettes
Quantity of sticks, ‘000 pieces
18
258
Source: Australian Customs and Border Protection annual reports104-107
Table 13.7.3 Responses to the question ‘How often do you smoke this type of tobacco?’, current smokers
14 years and over, 2010
% of all current
smokers
Currently use every day, some
days or only occasionally
Have used it but no longer use it
Have never used unbranded
Total:
% of current
% of current users
smokers who have of unbranded
ever used illicit
tobacco
4.9%
20.5%
100%
19.0%
76.1%
100%
79.5%
n.a.
100.0%
n.a.
n.a.
100%
Source: National Drug Strategy Household Survey, 2010, AIHW 2011103, Table 3.11, p39
Recent trends use of unbranded tobacco
in Australia are provided in the 2010
National Drug Strategy Household
Survey.i While some 24% of recent smokers had tried unbranded tobacco at least once in their lifetime—only 4.9%
of recent smokers were still using it on a continuing basis and only 1.5% of smokers used it half the time or more.
i
The question asked about illicit tobacco in 2010 differed somewhat to the question asked in 2007—see Technical Appendix 2 for further details.
Section: 13.7.6
74
Facts and Issues
Table 13.7.4 Responses to question to those who have ever used, ‘Would you say that when
you smoke you...?’
% of current users % of all
of unbranded
current
tobacco
smokers
Only smoke this type of tobacco
0.6%
12.7%
Mainly smoke this type of tobacco
0.6%
11.9%
Smoke this tobacco about half of the time
0.3%
6.1%
Smoke this tobacco less than half the time
0.1%
2.2%
Occasionally smoke this type of tobacco
3.1%
67.1%
Have never used unbranded or no longer use it
95.3%
Total (valid cases only):
100%
100%
Source: National Drug Strategy Household Survey, 2010 (computer file). Canberra: Australian Data Archive, The
Australian National University, 2011, absolute person weights used, applied to all current smokers
Table 13.7.5 Percentage of Australians 14 years and older (smokers and all
Australians) reporting currently using unbranded tobacco and using
‘half the time’ or more often
2004
2007
2010
Currently using
Using unbranded tobacco
unbranded tobacco
half the time or more
% of all
% of total
% of all
% of total
current
Australian
current
Australian
smokers population smokers population
not reported not reported not reported
0.4%
6.1%
1.4%
1.1%
0.2%
4.9%
1.1%
1.5%
0.3%
Source: Table 3.11, p 39 and A1.2 p 203, AIHW 2011103 and National Drug Strategy
Household Survey 2004, AIHW 2005108
Comparison of data from the last three National Drug Strategy Household surveys indicates that fewer smokers
over time are using unbranded tobacco, but that a slightly higher percentage of those users are using regularly.
13.7.7
Contraband cigarettes—a growing problem in Australia or a
threat about which people are increasingly aware?
The extent of any diversion of cigarettes produced by licensed manufactures in Australia (either historical or
recent) is unknown. In 2000–01, Australia exported more than 1 800 metric tonnes of tobacco products including
8.5 metric tonnes to Australian territories and 942 metric tonnes to various South Pacific islands.109 In some cases,
the amounts exported to particular countries seem very high compared with the population of those countries.110,111
Stock exported to distributors in particular countries could be being sold to retailers beyond that country, so it is
difficult to judge the significance of any apparent discrepancies.
Counterfeit cigarettes have been identified in seizures of contraband good destined for Australia on a number of
occasions. But it is unclear how big the trade in counterfeit cigarettes really is.
13.7.7.1
Well-documented cases of evasion of taxes on cigarettes in Australia
In June 1996, prominent investigative journalist Brian Toohey reported in an article in the Australian Financial
Review112 on the successful prosecution by the New South Wales Fraud Enforcement Agency and the Australian
Customs Service of several Chinese-born people found to have been distributing counterfeit Winfield cigarettes in
Australia. The article reported that an investigation by company Control Risk Pacific for its client Rothmans traced
the cigarettes back to two factories in China, one in Changchun in northern China, and the other in Filin in central
China. According to an assessment performed by the Australian Government’s Australian Transaction Reports
and Analysis Centre, these factories were owned by the Chinese Government Tobacco Monopoly. The packets
were outstanding copies. The article also reported that private investigation firm Nationwide Security employed by
Philip Morris uncovered imports of counterfeit Marlboro soft pack cigarettes. An editorial, which appeared to be a
close paraphrase of the Toohey article, appeared in the August edition of the Australian Retail Tobacconist.113
Section: 13.7.7.1
in Australia
75
The government’s Transaction Reports and Analysis Centre (AUSTRAC) included the following case studies in its
annual reports documenting its assistance to customs authorities seeking to identify and prosecute those involved
in the illicit tobacco trade:
Case study 11, 2007 reproduced as Case study 3, 2008
‘Company directors generate false receipts to evade tax
Directors of a company were involved in purchasing large quantities of duty free cigarettes and
alcohol to sell on the domestic market contrary to their export-duty free status, thus avoiding
tax obligations. By not paying any tax on the goods the company was able to markedly increase
profits. The syndicate also generated false receipts that purported to come from an export
company detailing their alleged cigarette exports. Investigations into the company confirmed
that no such exports had ever been made. Payment for the cigarettes was made to the delivery
driver on a cash-on-delivery basis. A large number of the company’s sales occurred over the
internet from customers paying via credit card. Payments for these orders were made from
one of two credit cards linked to Belize bank accounts. One of these cards was held in the
company’s name. The money in the Belize bank account was sent there by one of the directors
using several false names from Australia, Belize, Hong Kong, and Vietnam. The director
conducted structured wire transfers under false names and from company accounts. The funds
were deposited at well known banks, with multiple transactions occurring on the same day at
different bank locations, and all of the cash transfers were conducted in amounts of just under
AUD10 000 to avoid the reporting threshold.’
Case study 15, 2009
In 2009, AUSTRAC helped identify a consignment of contraband cigarettes from the Middle East that were
shipped to Australia via New Zealand. An unexpected invoice by the shipping container company after a delay in
New Zealand ports resulted in identification of the Australian importer:
A law enforcement agency discovered a shipping container in New Zealand, destined for
Australia, which allegedly contained illicit tobacco products. The container originated in
the Middle East and, following its arrival in New Zealand, the shipping agents received
instructions to forward the container on to Australia. ‘Transhipment’, in which international
cargo passes through a third country on the way to its final destination, is one method used
by criminal groups attempting to prevent illegally imported goods being detected. However,
in this case, the container was held at the New Zealand shipping agent for some time and
the intended recipient in Australia was required to pay storage fees before the shipping agent
would release the container. AUSTRAC information identified an international funds transfer
from Australia to pay the New Zealand shipping agent, enabling law enforcement officers to
identify the intended recipient of the illicit tobacco products in Australia. Due to the low cost
of illicit tobacco products in the Middle East the importers attempted to disguise payment for
the tobacco within their normal business activities. The importers’ legitimate business activity
included regular international transactions, providing a veil of legitimacy under which to
import products illegally. AUSTRAC114 p31
13.7.7.2
Extrapolating case studies to estimates of total use
As indicated in Table 13.7.2 above, relatively small quantities of cigarette sticks have been seized by the Customs
and Border Protection authority in Australia—82 million sticks compared with the total 22 000 million sticks
estimated to have been sold in Australia in 2009–10, or just over one-third of one per cent of total sales.
Section: 13.7.7.2
76
Facts and Issues
This information is of little help in
determining the total extent of use in the
Australian market. It is not known whether
seizures represent a tiny per cent of the total
amount of contraband stock coming into the
country115 or—at the other extreme—all or
close to all of the stock that would have been
imported had the stock not been seized.
Table 13.7.6 below provides an estimate
published by Euromonitor International
of the penetration of counterfeit and other
contraband cigarettes in Australia.
No information is provided about the
source of the data for this estimate so it
is impossible to judge its accuracy. The
industry-sponsored Deloitte reports put
the size of the market for contraband and
counterfeit cigarettes in Australia at 1.3% in
201097 and 4.4% in 2011.99
Table 13.7.6 Estimated penetration of contraband cigarettes in Australia, 1998–99 to 2004–05,
(millions of cigarettes)
Year
1998–99
1999–00
2000–01
2001–02
2002–03
2003–04
2004–05
2005–06
2006–07
2007–08
2008–09
2009–10
Estimated actual
Penetration of
consumption of
contraband sales
cigarettes
2.5%
3.0%
3.1%
3.1%
3.3%
3.6%
4.0%
Data available on subscription to Euromonitor
4.3%
3.3%
3.1%
3.1%
3.4%
Estimated
contraband sales
Legal sales
The National Drug Strategy Household
survey in 2010 also asked about awareness
Source: Global Market Information Database, Euromonitor International, produced December 2006116
of ‘counterfeit’ cigarettes and whether people
had ever picked up differences in taste
Table 13.7.7 and packaging (questions 28, 29 and 30).i
Awareness of counterfeit cigarettes and belief among smokers that they
This question would underestimate the extent of use of
may have used them, Australians 14 years and older, 2010 (%)
(assumed and actual) contraband products in that no
questions are asked about intentional purchase of such
products. It would overestimate use to the extent that
Males Females Persons
question 28 might predispose respondents to answer in
Aware of counterfeit cigarettes
29.7% 19.7% 25.1%
the affirmative on question 29.
Do not believe they have ever purchased
13.7.7.3
How reliable are consumer estimates of use
of contraband cigarettes?
It is likely that respondents inadvertently over-estimated
the extent of their use in both the Roy Morgan survey
used in the Deloitte report to estimate extent of
population use, and in the National Drug Strategy
Household Survey. Levels of perceived use in both
surveys could be unrealistically high due to people
making any of the following erroneous assumptions:
i
80.3% 76.9% 78.8%
counterfeit cigarettes
Believe that they may have purchased
19.7% 23.1% 21.2%
counterfeit cigarettes
Frequency at which they bought cigarettes they believed may have been
counterfeit:
Once a month
4.6%
4.7%
4.6%
Once every six months
7.0%
8.3%
7.6%
Once a year
8.1% 10.1% 9.0%
Source: National Drug Strategy Household Survey 2010, AIHW 2011103
The 2010 survey asked in addition
D28. Have you ever seen or heard of counterfeit cigarettes?
D29. Have you ever purchased what you thought was your usual brand and then noticed a difference in the taste or packaging?
D30. How often has this occurred?
Once a month
Once every six months
Once a year.
Section: 13.7.7.3
in Australia
77
<< People may have assumed that heavily discounted cigarettes are illicit whereas it could just be a case of retailers
selling off stock that has become old or difficult to move.
<< Cigarettes that tasted different to usual may have been assumed to have been counterfeit whereas they may
have just been a batch that was slightly different because of small changes in the manufacturing process (e.g. a
change from local to offshore processing, or after the implementation of measures to comply with legislation on
reduced ignition propensity).i
<< Cigarette cartons with Asian print on the packaging may be assumed to have been counterfeit when they were
in fact merely manufactured in Asia. The Australian Retail Tobacconist for instance lists Malaysia and Singapore as
places of manufacture for Dunhill cigarettes. Now that tobacco is no longer grown in Australia, companies are
increasingly manufacturing overseas.
Given the subjective nature of judgements about taste, and the likelihood that consumers who have heard publicity
about counterfeiting would be more attentive to brand names and packaging, it is likely that the percentage of
people believing that they had bought such cigarettes increased over the past two years due simply to the very high
levels of media discussion about cigarette smuggling elicited by the previous Deloitte reports97,98 and the extensive
media coverage about this topic generated by media releases from BAT and other tobacco companies.
People answering questions in the Roy Morgan Survey on which the Deloitte report for 2011 was based may have
assumed that very cheap cigarettes they had tried with Asian-sounding names were counterfeit or contraband,
when in fact they were just very cheap cigarettes imported from Asia with the duty legitimately paid. In 2011,
there were at least 12 brands that were being legitimately imported from Asia, all substantially cheaper than local
better known brands. The table below lists the recommended retail prices of these brands from The Australian Retail
Tobacconist, but it is likely that many are sold in Asian groceries and the like at discounted prices considerably lower
than these. For comparison:
Brand
Local manufacturer
Dunhill
British American Tobacco
Winfield
British American Tobacco
Country of origin
Australia (in addition to Malaysia and
Singapore)
Australia
Local importer
Pt Korea Pty Ltd
Patron Group (Australia) Ltd
Trojan Trading Company
Pt Korea Pty Ltd
Pt Korea Pty Ltd
Everbright Int’n Trading Co Pty Ltd
ATA International Pty Ltd
Country of Origin
Korea
China
Hong Kong
China
Korea
China
China
China
Korea
China
ATA International
RRPMay/June 2011
$13.90 for 20s, $17.20 for 25s
$13.45 for 20s, $16.55 for 25s
But note:
Brand
Carnival
Chunghwa
DJ Mix Special Feel
Double Happiness
Esse Blue
Golden Deer
Panda
Peony
Raison Blue
Shuangxi
Yuxi
Overseas manufacturer
KT&G South Korea
Shanghai Cigarette Factory
Not stated
Not stated
Not stated
KT&G South Korea
China Tobacco Guandong Industry Corp
Not stated
RRP as at May/June 2011
$9.90
$11.40
$12.64
$9.15
$10.70
$17.00
$10.70
$9.60
$10.55
Source: The Australian Retail Tobacconist trademarks and prices lists, May–July 2011119,120
Given the difference between the prices of these brands and top-selling brands such as Winfield 25s, it would be little
wonder if many people thought that Asian brands were contraband.
It may also be possible that some respondents to surveys may confuse electronic cigarettes with counterfeit
cigarettes, both sometimes being referred to as ‘fake cigarettes’.
i
It should be noted that the Reduced Fire Risk cigarette regulations came into force in 2010 (over the period of the Roy Morgan surveys),117 implementation having been brought forward
as a result of concerns in the wake of the Black Saturday bushfires.118
Section: 13.7.7.3
78
Facts and Issues
13.7.8
Estimates of total illicit market for tobacco products in Australia
What conclusions can be drawn about the size of the illicit tobacco market in Australia?
13.7.8.1
Expert opinion
Tobacco industry investigators employed to assist companies in identifying sale and counterfeiting of cigarettes are
likely to focus on complaints and retailers in areas identified as ‘high risk’ based on complaints and factors such as
ethnicity believed to be associated with involvement in illicit trade.112 For this reason the estimates of such people
relied upon in the PriceWaterHouseCoopers and Deloitte reports might be inclined to over-estimate likely use.
13.7.8.2
Analysis of reported use of tobacco products compared with receipts of product subject
to excise duty
As discussed in S13.7.3.1 above, another method of estimating the extent of illicit trade is to quantify by how much
reported consumption (estimated from population prevalence multiplied by reported by the average number of
cigarettes smoked per person per day) exceeds consumption based on official tax receipts. In Australia however,
reported consumption is substantially below that estimated through official tax receipts. (This is most likely due
to smokers underestimating their consumption.) The extent to which reported excise and custom receipts exceed
reported consumption was somewhat lower in 2000–01 and in 2009–10, both years in which there were significant
increases in excise/customs duty. The explanation for this could lie in some increase in use of illicit tobacco, but
equally it could be the result of variations in consumption across the year related to the timing of the survey in
relation to the tax increase. Reported consumption assessed in May to October 2010 (when the NDSHS surveys
were being conducted) straight after the increase in duty in April 2010 may have been lower than for the 2009–10
year as a whole.
Table 13.7.8 Consumption estimates based on self-report versus customs and excise receipts 1998 to 2010
1998
2001
2004
2007
2010
Prevalence of daily, weekly, or monthly smoking
24.9%
23.4%
20.7%
19.4%
18.0%
Population 14+
15 038 764
15 693 890
16 389 918
17 226 200
18 396 129
Smokers 14+
3 979 600
3 645 700
3 395 100
3 345 000
3 328 959
Average cigs per day per smoker
14.4
15.6
14.1
13.9
14.7
Total annual consumption (based on estimated numbers of
20 958 279 143 20 796 635 243 17 437 476 107 16 918 532 143 17 913 604 187
smokers and reported numbers of cigarettes smoked)
Total cig. equivalents dutied per annum
31 311 578 462 25 475 471 114 25 883 730 608 24 598 548 233 23 644 571 100
Dutied cig. equivalents smoked per smoker per day
21.6
19.1
20.9
20.1
19.5
% by which dutied consumption exceeds reported consumption
33%
18%
33%
31%
24%
Sources: M Scollo calculations using data from the Australian Institute of Health and Welfare reports on the National Drug Strategy Household Surveys 102,103,108 and excise and customs data from
Chapter 2, Section 2.2
Section: 13.7.8.2
in Australia
79
13.7.8.3
Observational data
No studies have been published in Australia reporting on characteristics of discarded packs. Without tax stamps
or other forms of overt markings, contraband or other contraband cigarette packs will be indistinguishable unless
they fail to display Australian health warnings. Even discarded packs without Australian health warnings could be
packs purchased overseas by tourists travelling in Australia.
No studies have been published
on the results of test purchases
by mystery shoppers.
13.7.8.4
Table 13.7.9 Tobacco industry estimates of size of illicit tobacco market in Australia based on consumer surveys,
2007, 2009, 2010 and 2011
Estimates based on
surveys of consumers
Tobacco industry
estimates based on
consumer surveys, 2007,
2009, 2010 and 2011
Unbranded, ‘000 kg
Contraband, ‘000 kg
Counterfeit, ‘000 kg
Total contraband & counterfeit, ‘000 kg
Overlap between contraband & counterfeit
(calculated from reported figures attached)
Total illicit market, ‘000 kg
Total legal market, ‘000 kg
Total illicit & legal market, ‘000 kg
Unbranded share of legal market
Contraband & counterfeit share of legal market
Unbranded share of total market
Contraband & counterfeit share of total market
Total illicit share of legal market:
Total illicit share of total market:
2 430
116
134
250
Mid 2011
(not
released)
2 193
212
223
435
1 427
407
430
837
99.6%
0%
0%
0%
2 348
19 089
21 341
11.1%
0.7%
9.9%
0.6%
12.3%
11.0%
2 680
16 853
19 399
14.4%
0.7%
12.5%
0.6%
15.9%
13.8%
2 628
16 853
19 258
13.0%
1.3%
11.4%
1.1%
15.6%
13.6%
2 264
16 861
18 695
8.5%
2.4%
7.6%
2.2%
13.4%
12.1%
2007
2009
2010
1 827
2 119
133
228
229
1 827
28 547
30 374
6.4%
0.0%
6.0%
0.0%
6.4%
6.0%
2011
The estimates prepared for
Australian tobacco companies
over the four years from 2007
would seem to suggest an
increase and then tailing off
of use of unbranded tobacco,
and small but growing use of
illicit cigarettes—refer Table
Sources: PriceWaterHouseCooopers 200859 and 2010,60 Deloitte 2011a97, 2011b98 and 201299 using Roy Morgan surveys
13.7.9 below. Tabulating the
results of these studies in this
manner several inconsistencies
become apparent. First, the
size of the legal market in 2007 is impossibly high if, as the report suggests, unbranded tobacco was 1 827 000 ks
and made up 6.4% of the market. Second, the PriceWaterHouseCooopers report assumed a substantial overlap
between ‘counterfeit’ and ‘contraband’ tobacco, however the Deloitte report appears to treat these as completely
non-overlapping and adds them together.
The surveys of consumers on which the PriceWaterHouseCoopers and Deloitte reports are based consisted of
very small numbers of smokers drawn from a panel whose willingness to complete a survey on this topic makes it
unlikely that they were representative of the total population of smokers.
Estimates based on findings of National Drug Strategy Household Survey and customs
seizures
Estimates of prevalence and frequency of use of unbranded tobacco using data from the National Drug Strategy
Household Survey are described in Section 13.7.6 above. Using this data and estimating the numbers and weigh of
tobacco products used, Quit Victoria has prepared estimates of the size of the market in Australia.100
Section: 13.7.8.4
80
Facts and Issues
As discussed in Section 13.7.7,
estimates of use of counterfeit
cigarettes drawn from the NDSHS are
not considered accurate. However,
a rough indication of the size of the
market for illicit branded cigarettes in
Australia might be gained by looking
at the proportion of tobacco product
seizures that are for branded cigarettes
rather than unbranded tobacco.
Using these percentages, it is then
possible to scale up the estimates of
the size of the market for unbranded
tobacco to generate an estimate of the
total size of the market.
Table 13.7.10 Number of detections and quantities of tobacco and numbers of cigarettes seized by Australian
customs authorities, 2006–07 to 2010–11
2006–07 2007–08 2008–09
Quantity of loose tobacco, ‘000 kgs
67
287
180
311
258
Quantity of sticks, ‘000 pieces
42 000
107 000
50 176
68 728
82 000
% that illicit cigarettes make up of total
quantity of illicit tobacco products seized
39%
27%
22%
18%
24%
Source: Australian Customs and Border Protection annual reports104-107
Table 13.7.11 Estimated market share of illicit trade in Australia based on National Drug Strategy Household Survey reports and assuming use of
illicit cigarettes compared with unbranded tobacco is similar to the proportion that illicit cigarettes make up of total seizures
Chop-chop smokers
Number of current users
162 194
Average daily cigarette consumption
18 (chop-chop cigarettes)
Number of cigarettes smoked per year
347 816 599
Note: Population estimates based on NDSHS 2010 weightings.
Frequency of chop-chop use
Only use chop-chop
Mainly use chop-chop
Use chop-chop half the time or more
Use chop-chop less than half the time
Use chop-chop occasionally
Total:
Estimated revenue forgone:
Using different assumptions
regarding daily cigarette
consumption of chop-chop: smokers
N
%
20 599
19 301
9 894
3 568
108 832
162 194
$125m
12.7%
11.9%
6.1%
2.2%
67.1%
All smokers
14.7
17 913 604 187
N cigarettes smoked per year
per chop-chop smoker
6 570
5 256
3 285
1 971
657
Estimated size of illicit
Estimated size of market
tobacco market (including
for unbranded tobacco
both unbranded tobacco and
(chop chop) as share of total illicit branded cigarettes)
tobacco market
as share of total tobacco
market
15
1.6%
2.0%
16
1.7%
2.1%
18
1.9%
2.4%
20
2.2%
2.7%
22
2.4%
3.0%
24
2.6%
3.2%
Source: Quit Victoria, 2012101
Section: 13.7.8.4
2009–10 2010–11
Total: N cigarettes
smoked per year
135 333 052
101 446 508
32 501 245
7 033 056
71 502 738
347 816 599
in Australia
81
13.7.9
To what extent does avoidance and evasion of taxes on tobacco
products reduce public health, increase health disparities and
reduce public safety?
Avoidance and evasion of tobacco products are a concern to tobacco control for several reasons. First and probably
most importantly, fear about losing revenue can deter governments from adopting effective tobacco control policy8
or even to reverse important policy decisions with severely adverse consequences for public health.121 Second,
cheaper products readily available to consumers reduce the effectiveness of tobacco taxes both as a source of
government revenue and a means of reducing tobacco consumption,6,122 particularly among more disadvantaged
groups.
13.7.9.1
Effects on availability of cheap tobacco products for consumption (and therefore public
health)
Analysis of data from the International Tobacco Control Policy Evaluation Study (ITCPES) shows that smokers
who have access to un-taxed cigarettes are less likely to say that they will make a quit attempt123 and to actually
make such an attempt than those who only buy full-priced cigarettes.124 They also tend to less vigorously reduce
consumption in response to a rise in prices.125 In some countries it seems that young people are able to access
cigarettes from the tax-free market126,127 and that cigarettes available tax-free determines brand choices.128
Despite concerns about consumption effects, and even in countries where the level of smuggling would appear to
be quite high (even allowing for industry exaggeration), such activity has by no means completely undermined
tobacco control policy. In South Africa for instance where illicit trade was estimated to have occupied between
7% and 11% of the market in 2007, consumption in the total market, including both the illicit and legal market,
has declined in size consistently. At the same time, tax revenue from higher excise taxes has offset the tax losses
as a result of illicit trade.129 This is also the case for Australia where even the industry’s (most likely exaggerated)
estimates of the amount of the quantity of illicit tobacco consumed and the estimated revenue forgone by tax
evasion are substantially lower than the additional revenue the government has received following increases in
taxes, with substantial reductions in consumption evident (though not highlighted) in industry figures101—see
technical appendix 4 for further details.
13.7.9.2
Health disparities
Whereas increases in taxes can help to prompt greater quitting among disadvantaged groups, it seems likely that
access to cheap sources of tobacco disproportionately affects low income groups who are more price sensitive.130
Several studies have demonstrated that smokers who are poorly educated are more likely to (legally) avoid taxes.10,131
Cases of socially disadvantaged groups purchasing smuggled cigarettes have also been reported—among ethnic
Chinese in New York132 and in extremely deprived areas of Scotland where residents perceived smugglers as
‘providing a valuable service to the community.’133
A study in Australia published in 2009134 found that chop-chop users are more likely to have taken up smoking
at a young age, with ‘a 60% greater odds of ’ reporting below average social functioning and the sF-8 scale and
nearly twice the odds of reporting a measurable disability.’ They are also more likely to report significantly worse
health. The authors imply that there may be some causal relationship between use of chop-chop and worse health
outcomes. However, given that chop-chop only became available in Australia in about the turn of the 20th century,
well after current users took up smoking, and given that those who took up smoking at an earlier age are much
Section: 13.7.9.2
82
Facts and Issues
more likely to be heavier smokers more prone to ill health, it seems likely that the relationship works in the other
direction. It is highly disadvantaged heavy smokers with significant health problems who have been more likely
to use chop-chop. It cannot be determined how many additional people would have quit had chop-chop not been
available in Australia.
13.7.9.3
Greater access for children?
A cross-sectional survey of 15- and 16- year olds in the (low-SES) North-West of England found that 28% of
teenagers reported using ‘fake’ cigarettes.135 It is not clear how the teenagers would have known whether the
cigarettes were fake. The percentage purchased from ‘street sellers’ was not disclosed. In April 2011, the industryfunded Alliance of Australian Retailers claimed that the government’s National Drug Strategy Household Survey
showed that Australian children as young as 14 years old were smoking illicit tobacco. The Australian Institute of
Health and Welfare’s analysis of the 2007 NDSHS102 reported that 4.5% of teenagers aged 14 to 19 years reported
having ever tried illicit tobacco products. It should be noted however that fewer than 1% (+/- 50%) indicated that
they used it ‘half the time or more’. The figures quoted in the report relate to 14–19 year olds as a group. Prevalence
of use for teenagers of each age (14, 15, 16 and so on) cannot be determined from examination of the report.
Detailed examination of the data file on which the report was based however shows that only 1.2% of 14-year-olds
reported ever having tried unbranded loose tobacco. Most importantly, examination of that file reveals that no
14-year-olds at all reported currently smoking unbranded loose tobacco.
Figure 13.7.1
Advertisements placed in Melbourne Age and other Australian newspapers, 20 to 22 April 2011
13.7.9.4
Are illicit tobacco products more dangerous?
The Centre for Regulatory Effectiveness in the US136 has compiled a number of studies discussing the harmfulness
of counterfeit cigarettes as part of its efforts to oppose regulatory control over menthol by the US Food and Drug
Administration. The studies include
Pappas R, Polzin G, Waston C and Ashley D. Cadmium, lead and thallium in smoke
particulate from counterfeit cigarettes compared with authentic US brands. Food and
Section: 13.7.9.4
in Australia
83
Chemical Toxicology 2007;45:202-9. Available from: http://www.ncbi.nlm.nih.gov/
pubmed/17011104
which found substantially levels of cadmium 2.5 time higher, lead 1.4 to 4.9 times
higher in counterfeit cigarettes supplied by a UK government agency compared to
genuine counterparts. Levels of thallium were also higher than for most of the authentic
brands.137
and
Swamia K, Judda C and Orsinia J. Trace metals analysis of legal and counterfeit cigarette
tobacco smaples using inductively coupled plasma mass spectrometry and cold vapour atomic
spectometry. Spectroscopy Letters 2009;42(8):479-90. Available from: http://www.tandfonline.
com/doi/abs/10.1080/00387010903267799
which found higher levels of metal Be, As, Mo, Cd, Sb, Tl, Pb, and Hg.138
Heavy metals are problematic for health because they accumulate over time. Other studies have shown that such
heavy metals vary widely between brands of cigarettes in various countries.139–151 Cigarette smoke contains more
than 7000 chemicals.152 In any two samples of cigarettes, some chemicals will be significantly higher in one sample
than another, some will be significantly lower and some will not differ significantly. While heavy metals are
harmful to health, it is the carcinogens and poisonous gases rather than the heavy metals in cigarettes that cause
the greatest morbidity and mortality.
The Centre also quotes highly alarming material from a translated copy of an article purportedly produced by the
Shandong Provincial Tobacco Monopoly Bureau asserting that counterfeit cigarettes use inferior or even waste
or contaminated waste products. They talk of a parasite found in tobacco plants the eggs of which can be inhaled
and cause great harm to the nervous system including in severe cases necrosis of the brain. The article talks of
industrial dyes that when combusted ‘will produce severe damage to the reproductive system and visual system.’
Tobacco used in cigarettes, it is claimed, may be produced from waste products including cigarette butts in bins.
A UK government report states that counterfeit cigarettes have been found to contain ‘rat droppings, camel dung,
sawdust and tobacco beetles.’
These alarming reports ignore the fact that very few countries in the world require companies to test and report
on contaminants or on residues from pesticides, herbicides or fungicides in tobacco used in ‘genuine’ cigarettes
to kill mould, parasites and the like, or, indeed, on the effects (when combusted) of these or any substances added
during production. Any health problems associated with counterfeit cigarettes (and with illicit tobacco) would be
insignificant compared with the number and severity of major health problems caused by smoking itself.
13.7.9.5
Law and order issues?
US authorities believe that money gained from illicit tobacco trade has been used for other serious criminal
enterprises.49 None of the reports alleging involvement of terrorist organisations have provided details of evidence
on which these assessments were based, so it is difficult to judge how credible they are. Widespread use of illicit
tobacco would be a legitimate concern in any country in that such activities could reduce barriers among citizens
to the purchasing of other black market goods, and could also provide incentives to public officials to facilitate
black market activities.8,72,153
Section: 13.7.9.5
84
Facts and Issues
13.7.10
How can legal and illegal circumvention of tobacco taxes be
reduced?
In 2009, Canadians Sweeting, Johnson and Schwartz undertook an extensive review of the effectiveness of policy
measures to reduce avoidance and evasion of taxes on tobacco products.154 Little is known about the effectiveness of
policies to reduce avoidance, and it seems likely that activities will continue so long as they are deemed legal.155 As
the authors point out, the nature of illicit trade changes over time, largely in response to government efforts.
13.7.10.1
Knowledge and experience on measures to discourage internet selling
Internet sales have the capacity to undermine the public health benefit of higher cigarette prices.156 Given the
difficulty of collecting local taxes from suppliers based in overseas jurisdictions, many tobacco control advocates
have called on governments to ban the advertising of such products to internet users.i Other proposals to disrupt
internet trade in cigarettes have included preventing the vendor from hosting a website (by seizing relevant
domain names),157 preventing the vendor from receiving payment (by banning credit card payments for cigarette
purchases over the Internet) and preventing shipments (by restricting local mail carriers and delivery services).158
In the United States, several credit card companies voluntarily refused to provide service to such vendors.159 Several
states in the US are now successfully collecting taxes from residents purchasing from Internet sites after requiring
vendors to supply purchase details under the terms of the so-called ‘Jenkins Act’ (15 USC 376a).6
13.7.10.2
Measures to reduce or eliminate duty-free sales
Article 6 of the WHO Framework Convention on Tobacco Control states that Parties should
‘…adopt or maintain as appropriate measures which may include:
…b. prohibiting or restricting, as appropriate, sales to and/or importations by international
travellers of tax- and duty-free tobacco products’.
Several jurisdictions internationally have banned duty-free sales or reduced allowable limits for the purchase of
duty-free cigarettes.
13.7.10.3
Knowledge and experience about effectiveness of measures to prevent illegal
circumvention
Sweeting et al conclude that reducing smuggling and other forms of illegal circumvention requires a range
of measures including amendments to taxation legislation, improved enforcement and public awareness
campaigns. Policy measures that were effective at one point in time may be less effective in other locations at
later times as those involved in the illicit tobacco trade change their practices to reduce the chance of detection.154
The Framework Convention Alliance (of international non-government organisations) has compiled much
material160–162 drawn from experience in jurisdictions such as UK, the European Union and Canada, all of which
appear to have made some progress over the 2000s in reducing illicit trade. This knowledge and experience have
been brought to bear in the drafting of the WHO Framework Convention on Tobacco Control and associated
guidelines and a Protocol specifically on illicit trade.
i
Or to enforce existing provisions of legislation prohibiting tobacco promotion—see Section11.x
Section: 13.7.10.3
in Australia
85
13.7.11
The WHO Framework Convention on Tobacco Control (draft)
protocol to eliminate illicit trade in tobacco products
The reduction of illicit trade is an important element of the WHO Framework Convention on Tobacco Control
(FCTC) which came into force on the 27 February 2005.163
13.7.11.1
The Convention
Article 15 of the FCTC obliges ratifying countries including Australia to:
2. ... adopt and implement effective legislative, executive, administrative or other measures to
ensure that all unit packets and packages of tobacco products and any outside packaging of
such products are marked to assist Parties in determining the origin of tobacco products, and
in accordance with national law and relevant bilateral or multilateral agreements, assist Parties
in determining the point of diversion and monitor, document and control the movement of
tobacco products and their legal status.164
Article 15 goes on to state:
‘In addition, each Party shall:
(a) require that unit packets and packages of tobacco products for retail and wholesale use
that are sold on its domestic market carry the statement: ‘Sales only allowed in (insert name of
the country, subnational, regional or federal unit)’ or carry any other effective marking indicating
the final destination or which would assist authorities in determining whether the product is
legally for sale on the domestic market; and
(b) consider as appropriate, developing a practical tracking and tracing regime that would
further secure the distribution system and assist in the investigation of illicit trade.
3. Each Party shall require that the packaging information or marking specified in paragraph
2 of this Article shall be presented in legible form and/or appear in its principal language or
languages.
4. With a view to eliminating illicit trade in tobacco products, each Party shall:
(a) monitor and collect data on cross-border trade in tobacco products, including illicit trade,
and exchange information among customs, tax and other authorities, as appropriate, and in
accordance with national law and relevant applicable bilateral or multilateral agreements;
(b) enact or strengthen legislation, with appropriate penalties and remedies, against illicit trade
in tobacco products, including counterfeit and contraband cigarettes;
(c) take appropriate steps to ensure that all confiscated manufacturing equipment, counterfeit
and contraband cigarettes and other tobacco products are destroyed, using environmentallyfriendly methods where feasible, or disposed of in accordance with national law;
(d) adopt and implement measures to monitor, document and control the storage and
distribution of tobacco products held or moving under suspension of taxes or duties within its
jurisdiction; and
(e) adopt measures as appropriate to enable the confiscation of proceeds derived from the
illicit trade in tobacco products’.
WHO Framework Convention on Tobacco Control164 p14
Section: 13.7.11.1
86
Facts and Issues
According to Article 33 of the Convention, the Conference of Parties (COP) may adopt protocols to the
Convention. Only Parties to the Convention may be Parties to a protocol. Any protocol to the Convention shall be
binding only on the Parties to the protocol in question.
At its second session in July 2007,i the COP decided to establish an Intergovernmental Negotiating Body (INB),
open to all Parties, to draft and negotiate a protocol on illicit trade in tobacco products. The protocol would build
upon and complement the provisions of Article 15 of the WHO FCTC. The INB held its first session in Geneva
in February 2008ii, followed by its second session in October 2008iii. The third session of the INB took place in June
2009iv and the fourth in March 2010.v The COP reviewed the progress made at its fourth session in Uruguay in 2010.vi
The Conference decided that negotiations on a protocol should continue at a final session of the INB to be held in
2012, and that an informal working group, composed of representatives of regional groups of Parties, would work
in 2011 to facilitate negotiations at the final session of the INB. This group met in Geneva in March–April 2012.vii
At the outcome of the negotiations, the INB decided to recommend to the COP that the draft protocol to eliminate
illicit trade in tobacco products, on which consensus was obtained, be considered by the COP at its fifth session.
(FCTC/COP/5/7, at paragraph 14 http://apps.who.int/gb/fctc/PDF/cop5/FCTC_COP5_7-en.pdf ).7
13.7.11.2
The draft protocol on illicit trade
The draft protocol to eliminate illicit trade in tobacco products7 outlines obligations under the following core areas:
<< Part III: Supply Chain Control. Provisions to control thesupply chain of tobacco, tobacco products and
manufacturing equipment
<< Part IV: Offences. Requires Parties to make unlawful under domestic law certain conduct.
<< Part V: International Cooperation. Provisions that provide for international co-operation, including sharing
information regarding illicit trade, sharing enforcement information, cooperating with training and technical
assistance matters, and law enforcement cooperation.
<< Part VI: Reporting. Provisions that provide for reporting under the Protocol through the WHO FCTC
reporting instrument.
<< Part VII: Institutional Arrangements and Financial Resources.
Part III Supply chain control
Licensing
Article 6 of the draft protocol would require Parties to establish a licence or equivalent approval or control system.
Parties would be required to:
1. prohibit without a licence the manufacture of tobacco products and manufacturing equipment and the import
or export of tobacco products and manufacturing equipment
2. endeavor to license to the extent appropriate any person or legal entity involved in retailing, growing,
transporting commercial quantities of tobacco products or manufacturing equipment, or wholesaling,
brokering, warehousing or distribution of tobacco, tobacco products or manufacturing equipment (except for
traditional small-scale growers, farmers and producers)
3. establish an effective licensing system by
i
ii
iii
iv
v
vi
vii
For further information, see http://www.who.int/fctc/cop/sessions/second_session_cop/en/index.html
For further information and documentation, see http://www.who.int/fctc/protocol/illicit_trade/first_session_inb/en/index.html
See http://www.who.int/fctc/protocol/illicit_trade/second_session_inb/en/index.html
See http://www.who.int/fctc/protocol/illicit_trade/third_session_inb/en/index.html
See http://www.who.int/fctc/protocol/illicit_trade/inb4/en/index.html
See http://www.who.int/fctc/cop/sessions/fourth_session_cop/en/index.html
See http://www.who.int/fctc/protocol/illicit_trade/inb5/en/index.html
Section: 13.7.11.2
in Australia
87
a. designating a competent authority to issue, renew, suspend, revoke and/or cancel licences
b. requiring licence applicants to provide proof of identity, tax registration numbers, location,
details of proposed activities, description of manufacturing equipment, documentation
regarding criminal records, identification of all bank accounts and payment details and
description of intended us and intended market
c. monitoring and collecting licence fees
d. preventing, detecting and investigating any irregular or fraudulent practices
e. undertaking periodic review, renewal, inspection or audit of licences
f. establishing a time frame for expiration and subsequent reapplication or updating
g. obliging any licensee to inform the competent authority of changes in location
h. obliging any licensee to inform the competent authority of any acquisition or disposal of
manufacturing equipment and
i. ensuring any destruction of equipment takes place under the supervision of the competent
authority.
4. Ensure that no licence is assigned without receipt of required information and prior approval of the competent
authority.
5. Five years following the entry into force of the Protocol, the Meeting of the Parties (the Protocol equivalent of
the COP) shall ensure at its next session that evidence-based research is conducted to ascertain whether any key
inputs exist that are essential to the manufacture of tobacco products, are identifyable and can be subject to an
effective control mechanism.
Due diligence
<< Article 7 would require that Parties require that all persons and entities engaged in the supply chain of tobacco,
tobacco products and manufacturing equipment conductdue diligence before the commencement of and
during the course of a business relationship. It outlines that due diligence includes obtaining and updating
information relating to customer identification.
Tracking and tracing
<< Article 8 would require that Parties establish within five years of entry into force of the Protocol, a tracking and
tracing regime comprising a national and/or regional tracking and tracing system and a global information
sharing focal point located at the Convention Secretariat of the WHO FCTC.
<< This will require within five years for cigarettes (and within 10 years for other tobacco products) unique, secure
and non-removable identifications markings such as code or stamps, affixed to, or to form part of, all unit
packages. As part of this system, each Party will require that the following information be available to assist
with monitoring the movement of products and with determining their legal status:
a. date and location of manufacture
b. manufacturing facility
c. machine used to manufacture
d. production shift or time
e. name, invoice, order no. and payment records of the first customer not affiliated with the
manufacturer
f. intended market of retail sale
g. product description
h. warehousing and shipping
i. identity of any known subsequent purchaser
j. intended shipment route, shipment date, destination, point of departure and consignee.
Information in a, b, g and where available f will appear as part of the unique identification markings.
Section: 13.7.11.2
88
Facts and Issues
<< Parties would also be required to cooperate with each other and with competent international organizations as
mutually agreed to facilitate the sharing and development of best practices for tracking and tracing systems.
<< Obligations under this provision shall not be performed by or delegated to the tobacco industry, and Parties
must ensure that its competent authorities, in participating in the tracking and tracing regime, interact with
the tobacco industry and those representing the interests of the tobacco industry only to the extent strictly
necessary in the implementation Article 8.
Record-keeping
Article 9 would require, as appropriate, that each Party requires that persons and entities engaged in the supply
chain of tobacco, tobacco products and manufacturing equipment maintain complete and accurate records of all
relevant transactions, to provide information on request to competent authorities on market volume, trends and
forecasts as well as products in stock or in tax and customs warehouses.
Security and preventive measures
Article 10 would require, as appropriate and consistent with national law and the WHO FCTC, that Parties require
all licensees take necessary measures to prevent the diversion of tobacco products into illicit trade channels,
including reporting to competent authorities the cross border transfer of cash in amounts stipulated in national
law or of cross-border payments in kind, and all ‘suspicious transactions’, as well as reporting any supply of tobacco
products or manufacturing equipment not commensurate with the demand for such products.
All payments would be required only in the same currency as appears on the invoice and only through legal modes
of payment from financial institutions located on the territory of the intended market. Each party shall ensure that
any contravention of the requirements of this Article is subject to ‘appropriate criminal, civil or administrative
procedures and effective, proportional and dissuasive sanctions.’
Internet sales
Article 11 would require each Party to require that persons and entities engaged in any transaction with regard
to tobacco products through the Internet to comply with all relevant obligations covered by this Protocol, and to
consider banning retail sales through the Internet and any other evolving technology-based modes of sale.
Free zones and international transit
Article 12 would require Parties within three years of the entry into force of this Protocol to implement effective
controls on all manufacturing of, and transactions in, tobacco and tobacco products, in free zones, by use of all
relevant measures as provided by the Protocol. In addition, the intermingling of tobacco products in a single
container at the time of removal from the free zone shall be prohibited.
Each Party would also be required, in accordance with national law, to apply control and verification measures to
international transit or transshipment within its territory.
Duty-free sales
Article 13 requires Parties to implement effective measures to subject any duty free sales to all relevant provisions
of this Protocol, and establishes the requirement that no later than five years following the entry into force of the
Protocol, the Meeting of the Parities shall ensure that research is conducted to ascertain the extent of illicit trade
that can be related to duty-free sales, and to consider appropriate further action.
Part IV Offences
Article 14 requires Parties to make it unlawful to:
a. manufacture, wholesale, broker, sell, transport, distribute, store, ship, import or export tobacco, tobacco
products or manufacturing equipment contrary to the provision of the Protocol
b. do any of the above without the payment of applicable duties, taxes and other levies or without bearing
applicable fiscal stamps, unique identification markings, or any other required markings or labels or to engage
in any other acts of smuggling
Section: 13.7.11.2
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c. to manufacture or engage in trade in any tobacco, products , equipment or packaging bearing false stamps,
unique identification markings or labels
d. to conceal tobacco products by mixing them with non-tobacco products during progression through the supply
chain
e. to intermingle tobacco products with non-tobacco products in free zones or in international transit
f. to use the Internet, telecommunication, or any other evolving technology-based modes of sale of tobacco in
contravention of the Protocol
g. to obtain products or equipment from anyone not licensed
h. to obstruct any public or authorized office in their duties
i. to make false, misleading or incomplete statements, to fail to provide required information or to mis-declare
any items or fail to maintain records or;
j. to fail to create or maintain records required by the Protocol
k. to launder the proceeds of unlawful conduct.
Parties are also required, subject to domestic law, to determine which of the above offences shall be criminal and to
inform the Secretariat of such determination. Parties are also encouraged to review national laws regarding money
laundering, mutual legal assistance and extradition.
Enforcement
Remaining articles of Part IV of the Convention covers arrangements concerning liability of legal persons (Article
15), Prosecutions and sanctions (Article 16) and seizure payments (Article 17) disposal and destruction (Article
18), and Special investigative techniques.
Part V International Cooperation
Part V of the Protocol covers General information sharing (Article 20), enforcement information sharing (Article
21), confidentiality and protection of information (Article 22), assistance and cooperation related to training,
technical assistance and cooperation in scientific, technical and technological matters (Article 23), assistance
and cooperation in investigation and prosecution (Article 24), protection of sovereignty (Article 25), jurisdiction
(Article 26), law enforcement cooperation (Article 27), mutual administrative assistance (Article 28), mutual legal
assistance (Article 29), extradition (Article 30) and measures to ensure extradition (Article 31).
Part VI Reporting
Article 22 sets out arrangements for reporting and exchange of information.
Part VII Institutional arrangements
Article 33 describes arrangements for the meeting of the Parties. Article 34 establishes the Secretariat, and Article
35 sets the ground rules for relations between the Parties and intergovernmental organisations and Article 36
describes arrangements for financing.7
13.7.11.3
Challenges posed by illicit tobacco for the integrity and effectiveness of tobacco control
Liberman et al have described several challenges inherent in efforts to address the problem of illicit tobacco. ‘While
illicit tobacco trade is a health problem,’ they point out ‘the expertise, experience and capacity needed to combat
illicit trade are not traditionally found in health agencies’ but rather lie within the mandates and expertise of
customs, revenue, law enforcement and justice agencies. They point to the need to work with other agencies both
Section: 13.7.11.3
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Facts and Issues
domestic and international such as the UN Office on Drugs and Crime and the World Customs Organization to
‘ensure both an effective response’ and an efficient use of limited governmental resources’. Combating illicit trade
does require the involvement of tobacco companies, but this could pose dangers if ‘relationships and norms of
cooperation spill over into other areas of FCTC implementation.’
In many parts of the world, tobacco companies work very closely with governments on measures to prevent
illicit trade,i providing training of customs and other government officials and contributing resources to assist
governments with surveillance and law enforcement activities.84 This kind of activity sits uneasily with Article 5.3
of the WHO FCTC which states ‘in setting implementing public health policies with respect to tobacco control,
Parties shall act to protect these policies from the commercial and other vested interests of the tobacco industry
in accordance with national law.’165 Guidelines for Article 5.3 contain suggestions for limiting interactions with the
tobacco industry to only those strictly necessary for effective regulation, ensuring transparency with respect to
interactions with the industry and rejecting partnerships.166
While tobacco companies are likely to continue to work closely with revenue and customs agencies, Liberman
et al suggest the adoption of institutional arrangements to ensure that the World Health Organization, the
Conference of the Parties to the WHO Framework Convention on Tobacco Control and the FCTC Secretariat are
all quarantined from inappropriate interaction with tobacco industries so that the FCTC remains health focused
and ‘its culture remains one in which the ‘fundamental and irreconcilable conflict between the tobacco industry’s
interests and public health policy interests…’ is always recognised.84
13.7.12
What has been done in Australia to date to reduce avoidance and
evasion of tobacco taxes?
13.7.12.1
Internet sales
Surveys of smokers in Australia to date reveal very few cases of people reporting purchasing of cigarettes via the
Internet.167 However there are several Internet sites with Australian domain names that do sell cigarettes—see
Chapter 11, Section 11.12 for further details. Amendments to the Tobacco Advertising Prohibition Act 1992 first
introduced in 2010168 and passed in early 2012169 clarify that while it is illegal to advertise tobacco products on
the Internet, sale of tobacco products through the Internet is allowed in Australia. The Act provides for the
establishment of regulations that require:
‘information about any fees, taxes and charges payable in relation to tobacco products’ S4(b)ii
13.7.12.2
Duty-free
Economists Collins and Lapsley noted in a paper for the Economic Society of Australia in 1994170 the inconsistency
of duty-free concessions for alcohol and tobacco given the large social costs that they had recently documented
associated with use of these drugs in Australia.171 They also drew attention to several international trade agreements
that they believed may have prevented Australia from ending such concessions.
No recent figures on quantities of duty-free sales appears to be publicly available, however an estimate prepared
in 2002 found that had duty been paid on all the products which were sold duty-free in Australia in 2001, revenue
would have totalled more than $130 million.172 Without duty-free status, sales may have been considerably lower, so
it is unclear how much extra revenue the government would gain if duty-free sales were to be abolished.
i
Section: 13.7.12.2
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In 2003 the Government undertook a review of duty-free allowances and decided against removal of concessions.
On 1 February 2005 it amended a by-law under the Customs Tariff Act 1995173 to revise quantities allowed under the
concessions from 250 grams of tobacco products (assumed to be equivalent to 250 cigarettes) to specifically include
250 cigarettes or 250 grams of cigars.
In its 2012–13 Budget handed down in May 2012, the Australian Government announced that it would reduce
the personal allowance for duty-free tobacco from 1 September 2012 from ‘250 cigarettes to 50 cigarettes or
50 grams of other tobacco products.’ This measure is expected to increase receipts by $660 million over the forward
estimates—by $127m in 2012–13, $165m in 2013–14, $176m in 2014–15 and $192m in 2015–16.174
There would be no legal impediment to the government banning sale in Australia of duty-free products for arriving
passengers to import duty-free or for leaving passengers to export. However, Australia is a party to several
agreements relevant to the import of duty-free products purchased elsewhere.
These include:
<< the Convention Concerning Customs Facilities for Touring as amended 5 September 1966 the ‘New York
Convention’ (New York, 4 June 1954)i
<< the International Convention of the Simplification and Harmonization of Customs Procedures of 18 May
1973 (as amended by the Protocol of Amendment to the International Convention on the Simplification and
Harmonization of Customs Procedures of 18 May 1973, Brussels, 26 June 1999) ‘the Kyoto Convention’ii and
<< the OECD Decision–Recommendation on International Tourism Policy 1985iii
The New York Convention defines ‘tourist as a non-resident and therefore only applies to non-residents. The
Kyoto Convention sets out a recommended level only, rather than a binding Standard. The OECD Decision–
Recommendation states:
‘In adopting this Decision–Recommendation, the Council:
1. NOTED the reservations and observations made by individual Member countries with relation to certain
elements of Annexes 1 and ii to the Decision–Recommendation and expressed hope that it would be
possible for these to be removed over the course of time.
2. AGREED that the adoption of the Decision–Recommendation did not prevent a Member country from
taking action which it considered necessary for the maintenance of public order, or the protection of
public health, morals or safety.’
The provisions of these agreements would need to be assessed before Australia could move to further restrict the
import of duty-free cigarettes in Australia.
13.7.12.3
Smuggled tobacco products
Australia has contributed to an anti-tobacco smuggling alliance established in 2004 to exchange information and
coordinate efforts to fight smuggling within the Asia Pacific region.175
In June 2012 the Australian Government introduced legislation to make smuggling of tobacco products an offence
punishable by up to 10 years imprisonment or 100 penalty units.176 This legislation was passed in November 2012.iv
i
ii
iii
iv
See http://www.austlii.edu.au/au/other/dfat/treaties/ATS/1967/1.html
See http://www.austlii.edu.au/au/other/dfat/treaties/ATS/2006/22.html
Not available on-line.
See http://www.comlaw.gov.au/Details/C2012A00146
Section: 13.7.12.3
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Facts and Issues
13.7.12.4
Protocol on illicit trade
Staff from Australian government agencies have had some involvement in the development of the protocol. Before
Australia decides whether to become a Party, the Parliament would refer the Protocol for assessment of its Joint
Standing Committee on Treaties.i
Acknowledgement
Thank you to Jonathan Liberman and Nicholas Coxon for comments on an earlier draft of this paper. Remaining
errors and imprecision are the authors’ own.
i
See http://www.aph.gov.au/Parliamentary_Business/Committees/House_of_Representatives_Committees?url=jsct/index.htm
Section: 13.7.12.4
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166. Conference of the Parties to the WHO Framework Convention on Tobacco Control. Guidelines for implementation of article 5.3 (on the protection of public health policies with respect to
tobacco control from commercial and other vested interests). (decision FCTC/COP3(7)), World Health Organization: 2008. Available from: http://www.who.int/fctc/protocol/guidelines/
adopted/article_5_3/en/index.html
167. Yong H, Tobacco Control Unit, The Cancer Council Victoria Melbourne. Results of ITCPES on numbers of people purchasing tobacco products via the Internet (personal communication).
Email to Michelle Scollo of The Cancer Council Victoria, 2007.
168. Tobacco Advertising Prohibition Amendment Bill 2010 (Cth). Available from: http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query%3DId%3A%22legislation%2Fbillho
me%2Fr4488%22
169. Tobacco Advertising Prohibition Amendment Act 2012(Cth). Available from: http://www.comlaw.gov.au/Details/C2012A00005
170. Collins D and Lapsley H. Increasing the health risks of overseas travel? Duty free concessions for alcohol and tobacco. The Economic Society of Australia 1994;13(4):87-99. Available from:
http://onlinelibrary.wiley.com/doi/10.1111/j.1759-3441.1994.tb01176.x/abstract
171. Collins C and Lapsley L. Estimating the Economic Costs of Drug Abuse in Australia. Canberra: Department of Health and Community Services in association with the National Campaign
Against Drug Abuse, 1991.
172. Parliamentary Library Officer, Parliamentary Library, Parliament House Canberra. Estimate of value of duty free sales of tobacco (personal communication). Electronic file to Andrew
Herington Adviser to opposition health spokesperson Ms Jenny Macklin MP, 2001.
173. Customs Tariff Legislation Amendment Act 1995 (Cth). Available from: www.comlaw.gov.au/Details/C2004A04992
175. Anon. Fighting tobacco smuggling in Asia-Pacific debated. Vietnam News Agency, (Hanoi) 2004: Available from: http://www.vnagency.com.vn/Home/EN/tabid/119/itemid/13320/
Default.aspx
176. Customs Amendment (Smuggled Tobacco) Bill 2012(Cth). Available from: http://parlinfo.aph.gov.au/parlInfo/search/display/display.w3p;query=Id%3A%22legislation%2Fbills%2F
r4858_first-reps%2F0000%22;rec=0
177. Anon. Smokes shredded. Herald Sun, (Melbourne, Australia) 2000: 24
178. Scanlan D. Canada’s Dodge, 12 Others will Testify in JTI-MacDonald Case. Bloomberg, (Toronto) 2005: Available from: http://www.cbc.ca/money/story/2005/12/14/
appealdodge-051214.html
179. Tobacco Free Kids. Illegal Pathways to Illegal Profits: the big cigarette companies and international smuggling. Washington DC: Tobacco Free Kids, 2002. Available from: http://global.
tobaccofreekids.org/files/pdfs/en/Illegal_profits_to_illicit_profit_en.pdf
Section: 13.7.12.4
in Australia
99
180. The European Union v RJR Nabsico Inc, 789 Docket Nos. 02-7325 (L), 02-7330 (CON), 02-7323 2004 United States Court of Appeals for the Second Circut.Available from: http://archive.
tobacco.org/resources/documents/040114EUvPM.html
181. European Commission. Decisions by the Court of Justice and the Court of First Instance (5/168). Bulletin of the European Union 2006;12 Available from: http://europa.eu/bulletin/
en/200612/p135006.htm
182. Excise Amendment (Compliance Improvement) Act 2000. Available from: http://www.comlaw.gov.au/ComLaw/Legislation/Act1.nsf/0/A08FF2660F239B07CA256F72000ABE96?OpenD
ocument
183. The Auditor-General. Performance Audit Administration of Tobacco Excise. Audit Report No.55 2001–02. Canberra: Australian National Audit Office, 2002. Available from: http://www.
anao.gov.au/director/publications/auditreports/2001-2002.cfm?pageNumber=2
184. Excise and Other Legislation Amendment (Compliance Measures) Act 2004. Available from: http://www.comlaw.gov.au/comlaw/Legislation/Act1.nsf/0/874101728600C2CACA256F720
01167D4?OpenDocument
185. Phillbrook J. Chop Chop. Australian Retail Tobacconist 2005;65 (April/May 3):1.
186. Excise Laws Amendment (Fuel Tax Reform and Other Measures) Act 2006. Available from: http://www.comlaw.gov.au/comlaw/Legislation/Act1.nsf/0/0C1643C94594FCAECA2571A200
1964C8?OpenDocument
187. Costello P. The Hon. Excise Laws Amendment (Fuel Tax Reform and Other Measures) Bill 2006 and Excise Tariff Amendment (Fuel Tax Reform and Other Measures) Bill 2006 Explanatory
Memorandum. The Parliament of the Commonwealth of Australia House of Representatives, 2006. Available from: http://www.comlaw.gov.au/ComLaw/Legislation/Bills1.nsf/framelodg
mentattachments/5F9F9AF8EA680FD5CA25716F0018F551
Section: 13.7.12.4
100
Facts and Issues
Industry involvement in large-scale smuggling
In 1997 two British American Tobacco managers pleaded guilty to charges brought by the Royal Canadian
Mounted Police related to tobacco smuggling between Canada and the US.177 In August 2004, a Quebec judge
ordered JTI-MacDonald, the Canadian Unit of Japan Tobacco Inc, to pay C$1.37 billion in taxes lost to Quebec
when tobacco companies exported cigarettes to the United States knowing that they would be smuggled back
into Canada for sale on the illict market.178 In Ottawa in May 2006 a former senior executive of RJR-MacDonalds
Corporation commenced serving a conditional sentence after pleading guilty to conspiring to smuggle cigarettes
and defraud the Canadian government of more than $1 billion in taxes. The executive, a former company vicepresident, has admitted overseeing the scheme but told the court that it was developed by more senior executives of
the company, later known as JTI-Macdonald. These executives were charged with fraud and a preliminary hearing
was held in Toronto late in 2006.19
In 2000 the respected British newspaper, The Guardian, in cooperation with the International Consortium
of Investigative Journalists, released damning documents showing how tobacco company British American
Tobacco (BAT) secretly encouraged tax evasion and cigarette smuggling. In April 2001 the US non-government
organisation, Campaign for Tobacco-Free Kids, released a report and numerous documents that detailed the
involvement of BAT, Philip Morris and RJ Reynolds in illicit activities in several markets. Among other things
these reports revealed that cigarette companies:
<< intentionally used small amounts of legal imports of certain brands to mask the display and sale of smuggled
cigarettes in a country and to provide an excuse for their advertising and marketing efforts designed to
promote the sales of the smuggled versions
<< sent high-level executives to meetings with the middlemen companies directly in charge of smuggling
efforts to discuss details of the smuggling operations, including destinations, brands, routes, quantities and
prices
<< knowingly supplied cigarette smuggling operations used by illegal drug traffickers for money laundering
purposes.
Campaign for Tobacco-Free Kids, 2001 179 Executive summary, p vi
After an investigation launched in October 2000 by the UK Department of Trade and Industry, the European
Commission filed a complaint in August 2001 on behalf of the European Community and 10 of its member states
(Italy, Germany, France, Spain, Portugal, Greece, Belgium, The Netherlands, Finland and Luxembourg) alleging
that two US cigarette manufacturers had promoted smuggling.
On 19 February 2002, the US District Court in New York dismissed the EC and Member States’ smuggling claims
on the basis of the ‘revenue rule’, a technical rule according to which a US court need not enforce a foreign tax
claim. In its ruling, the District Court also held that the ‘revenue rule’ does not necessarily apply to other aspects of
the EC and Member States’ claims and dismissed this part of the case ‘without prejudice’. The EC and the Member
States appealed this ruling before the 2nd Circuit Court of Appeals in New York on the basis that the ‘revenue
rule’ does not apply to the EC case. The EC’s appeal was supported by formal interventions, known as ‘amicus
curiae’ briefs, by the World Health Organization and two US organisations, the Campaign for Tobacco-Free Kids
and the Federal Law Enforcement Officers Association (FLEOA) /. On 14 January 2004, the Second Circuit Court
of Appeals upheld the dismissal of the smuggling claims and ruled that the ‘revenue rule’ barred those claims.
However it also confirmed that the EC and the Member States could replead their other claims in a separate
action.180 The EC and the Member States submitted a Petition for Writ of Certiorari to the Supreme Court of the
United States to appeal against the ruling of the Second Circuit Court of Appeals. This was filed by the Supreme
Court on April 12, 2004 under Docket No. 03- 1427.
After a series of hearings, decisions and appeals181 in 2004 the European Union reached an out-of-court agreement
with Philip Morris International whereby the company would provide $1 billion over six years to assist the
European Union with anti-smuggling measures including in particular action on counterfeit cigarettes—see details
of agreement at http://ec.europa.eu/anti_fraud/investigations/eu-revenue/philip_morris_international_2004_
en.htm
in Australia
101
Similar agreements were established with Japan Tobacco in 2007, with British American Tobacco and with
Imperial Tobacco Limited in 2010. See website of the European Anti-Fraud Office for a copy of each of the
agreements— http://ec.europa.eu/anti_fraud/investigations/eu-revenue/cigarette_smuggling_en.htm
102
Facts and Issues
Technical Appendix 13.7.2
Australian Taxation Office action to address the
problem of illicit tobacco growing
The Australian Government put considerable effort into containing the growth of illicit tobacco after concerns were
raised about ‘chop-chop’ from the late 1990s.
Extra investigators were appointedi and amendments to the Excise Act in 2000 tightened licensing and reporting
requirements for growers, and instituted penalties of up to two years’ imprisonment or financial penalties of up to
$55 000 for some offences.182
Following an audit of excise collection in 2001, the Australian National Audit Office made a number of
recommendations for further improving the administration of excise in the areas of ‘supporting business systems,
risk management and governance’.183 In 2004, further amendments to excise legislation184 were put in place that:
<< included tobacco seed and plant as well as leaf in provisions relating to movement and permissions for
movement (Sections 44 and 117D) and
<< enabled disposal of forfeited, seized goods and use of evidentiary certificates in prosecutions (sections 107FJ
and 107GB).
The powers extended to the Australian Taxation Office by these amendments enabled it to pursue further strategies
to improve compliance including:
<< measuring crops planted on licensed premises, ensuring correct bookkeeping procedures and identifying
growers planting for the next season
<< reviewing manufacturers’ refunds, remissions and drawback processes and supervision of tobacco destructions
and
<< reviewing and reissuing excise storage licences and continuing permissions of duty-free stores. 57
Between 2000–01 and 2004–05, ATO estimates of tobacco illegally diverted as a total tobacco grown increased
from 6 to 9%. During the 2002‒03 and 2004‒05 financial years, the seizures represented about 20% of the tobacco
that the ATO estimated was illegally diverted.
Over the 18-month period to December 2004 there were 50 prosecutions, 30 of which resulted in custodial
sentences and Penalty Infringement Notices issues to 26 retailers around Australia.185 The Australian Customs
Service also devoted considerable resources to preventing illegal importation of unprocessed tobacco from
overseas.ii
In 2006 the Excise Laws Amendment (Fuel Tax Reform and Other Measures) Act186 removed prescribed reporting
requirements for tobacco producers (Section 50), but widened the powers of the ATO to nominate persons who
must account for tobacco leaf and pay excise duty in respect of leaf not accounted for, and to specify for each
person exactly the information required. This allowed the ATO to better tailor reporting requirements depending
on the risk posed by each grower, distributor and manufacturer. Since this time, the Act has required threeyearly renewal of licences. When deciding whether to grant a licence, the ATO was able to take into account the
applicant’s skills and experience (s.39A (2)(fa)). When deciding whether an applicant was a ‘fit and proper person’
to hold a licence it could take into account both ‘the extent of the person’s compliance, within four years before the
application was made, with any law administered by the (Commissioner of Taxation)’ (s.39B(ba) and ‘the persons’
financial resources’ (s39B(ca))187
In its follow-up audit in 2006, The National Audit Office (ANAO) reported that the ATO had fully implemented its
recommendations to:
<< articulate strategies and assess performance related to the Tobacco Industry Group Business Plan
<< ensure compliance with legislation
i
ii
In 2003 it was reported that the ATO had some 100 excise staff investigating the illegal chop-chop trade.
A seizure at Port Melbourne in November 2004 for instance netted nine tonnes of loose tobacco from the Philippines.
Section: Technical Appendix 13.7.2
in Australia
103
<< share intelligence with the Department of Health and Ageing and other agencies
ensure that excise intelligence systems meet business needs
<< share intelligence with retailers, the Australian Customs Service, the Australian Federal Police, and road
transport authorities
<< finalise a memorandum of understanding with the Customs Service and
<< clarify the respective roles of the Tobacco Industry Group and Investigations Unit within the ATO.
The ANAO considered that the ATO had also substantially completed it plans to improve excise intelligence
capacity, ensuring adequacy of staff skills.96
104
Facts and Issues
Technical Appendix 13.7.3
Notes on questions about unbranded tobacco in
2010 compared with 2007 National Drug Strategy
Household surveys
a. The questions in the 2007 National Drug Strategy Household Survey (NDSHS)102 that asked about unbranded
products covered both loose cigarettes and tobacco sold in plastic bags (questions 29 to 32),i whereas the 2010
question only mentioned unbranded tobacco (questions 31 to 34).ii While many people will have interpreted
the 2010 question as also covering rolled unbranded cigarettes in addition to unbranded tobacco, unfortunately
the 2010 figure is not directly comparable to the figure for 2007. The Deloitte reported states on page 25 that
cigarettes in packs or cartons made up 60% of unbranded tobacco in 2010, or 1.5 times the percentage using
loose tobacco. Even if no users of unbranded cigarettes were picked up in Q31 in 2010 (which is unlikely), the
total prevalence of smokers using unbranded tobacco products half the time or more could be no more than
about 2.25%, still substantially lower than the 15.7% estimated by Deloitte.
b. It should be noted that the 2011 Roy Morgan survey used as the basis for the Deloitte report published in May
201299 detected lower prevalence of use of unbranded tobacco in 2011 compared to 2010.
c. Tobacco companies may argue that people would underreport smoking of illicit tobacco in a Government
sponsored survey. Note however, that both survey sponsors employed the Roy Morgan Company to collect data.
Large numbers of people in the NDSHS report using illicit drugs with, for instance, 8.3% of respondents in the
2010 survey admitting to using an illicit drug in the last month. Participants are provided with information
about the purpose of the survey and given credible assurances about confidentiality.
i
ii
The 2007 Survey asked:
D29. Have you seen or heard of unbranded loose tobacco (also called ‘chop-chop’) sold in plastic bags or rolled into unbranded cigarettes
D30. Have you ever smoked it?
D31. How often do you smoke this type of tobacco?
Every day
Some days
Only occasionally
No longer use it
D32. Would you say that when you smoke, you. . .?
Smoke this type of tobacco about half of the time
Smoke this type of tobacco less than half of the time
Occasionally smoke this type of tobacco http://www.aihw.gov.au/national-drugs-strategy-household-surveys/
The 2010 Survey asked
D31. Have you seen or heard of unbranded loose tobacco or ‘chop-chop’ sold in plastic bags?
D32. Have you ever smoked unbranded loose tobacco or ‘chop-chop’ sold in plastic bags?
D33. How often do you smoke this type of tobacco?
Every day
Some days
Only occasionally
No longer use it
D34. Would you say that when you smoke, you. . .?
Smoke this type of tobacco about half of the time
Smoke this type of tobacco less than half of the time
Occasionally smoke this type of tobacco http://www.aihw.gov.au/2010-national-drug-strategy-household-survey/
in Australia
105
13.8
What is the ‘right’ level of tobacco taxation?
The most significant issue that governments must face in considering taxation as a tobacco-control policy is in
deciding on an appropriate level for excise and customs duty on tobacco products. There are several possible
approaches.
13.8.1
Tobacco taxes to recoup social costs
Many economists would argue that the ‘correct’ level of tobacco taxation is that which ensures that revenue from
tobacco taxes is at least equal to the costs likely to be imposed on society resulting from tobacco use (that is, those
costs not borne voluntarily by smokers themselves).1 While theoretically this seems like an attractive proposition,
in practice governments attempting to set tax levels on this basis would face several difficulties.
Quantification of costs have been established for Australia, as for elsewhere, but the most comprehensive of these
are estimates of current costs based on past tobacco consumption rather than estimates of future costs based on
consumption by current smokers.i It doesn’t seem fair to expect current smokers to bear costs associated with
smoking by previous generations of smokers over whose smoking they had no control. If taxes were set to cover the
costs associated with past consumption, then remaining smokers would have to contribute the same total amount of
revenue, regardless of the total quantity of tobacco smoked, and regardless of how many smokers managed to quit.
Some studies have attempted to project future costs associated with smoking by current smokers; however,
because most health effects occur only after many years of use, and because medical treatments change rapidly, it
is extremely difficult to quantify such costs with any accuracy. Gene therapies, for instance, could revolutionise the
treatment of many cancers and cardiovascular problems over the next 10 to 15 years.
Another challenge would be to ensure that all the relevant costs were being included. For many of the health
problems caused by smoking, the extent of mortality and morbidity has yet to be quantified. Also, there are many
health conditions that scientists suspect may be caused or worsened by smoking, but insufficient research has
been conducted to ascertain causality. Further, current costs are based on average treatment costs. The cost of
treating diseases in people who smoke are likely to be higher than average due to problems such as slower healing
of fractures and a greater incidence of post-operative complications.2 Authors of economic studies acknowledge
that current estimates are likely to significantly underestimate the true costs for all these sort of reasons.3 If tax
rates were to be set on the basis of likely future healthcare and other social costs associated with smoking, then a
mechanism would need to be established for more comprehensively and regularly updating estimates of the health
burdens associated with tobacco use.
13.8.2
Tobacco taxes as a corrective force to combat failures of selfcontrol
While the costs borne by business and costs borne by government due to smoking are considerable, the costs
borne non-voluntarily by smokers themselves and by their immediate families are a third, very large component of
Collins and Lapsley’s estimate of total tangible costs: $9871.2 million or close to 50% of the total
$19 609.3 million estimated tangible costs attributable to smoking for Australia in 2004–05 (see Chapter 17,
Section 17.3). In addition to almost $10 billion in tangible costs, smokers and their families bear 100% of the
intangible costs attributable to tobacco use: $19 459.7 million in 2004–05. Collins and Lapsley’s estimate of
i
Current costs would be higher than future costs to the extent that numbers of smokers were declining. Current costs would be lower than future costs to the extent that the costs of
medical, hospital and particularly pharmaceutical treatments were increasing.
Section: 13.8.2
106
Facts and Issues
intangible costs included an estimate of the value to individuals of a year of life lost in 2004–05, but they did not
attempt to quantify the pain and suffering of those who grieve for smokers who die early. And as well as bearing
these economic costs, addicted smokers spent more than $10 billion in 2004–05 on tobacco products, which
included more than $6 billion in excise and customs duty and goods and services tax (GST) on sale of tobacco
products.i
While the financial and health consequences of smoking might be considered disincentive enough, they largely
occur in the future and are more easily dismissed or discounted in a cognitive fashion by smokers. By contrast, the
difficulty of quitting (in particular of withstanding cravings) is something that must be faced in the present with
little prospect of immediate benefit. Increases in the cost of tobacco products helps to tip the balance, so that the
continuing costs of smoking are greater and the benefits of quitting more immediate. As described by Gruber and
Koszegi, governments can provide ‘a self-control device that will allow the consumer to avoid making sub-optimal
consumption decisions’ (p13).4 … or making the healthy choice the easier choice.
As part of its report to the government on recommended reforms to Australia’s tax system, a review panel, chaired
by the then Treasury secretary Ken Henry, undertook an analysis of Australian tobacco tax rates5 based on the
Gruber and Koszegi model.4 While acknowledging the difficulties of quantifying time preferences and warning that
considerable uncertainties surrounding their calculations, the panel concluded that tobacco excise rates could be
increased substantially. As stated in its report:
‘The ideal tax rate depends on a number of parameters. It depends on how strongly smokers
privilege current costs and benefits over future costs and benefits. The stronger the current
period preference, the harder smokers find it to carry out plans to stop smoking and the
higher the tax needs to be to help them overcome their self-control problems. The more harm
is done by current smoking, the higher the tax needs to be to limit the damage suffered by
smokers with self-control problems. The ideal tax rate also depends on whether the smoker
understands their self-control problem — that is, whether they are ‘naïve’ or ‘sophisticated’. A
naïve smoker does not realise they have a self-control problem.
...
In [Table E6-1], the value representing the strength of smokers’ current period preference can
range from 0 to 1. A value of 0 would mean that current period preference is absolute, so that a
smoker places no weight at all on what happens in future. A value of 1 would mean that there
is no current period preference, so that a smoker recognises the full costs of smoking, and can
make a rational decision about their current smoking
on that basis. The values tested in the table cover the
Table 13.8.1 mid-range of empirical estimates.’
Range of optimal tobacco tax rates for Australia ($ per stick)
This model suggests that excise duty on tobacco might need
to increase to almost 50 cents per stick before smokers who
highly discounted the future and who were unaware that
Strength of current period preference
they had problems controlling their smoking would seriously
0.60 0.65 0.70 0.75 0.80
think about quitting. At 50 cents per stick, the recommended
Optimal tax rate for
$0.31 $0.27 $0.22 $0.18 $0.14
‘sophisticated’ smokers
retail price of a pack of Winfield 25s would increase by about
Optimal tax rate for
26%, from $17.15 (February 2012) to $21.60 per pack.
$0.47 $0.41 $0.35 $0.29 $0.23
While this is an attractive model, the review panel points out
a number of limitations:
<< ‘It is very difficult to measure the strength of an
individual’s current period preference. ii
‘naïve’ smokers
Source: Table E6–1 from K Henry et al 20105
<< Different groups may vary in the strength of their current period preference. If so, a uniform tax will overtax
some and under-tax others. In particular, young people underestimate their chance of becoming addicted and
i
ii
This spending is not counted as a ‘cost’ to individuals, because, had they not been smokers, they would have spent this money on other goods and services. The cost (net of government
taxes) is counted as a cost to business outside the tobacco industry.
Henry et al explain that the values 0.60 to 0.80 are notional, not based on actual data from Australian smokers.
Section: 13.8.2
in Australia
107
their smoking responds more to price changes, so estimates for sophisticated smokers may underestimate the
appropriate overall rate.
<< It is difficult to estimate the value of life-years lost through smoking and of the other harms that smoking
causes.
<< Not all smokers are the same but they all pay the same tax. High tobacco taxes impose costs on the small
proportion of occasional smokers who are at little risk of harm.’ 5
13.8.3
Pricing products out of the reach of young people
Another approach to establishing the optimal level of tobacco taxes is to attempt to price tobacco products out of
the reach of young people.
The recommended retail price of a typical pack of 25 cigarettes in Australia in February 2012 was $17.15. This was
less than going to a movie (adult ticket $18.50, Hoyts April 2012), less than the cost of purchasing a new release
DVD ($19.95 for a single disc, Video Ezy April 2012) and less than half the amount the average teenager received
in weekly spending money in 2011 ($45.50 per week for young people aged 15 years (according to unpublished
data from the Australian Secondary Student Survey on Alcohol and other Drugs provided to the author by V White
December 2012). Depending on what other goods and services young people would not be prepared to forgo,
students on average pocket money would currently be able to afford to purchase up to two packs of cigarettes per
week. In 2011, secondary school students who smoked at least weekly smoked an average of 17 cigarettes per week.
A third approach to taxing tobacco products would be to set tax levels on cigarettes so that a week’s supply
would cost more than the average week’s disposable spending money. This might require the price of cigarettes
in Australia to more than double. Theoretically governments could go further and tax products so as to price
cigarettes out of the reach of all but the most ‘cashed-up’ young person, at higher than the pocket money received
by, say, 90% of young people aged 15 years. Because some young people receive very high levels of money they
are able to ‘spend on themselves’ (exceeding $100 a week), setting taxes that result in these sorts of prices would
impose considerable hardship on addicted smokers unable to dramatically reduce their consumption. Such a
dramatic doubling or tripling in price may also result in the development of a black market to supply remaining
users.
While it may not be feasible to price young people out of the tobacco market altogether, making cigarettes less
affordable to young people is likely to remain an important consideration in setting tax levels.
13.8.4
Taxing to take tobacco products to smokers’‘price point’ for
quitting
A less drastic and more pragmatic approach to establishing tax levels on tobacco products might be to base them
on what smokers tell us about how expensive cigarettes would need to be before they would think about quitting.
The average increase recorded in responses from smokers in Victoria who were asked this question in November
2010 was $6.20, an increase over prices current at that time of almost 40% (Hayes, L. Unpublished data derived
from the 2009 and 2010 Victorian Smoking and Health Surveys, Centre for Behavioural Research in Cancer, 2011).
This equates to about 85 cents per stick, or $21.25 for a pack of 25 cigarettes. A pack of 25 cigarettes would cost $21
if excise duty was about 47 cents per stick. So this result is at the high end of estimates by the Australia’s Future Tax
System panel,5 based on the Gruber and Koszegi model.5
Section: 13.8.4
108
Facts and Issues
13.8.5
Frequent price rises to discourage tobacco use
Even if an ideal tax on tobacco products could be established, the question remains as to how quickly it should
move to such a level. Very little information is available about the comparative effects on consumption of one very
large increase compared with several smaller increases.
It is known that quit attempts increase significantly following tax increases,6–9 so it makes sense to ensure that
increases are frequent and large enough to help to maintain the frequency of serious quitting attempts by
remaining smokers. Complementing such tax increases with other elements of a comprehensive strategy such as
media campaigns and access to services and products for smokers to assist cessation would maximise the potential
benefits.
Section: 13.8.5
in Australia
109
References
1. Warner KE, Chaloupka FJ, Cook PJ, Manning WG, Newhouse JP, Novotny TE, et al. Criteria for determining an optimal cigarette tax: the economist’s perspective. Tobacco Control
1995;4:380-6. Available from: http://tobaccocontrol.bmj.com/cgi/reprint/4/4/380
2. US Department of Health and Human Services. Women and smoking. A report of the Surgeon General. US Department of Health and Human Services, Centers for Disease Control and
Prevention, National Center for Chronic Disease Prevention and Health Promotion, Office on Smoking and Health. Atlanta, Georgia, 2001. Available from: http://www.cdc.gov/tobacco/
data_statistics/sgr/index.htm
3. Collins D and Lapsley H. The costs of tobacco, alcohol and illicit drug abuse to Australian society in 2004/05. P3 2625. Canberra: Department of Health and Ageing, 2008. Available from:
http://www.nationaldrugstrategy.gov.au/internet/drugstrategy/publishing.nsf/Content/mono64/$File/mono64.pdf
4. Gruber J and Koszegi B. A modern economic view of tobacco taxation. Paris: International Union Against Tuberculosis and Lung Disease, 2008. Available from: http://www.
tobaccofreeunion.org/content/en/217/
5. Review panel Australia’s Future Tax System. Final Report . Part 2: Detailed analysis; Chapter E: Enhancing social and market outcomes; E6: Tobacco taxation; E6–3: Excise rates should be
higher. Canberra: Treasury, 2010. Available from: http://www.taxreview.treasury.gov.au/content/FinalReport.aspx?doc=html/publications/Papers/Final_Report_Part_2/chapter_e6-3.
htm
6. Kengganpanich M, Termsirikulchai L and Benjakul S. The impact of cigarette tax increase on smoking behavior of daily smokers. Journal of the Medical Association of Thailand
2009;92(suppl. 7):S46–63. Available from: http://www.mat.or.th/journal/index.php?command=vol&selvol=92
Section: 13.8.5
110
Facts and Issues
13.9
Future directions for reform of tobacco taxes
With its ratification of the WHO Framework Convention on Tobacco Control (WHO FCTC), which came into
force on 27 February 2005,1 Australia is obligated to report on its rates of taxation for tobacco products in periodic
reports to the Conference of Parties.i The Convention (Part III, Article 6) also states:
2. Without prejudice to the sovereign right of the Parties to determine and establish their taxation policies, each Party should take
account of its national health objectives concerning tobacco control and adopt or maintain as appropriate measures which may
include:
a. implementing tax policies and, where appropriate, price policies, on tobacco products so as to contribute to
the health objectives aimed at reducing tobacco consumption.1
At its fourth meeting from 5–20 November 2010 in Uruguay,ii the Conference of the Parties to the Convention
established a working party to commence work on development of guidelines to meet obligations under Article
6.iii The Framework Convention Alliance (an alliance of international non-government organisations committed
to the advancement of tobacco control) had urged the Conference to develop guidelines that would facilitate
governments’ efforts to simplify and increase taxes on tobacco products.2 The full Working Group on Article 6
met for the first time in Geneva in December 2011. A drafting team composed of the key facilitators and other
members of the working group met in March 2012 to prepare the next draft of the guidelines, which was to have
been submitted for consideration by the Conference of Parties at its fifth session in Seoul in November 2012.iv
In the meantime a manual on administration of tobacco taxes published in 2010 by the World Health
Organization3 sets out the following as best practices for policy on tobacco taxes:
<< Use tobacco excise tax increases to achieve the public health goal of reducing the death and disease caused by
tobacco use.
<< Set tobacco excise levels so that they account for at least 70% of the retail prices of tobacco products.
<< Ensure taxes are as simple as possible.
<< Rely more on specific tobacco excises as the share of excise taxes in retail prices increase.
<< Rely more on excise taxes than on import duties.
<< Adopt comparable taxes and tax increases on all tobacco products.
<< Where revenue increases are a goal rely on tobacco tax increases to achieve revenue increases.
<< Automatically adjust specific tobacco taxes for inflation.
<< Increase tobacco taxes by enough to reduce the affordability of tobacco products.
<< Include tobacco excise tax increase as part of a comprehensive strategy to reduce use.
<< Use a portion of tobacco tax revenues to support other tobacco control and/or health promotion efforts.
<< Strengthen tobacco tax administrators’ capacity to monitor tobacco product markets and evaluate the impact of
tobacco tax increases.
This section provides information relevant to each of these elements of policy as they apply to tobacco taxation in
Australia.
The manual also urges governments to:
<< Eliminate tax and duty-free sales and adopt a number of measures intended to minimise avoidance and evasion
(see Section 13.7. 4).
<< Reject economic arguments against increasing taxes promulgated by the tobacco industry (see Section 13.10).
<< Not allow concerns about the regressivity of higher tobacco taxes to prevent tobacco tax increases (see Section
13.11).
i
ii
iii
iv
See http://www.who.int/fctc/reporting/en/
See http://www.who.int/fctc/cop/sessions/fourth_session_cop/en/index.html
See further details at http://www.who.int/fctc/protocol/guidelines/working_groups/en/
See http://www.who.int/fctc/publications/Convention_News_Issue_11_Jan_2012.pdf and http://www.who.int/fctc/protocol/guidelines/working_groups/en/
Section: 13.9
in Australia
13.9.1
18
Tax increases to achieve public
health goals
16
Tax increases were listed as a key strategy in Australia’s
National Tobacco Strategy 2004–094 and in the
government’s response 5 to the recommendations
contained in the draft National Preventative Health
Strategy.6 This response included its announcement in
April 2010 of a 25% increase in excise duty.7
Modelling undertaken for the Preventative Health
Taskforce8 suggests that Australia will be unlikely to
meet the public health goal of daily smoking prevalence
of less than 10% by 2018 specified in the National
Partnership Agreement on Preventive Health without
further significant increases in duty beyond the April 2010
increases.9
111
NPAPH media
14
NPAPH media plus tax increase
12
NPAPH media plus extra media spend
NPAPH plus tax increases plus extra media spend
10
8
2005
2010
2015
2020
Figure 13.9.1 Projected prevalence of daily smoking with funding committed
under the National Partnership Agreement on Public Health under
four alternative scenarios: return to pre-NPAPH spending on media
campaigns either with or without a further substantial increases
in taxes and additional media spending with or without a further
substantial increases in tobacco taxes
Source: Hurley et al 20098
13.9.2
Set excise levels to be at least 70% of retail prices
As indicated in Section 13.2, total taxes
on cigarettes in Australia make up only
about 60% of the recommended retail
price of cigarettes.
Table 13.9.1 sets out various levels of
duty and the consequent price and
percentages that tax would make
up of final price (assuming that
manufacturers and retailers maintained
current margins).
Table 13.9.1 Projected price per typical pack of 25 cigarettes and percentages that tax make-up of final
price: at excise and customs duty of 35, 45, 55, 65, 75 and 85 cents per stick
Excise and custom duty, cents per stick 0.35
0.45
0.55
0.65
0.75
0.85
Cost per pack 25s*
$17.15 $20.30 $23.50 $26.70 $29.85 $33.00
Total tax as % of final price
59.6
63.9
67
69.5
71.3
72.9
Source: Calculations by author using NSW Retail Tobacco Traders’ Association price list,10 Australian Taxation Office excise rate11
*
At 2012 rate
13.9.3
Ensure taxes are as
simple as possible
Prior to 1998, franchise fees based on the value of sales in the previous month or quarter were charged to
wholesalers and/or retailers in each state and territory (see Section 13.2.2 for further details). Differential levels
of fees in each state resulted in problems with evasion. Federal revenue could decline as a result of unanticipated
increases in state fees. Taxes in Australia since 1999 are considerably simpler, consisting of a single specific duty
on each cigarette, which is the same for both locally produced and imported products. Smoking tobacco, cigars
and large cigarettes (made of more than 0.8 g of tobacco) are taxed by weight. The goods and services tax (GST) in
Australia has been 10% since that time.
Section: 13.9.3
112
Facts and Issues
13.9.4
Rely more on specific tobacco excises (based on quantity) rather
than excise based on value as the share of excise taxes in retail
prices increase
As can be seen from Figure 13.2.1 in Section 13.2, GST on tobacco products makes up only 9.1% of the final price
whereas excise (or customs) duty makes up more than 50%. This means that GST makes up only 15% of total taxes
on tobacco products, whereas 85% comes from excise or customs duty.
With a high percentage of total taxes comprising duty rather than GST, Australian tobacco companies would have
much less scope than manufacturers in other countries to cross-subsidise budget brands through sales of premium
brands, and much less scope for discounting and specialling.
13.9.5
Rely more on excise taxes than on import duties
Excise duties on tobacco goods manufactured in Australia have been the same rate as customs duties charged on
imported products since 1995 (see Section 13.2).
13.9.6
Adopt comparable taxes and tax increases on all tobacco products
Smoking tobacco such as roll-your-own and pipe tobacco is subject to the same level of duty as cigarettes
containing tobacco weighing more than 0.8 g each: both are taxed per kilogram of tobacco. Where cigarettes weigh
less than 0.8 g each, the charge is set per stick such that it would be equivalent to a cigarette weighing 0.8 grams
and taxed by weight.12,13 Smokers generally make roll-your-own cigarettes lighter than factory-made cigarettes,
which means that they are able to smoke more cigarettes (though not necessarily more tobacco) for the same
outlay as smokers of factory-made cigarettes (see Chapter 12). It is difficult to imagine how this problem might
be rectified without returning to a purely (or largely) weight-based system of levying excise and customs duty.
As described in Section 13.3, such as system could increase incentives for manufacturers to produce increased
numbers of lighter cigarettes in each pack, which would result in packs that were cheaper per stick. It is perhaps
not unreasonable for roll-your-own cigarettes to attract less excise, given that they contain less tobacco and are less
convenient to smoke.
13.9.7
Automatically adjust specific tobacco taxes for inflation
Australia and New Zealand are two of the very few countries in the world that automatically index excise and
customs duty on tobacco products3 (refer Section 13.2.1 for further details).
13.9.8
Increase tobacco taxes by enough to reduce the affordability of
tobacco products
As outlined in Section 13.4, indexation of excise and customs duty has not been sufficient to prevent tobacco
products from becoming more affordable in Australia. Frequent increases in state franchise fees between 1984
Section: 13.9.8
in Australia
113
and 1997 as well as occasional increases in federal duty did, however, ensure that tobacco products became
substantially less affordable over the 1980s, 1990s and 2000s.
13.9.9
Include tobacco excise tax increases as part of a comprehensive
strategy to reduce tobacco use
Because many smokers dependent on tobacco-delivered nicotine will be unable to quit even with the
encouragement of regular price increases, it is essential that tax increases be just one part of a comprehensive
strategy to discourage smoking and support quitting.14,15
The World Health Organization recommends that when government revenue increases from increases in tobacco
taxes, extra funding should be provided for services and treatment to help smokers to quit.16 This recommendation
is based on considerations of health, economic efficiency, social justice and political acceptability. Australia’s
tobacco control strategy is one of the most comprehensive internationally.17 Apart from spending on public
education campaigns, increases in excise and customs duty in Australia have been followed by substantial increases
in spending on support of pharmaceutical treatments to assist smokers to deal with withdrawal symptoms, for
instance listing on the Pharmaceutical Benefits Scheme of bupropion (ZybanR) in February 2001, listing of
varenicline (ChampixR) in January 2008 and listing of nicotine replacement therapy in January 2011. Listing of
products has resulted in greatly increased levels of use. As can be seen from Figure 13.9.2, the tax increase in April
2010 also appears to have boosted prescriptions for anti-smoking medications.
100 000
90 000
Listing NRT
Listing Zyban
80 000
70 000
Tax increase
60 000
Listing Champix
50 000
40 000
30 000
20 000
10 000
0
Feb Jun Oct Feb Jun Oct Feb Jun Oct Feb Jun Oct Feb Jun Oct Feb Jun Oct Feb Jun Oct Feb Jun Oct Feb Jun Oct Feb Jun Oct Feb Jun Oct
01 01 01 02 02 02 03 03 03 04 04 04 05 05 05 06 06 06 07 07 07 08 08 08 09 09 09 10 10 10 11 11 11
Figure 13.9.2 Prescriptions for anti-smoking medications —total subsidised per month February 2001 to December 2011
Source: PBS Statistics https://www.medicareaustralia.gov.au/statistics/pbs_item.shtml
13.9.10
Use a portion of tobacco tax revenues to support other tobaccocontrol and/or health promotion efforts
Western Australia is believed to be the first jurisdiction internationally to use an increase in tobacco tax to finance
a large investment in tobacco-control activities.i Following the defeat of its Tobacco Products Control Bill 1983,
the West Australian Government agreed to allocate $2 million per year to the Health Department’s Smoking and
Health Project (WA Quit Campaign). This additional funding was made possible because of an increase in the state
i
In 1976 the Indian Government earmarked an amount per thousand bidis to provide funding for welfare programs to assist workers involved in the manufacturing of bidis.
Section: 13.9.10
114
Facts and Issues
tobacco licence fee from 12.5% to 35% (personal recollection of The Hon. Barry Hodge, former West Australian
Minister for Health 1983–96, communicated to Maurice Swanson, Director National Heart Foundation WA
Division, 2007).
Starting with Victoria in 1987,18 South Australia in 198819 and then Western Australia in 1990,20 business franchise
legislation was amended and tobacco legislation introduced to hypothecate a proportion of funds accrued from
state licence fees into foundations established specifically to promote and fund health promotion activitiesi.21
Foundations were developed primarily to address community concern about potential loss of sponsorship funds
to sport that would have ensued from comprehensive bans on tobacco advertising. A major disadvantage of
foundations was that they replicated government funding functions and administrative arrangements in sport
and recreation and the arts and culture, with the potential for conflicting policies, duplication and gaps. Major
advantages included being able to integrate sports and arts funding with health messages, and being able to act
flexibly and across public and private sectors.21
The idea of a health promotion levy was soon copied in US states (California 1989, Massachusetts 1990) and in
several countries (Egypt, Iran and Nepal in 1993 for cancer control and Thailand in 2001 for health promotion).21
In the UK in November 1999, the Chancellor of the Exchequer announced that the National Health Service was to
benefit from increases in tobacco taxes.22
Because it locks government into spending regardless of revenue from other sources and regardless of priorities
for spending in areas outside the dedicated fund, hypothecation of any sort is generally not favoured by Treasury
officials.
‘Hard’ hypothecation ended in Australia in 1997 when the High Court found that state franchise fees on tobacco
were unconstitutional (see Section 13.2.2). However, increases in excise and customs duty on tobacco products in
Australia have at least since 2001 been accompanied by increased expenditure on anti-smoking medications on
the Pharmaceutical Benefits Scheme (see Chapter 7, Section 7.16) and increased expenditure on social marketing
campaigns and targeted programs for smokers.5
Whether it be through formal, legislated ‘hard’ hypothecation or the ‘soft hypothecation’ of notional budget
allocation, the World Health Organization recommends earmarking a small portion of the total national tax
revenue from tobacco products to fund health promotion initiatives including tobacco control.16
13.9.11
Strengthen tobacco tax administrators’ capacity to monitor
tobacco product markets and evaluate the impact of tobacco tax
increases
Data on quantities of tobacco products subject to customs duty in Australia is available on request from the
Australian Bureau of Statistics.23 Data on quantities subject to excise duty is collected by the Australian Taxation
Office. This data is no doubt available to Taxation Office staff, but is made publicly available only annually (almost
a year after the end of the relevant financial year).24–27 The capacity to interpret data is also limited by the absence of
information about the average weights of the products subject to duty. With the data split across the two agencies,
not readily available to researchers there is scope to strengthen Australia’s capacity in this area.
i
Since the abolition of state fees in 1997, foundations have been funded directly through government budget allocations.
Section: 13.9.11
in Australia
115
References
1. WHO Framework Convention on Tobacco Control. Geneva: World Health Organization, 2003. Available from: http://www.who.int/tobacco/framework/en/
2. Framework Convention Alliance. COP-4: Guidelines for FCTC Article 6 - what Finance Ministries need to know FCA, 2010. Available from: http://www.fctc.org/index.php?option=com_
content&view=article&id=441:cop-4-guidelines-for-fctc-article-6-what-finance-ministries-need-to-know&catid=222:meeting-resources&Itemid=230
html
6. Preventative Health Taskforce. Australia: the healthiest country by 2020. National Preventative Health Strategy. Canberra: Commonwealth of Australia, 2009. Available from: http://www.
preventativehealth.org.au/internet/preventativehealth/publishing.nsf/Content/national-preventative-health-strategy-1lp
7. Rudd K, Swan W and Roxon N. Anti-Smoking Action [Media release]. Canberra: Office of the Prime Minister, 29 April 2010 [viewed 3 September 2010]. Available from: http://www.alp.
org.au/federal-government/news/anti-smoking-action/
8. Hurley S, Spittal M, Scollo M, Durkin S and Wakefield M. Predicted impact of proposed tobacco control strategies. Melbourne, Australia: Cancer Council Victoria, 2009. Available from:
http://www.health.gov.au/internet/preventativehealth/publishing.nsf/Content/0FBE203C1C547A82CA257529000231BF/$File/commpaper-imp-tob-cont-strat.pdf
9. Commonwealth of Australia, the State of New South Wales, the State of Victoria, the state of Queensland, the state of Western Australia, the state of South Australia, et al.
National Partnership Agreement on Preventive Health. Canberra: Council of Australian Governments, 2009. Available from: http://www.federalfinancialrelations.gov.au/content/
national_partnership_agreements/health/preventative_health/national_overview.pdf
10. NSW Retail Tobacco Traders Association. Price Lists. Australian Retail Tobacconist 2012;84(No 5. Feb-April):1-2.
11. Australian Taxation Office. Excise duty on tobacco products. Canberra: ATO, 2012. Available from: http://law.ato.gov.au/atolaw/view.htm?docid=PAC/BL030002/1
12. Excise Tariff Act 1921 (Cth). Available from: http://www.comlaw.gov.au/Details/C2012C00517
13. Customs Tariff Act 1995 (Cth). Available from: http://www.comlaw.gov.au/comlaw/management.nsf/lookupindexpagesbyid/IP200401908?OpenDocument
14. Sugarman S. A balanced tobacco control policy. American Journal of Public Health 2003;93(3):416–8. Available from: http://www.ajph.org/cgi/content/full/93/3/416
15. Warner KE, Chaloupka FJ, Cook PJ, Manning WG, Newhouse JP, Novotny TE, et al. Criteria for determining an optimal cigarette tax: the economist’s perspective. Tobacco Control
1995;4:380-6. Available from: http://tobaccocontrol.bmj.com/cgi/reprint/4/4/380
16. World Health Organization. Tools for advancing tobacco control in the XX1st century: policy recommendations for smoking cessation and treatment of tobacco dependence. Tools for
public health. Geneva: WHO, 2003. Available from: http://www.wpro.who.int/NR/rdonlyres/8D25E4D3-BB81-479E-8DF5-7BAF674DB104/0/PolicyRecommendations.pdf
17. World Health Organization. WHO report on the global tobacco epidemic, 2011: warning about the dangers of tobacco. Appendix 4, Graphs on tobacco taxes and prices. Geneva: World
Health Organization, 2011. Available from: http://www.who.int/tobacco/global_report/2011/en/index.html
18. Tobacco Act 1987 (Vic). Available from: http://www.austlii.edu.au/au/legis/vic/consol_act/ta198773/
19. Tobacco Products Control Act 1988 (SA).
20. Tobacco Control Act 1990 (WA). Available from: http://www.austlii.edu.au/au/legis/wa/consol_act/tca1990163/
21. Richardson J, Segal L, Carter R, Catford J, Galbally R and Johnson S. Prioritising and financing health promotion in Australia. Melbourne: Centre for Health Program Evaluation, 1999.
Available from: www.buseco.monash.edu.au/centres/che/pubs/rr4.pdf
22. Beecham L. Tobacco tax to be ringfenced for NHS. British Medical Journal 1999;319(7221):1322. Available from: http://www.bmj.com/cgi/content/full/319/7221/1322/a
2011.
24. Australian Taxation Office. Taxation Statistics 2003-04: A summary of tax returns for the 2003–04 income year and collections for the 2004–05 financial year. Canberra: ATO, 2006.
Available from: http://www.ato.gov.au/corporate/content.aspx?menuid=35310&doc=/content/70906.htm&page=18#P1198_58931
25. Australian Taxation Office. Taxation Statistics 2004-05: A summary of income tax returns for the 2004-05 income year and other reported tax information for the 2005-06 financial year.
Canberra: ATO, 2007 Last modified 17 April 2006 [viewed 21 April 2006]. Available from: http://www.ato.gov.au/corporate/content.asp?doc=/content/81183.htm&page=40&H40=&p
c=&mnu=38022&mfp=001&st=&cy=
Canberra: ATO, 2011 Last modified 17 April 2006 [viewed 21 April 2006]. Available from: http://www.ato.gov.au/content/00268761.htm
Canberra: ATO, 2012 Last modified 30 April 2012 [viewed 30 April 2012]. Available from: http://www.ato.gov.au/content/downloads/cor00305922_2010TAXSTATS.pdf
Section: 13.9.11
116
Facts and Issues
13.10
Arguments against tax increases promoted by the
tobacco industry
The tobacco industry recognises the effectiveness of tax increases in decreasing smoking and therefore sales
volumes. Internal documents released as part of settlement of litigation by US attorneys-general against Philip
Morris and British American Tobacco include the following statements:
Of all the concerns there is one—taxation—that alarms us the most. While marketing restrictions and public
and passive smoking do depress volume, in our experience taxation depresses it much more severely. Our
concern for taxation is therefore central to our thinking about smoking and health.1
Increases in taxation, which reduce consumption, may mean the destruction of the vitality of the tobacco
industry.2
Given such concerns it is not surprising that the industry has in many instances vehemently opposed large
increases in taxes. Opposition to tax increases historically—such as in submissions to government inquiries during
the early 1980s to mid-1990s3,4—invariably included one or more of the following arguments.
<< First, that the tobacco industry was important to Australia’s economy, and that increases in taxes on tobacco
(and other tobacco-control measures) would lead to an increase in unemployment.
<< Second, that increases in the price of tobacco products were inflationary—that they would result in unwelcome
increases in the Consumer Price Index (CPI), which would be in conflict with the inflation-control policies set
by central banks and international lending agencies.
<< Third, that increases would be likely to have unintended consequences, forcing consumers to switch to more
dangerous alternatives such as higher-tar and higher-nicotine cigarettes.
<< Fourth, that very large tax increases would lead to such significant declines in smoking that government
revenue will be put under threat.5,6
<< Fifth, that taxes were paternalistic and that governments should ‘stay out of people’s lives’.7,8
<< Sixth, that increases in tobacco taxes were regressive—that they impact most severely on the poor and
underprivileged.8,9–11
None of these arguments has been openly articulated by tobacco companies in recent years, the first four most
likely because they have clearly been at odds with governments’ experience with tax increases over three decades
since the 1980s; the fifth and sixth perhaps because the self-interest would be too apparent. Persons employed
by organisations that have received tobacco industry funding8 or who have done consulting work for tobacco
companies7 however have produced articles exploring the issue of paternalism and questioning the theoretical
rationale for tobacco taxes. Each of the first five arguments is examined in the following five sections.i The issue of
regressivity is discussed in detail in Section 13.11.
The major current argument against tax increases is:
<< Finally, that they will lead to an increase in illicit trade—that the resulting price differences between countries
will lead to incentives to smuggle, and that high prices will increases incentives for counterfeiters.13
This argument is discussed in detail in Section 13.7.4.
i
In its technical manual published in 2010,12 the World Health Organization includes the following as best practice principles for administration of tobacco taxes:
• Do not allow concerns about employment impact to prevent tobacco tax increase.
• Do not allow concerns about the inflationary impact of higher tobacco taxes to deter tax increases.
• Do not view low taxes and prices for some tobacco products as a ‘pro-poor’ policy.
• Do not allow concerns about the regressivity of higher tobacco taxes to prevent tobacco tax increases.
Section: 13.10
in Australia
117
13.10.1
Do increases in tobacco taxes threaten Australia’s economy?
Tobacco is no longer grown in Australia and very few people are employed by importers and the major
manufacturers. The number of people involved in selling tobacco products at the retail level is difficult to estimate,
but almost all would be involved in businesses that sell products in addition to tobacco. Collins and Lapsley have
demonstrated that the flow-on effects of employment in the tobacco industry are dwarfed by the social costs in
Australia.14 And as they point out (as has been pointed out before by economist Ken Warner15) any reductions in
tobacco-dependent employment following increases in tobacco taxes or other tobacco-control measures would
be offset by increases in employment in other sectors as spending on tobacco products is replaced by spending on
other goods and services.
13.10.2
Are increases in taxes on tobacco products inflationary?
Very large increases in the price of tobacco products could affect a country’s CPI,
particularly if a large proportion of the country’s population smokes and daily
consumption is high. This issue, and the falling proportion of many populations
who smoke, has led many in tobacco control to suggest removal of tobacco
from the basket of goods used to calculate the CPI. Indeed, in 1992, Tasmanian
Democrat Senator Robert Bell presented a Bill that proposed just such an
approach in Australia.16 The proposal was never supported, mostly because
of concerns about the integrity of the index. Modern economic management
puts great store by a country’s official CPI. It is regarded as a key indicator of
economic performance and is taken into account when establishing international
credit ratings. CPIs are also often used to determine increases in pensions and
benefits. The Australian Bureau of Statistics and most economists have opposed
the exclusion of tobacco from the CPI on technical grounds. The integrity of
the index relies on a very high degree of consistency over time and with other
jurisdictions internationally.
A way around the problems of the inflationary impact of increases in tobacco
prices would be to use an adjusted form of CPI that excludes tobacco and alcohol
as the index used for wage increases and indexation of pension and benefits. This
has been done in Luxembourg, France and Belgium since the early 1990s.17 This
way, increases in the price of cigarettes are not offset by increases in those wages,
benefits and pensions that are regularly increased in line with the CPI.
Table 13.10.1 Weighting of cigarettes and tobacco
sub-group in overall CPI, 1948–2011,
Australia
CPI series
1 September 1948
2 June 1952
3 June 1956
4 March 1960
5 December 1963
6 December 1968
7 December 1973
8 September 1974
9 September 1976
10 March 1982
11 December 1986
12 September 1992
13 June 1998
14 June 2000
15 June 2005
16 June 2011
Percentage
6.000
4.200
4.200
3.900
3.900
3.600
3.560
3.500
3.246
2.385
2.218
2.410
3.080
2.270
2.410
2.320
Concerns about the inflationary effects of tobacco price increases have waned
over time in an era of much lower rate of inflation and as the cigarettes and
tobacco sub-group has come to make up a progressively smaller component of
Source: Australian Bureau of Statistics 201119
the overall CPI. In Australia, the CPI is reviewed regularly to take account of
changing patterns of consumer spending,i and the sub-indices are re-weighted
accordingly after each review.18 The changing weightings of the cigarettes and tobacco sub-group are set out in
Table 13.10.1.
At the latest weighting,20 the price of cigarettes and other tobacco products would have to increase by at least 20%
in order to cause the overall Australian CPI to increase from the March 2012 rate of 1.6%21 to 2.0%.
i
As determined by household expenditure surveys, and limited to spending patterns of a reference group comprising employed households living in capital cities.
Section: 13.10.2
118
Facts and Issues
13.10.3
Do tax increases have unintended consequences?
Opponents of tax increases often cite a study by Evans and Farrelly,22 which found that smokers in high-taxing
states in the US were more likely to switch to high-tar cigarettes to maintain nicotine intake. There is no evidence
of such a phenomenon having ever occurred in Australia, where the move away from high-tar brands began in
the 1970s.23–27 Euromonitor International reported continuing declines over the 2000s, including a decline of 9% in
2010.28 Machine-measured tar levels are no longer reported on cigarette packaging in Australia.
Harrison points to the example of people putting on weight when they quit smoking and suggests an apparent
rise in obesity associated with increases in taxes on tobacco.7 This proposition is not supported in a much more
sophisticated analysis by Courtmanche, which shows the opposite effect.29 Obesity is a serious problem in Australia,
but the contribution of smoking cessation to this is minor30,31 and the health risk of putting on a few kilos pales into
insignificance compared with the risks of continuing smoking (see Chapter 3, Section 3.29).
All policies have ‘downsides’ or costs as well as benefits. While increases in taxes have been associated with some
smokers making product-related changes in preference to behaviour-related changes (see Section 13.5), not all
such changes result in any greater harm for continuing smokers. For example, while use of roll-your-own tobacco
may have increased in Australia following increases in taxes on tobacco products,28 this kind of tobacco is not
necessarily more harmful to smokers than smoking manufactured cigarettes provided that filters are used (see
Chapter 3, Section 3.27.1).
13.10.4
Do very high taxes threaten government revenue?
It is sometimes argued that, by raising tobacco taxes too sharply, governments risk decreasing tobacco
consumption so much that they will actually begin to lose taxation revenue. This proposition is often tied to the
work of Laffer, who proposed a curve of diminishing revenue if incentives to work decrease with increasing taxes
on incomes.32 Could a large increase in tobacco taxes kill the goose that lays the golden egg?
The answer is no, at least not immediately, for a number of reasons.
Because taxes contribute a proportion but do not constitute the whole of the price of tobacco products, prices
do not increase in direct proportion to tax increases.15 As discussed in Section 13.1, because demand is only
moderately responsive to prices increases, overall consumption only drops at about half the rate of price
increases—not enough to offset the increased revenue gained from increases in the rate of duty. There does not
appear to be any documented case internationally of reduced tax revenues when tobacco taxes were increased, even
where increases were high and problems with smuggling documented.15
However, the combined impact of tobacco tax and other tobacco-control policies in the community will reduce
tobacco consumption and hence revenue from taxes on tobacco over time. This is to be welcomed as evidence of
the success of public health policies, and should be planned for in the longer term. It was partly in recognition of
the likely decline in excise revenue that the Australian Coalition government in 1998 decided to introduce a goods
and services tax.33
It should be remembered that people who do not consume tobacco products will consume other goods and
services. This will result in revenue to government from the goods and services tax they pay on these products and
services, and revenue from tax on the profits of companies that sell them. Lower tobacco consumption will also
reduce costs to business, thereby increasing revenue to governments from taxes on company profits.
Section: 13.10.4
in Australia
119
13.10.5
Are tobacco taxes paternalistic and overly coercive?
Increasing tobacco tax has been just one part of the comprehensive strategy for reducing harm caused by tobacco
adopted by Australian governments over time.34,35 These strategies have also included progressive elimination of all
forms of promotion of tobacco products, mandating of clear and comprehensive consumer information, substantial
funding of education campaigns, services to quitters and subsidy of pharmaceuticals to help quitters cope with
withdrawal symptoms. While all these strategies are valuable, tax increases are by far the most reliable and effective
way of reducing consumption, with effects far stronger than for other tobacco-control interventions.36,37
The idea that governments shouldn’t interfere in people’s lives is attractive in theory. But in Australia more than
three million people still smoke, almost 90% of them regretting they ever started.38 Smoking imposes a cost to
taxpayers, but this pales into insignificance compared with the costs to business and to the households of smokers
themselves.39
Death of a breadwinner in middle age has disastrous consequences in any family—it can cause middle-income
families to become financially insecure, and can propel lower-income families into poverty and welfare
dependency. Reducing smoking helps people live more productive and healthier lives, which the government will
be able to ‘stay out of ’ for much longer!
The evidence that increasing excise and customs duty on tobacco products would increase prices, reduce
consumption and increase the number of Australians who give up smoking is incontestable.40,41 Failing to act on
such a clearly effective policy could be seen as a failure to prevent avoidable premature deaths.
Section: 13.10.5
120
Facts and Issues
References
1. Philip Morris International. Smoking and health initiatives. Bates no. 2023268375/8382. Legacy Tobacco Documents Library, University of California, San Francisco, 1995. Available from:
http://legacy.library.ucsf.edu/cgi/getdoc?tid=gvs98e00&fmt=pdf&ref=results
2. Bingham P. Excise Taxation of Tobacco Products, Bates no. 502649609-796 [Conference presentation]. Public Affairs for Profit, BAT International Conference 12–16 July 1992. British
American Tobacco, 1992. Available from: http://bat.library.ucsf.edu/data/g/n/x/gnx51a99/gnx51a99.pdf
3. Industry Commission. The Tobacco Growing and Manufacturing Industries. Industry Commission Inquiry Report No. 39. Canberra: Australian Government Publishing Service, 1994.
Available from: http://www.pc.gov.au/ic/inquiry/39tobacc
4. Prices Surveillance Authority. Report no. 52: inquiry into cigarettes declaration. Matter no: PI/94/1. Melbourne, Australia: PSA, 1994.
5. Rothmans of Pall Mall (Australia) Limited. Submission to the Industry Commission of Inquiry into the Tobacco Growing and Manufacturing Industries. North Sydney: Rothmans of Pall
Mall (Australia) Limited, 1994.
6. Philip Morris Ltd. Tobacco and Australia: a question of balance. Submission to the Industry Commission of Inquiry into the Tobacco Growing and Manufacturing Industries. Melbourne,
Australia: Philip Morris Ltd, 1994.
7. Harrison M and Robson A. Prevention no cure: a critique of the report of Australia’s National Preventative Health Taskforce. Agenda: A Journal of Policy Analysis and Reform 2011;18(2):.
Available from: http://epress.anu.edu.au/apps/bookworm/view/Agenda,+Volume+18,+Number+2,+2011/7401/Text/ch02-Harrison:Robson.html
8. Novak J. Nanny State taxes: soaking the poor in 2012. Melbourne: Institute of Public Affairs, 2012. Available from: http://www.ipa.org.au/library/publication/1335389416_document_
novak_nannystatetaxes.pdf
9. Viscusi W. Cigarette taxation and the social consequences of smoking. In: Poterba, J, ed. Tax policy and the economy. Cambridge, MA: Massachusetts Institute of Technology Press, 1995.
51–101. Available from: http://www.tobaccoinstitute.com/PDF/TI16741243_1327.PDF
10. Tobacco Institute. The Tax Burden on Tobacco. Washington DC: Tobacco Institute, 1995. Available from: http://www.tobaccoinstitute.com/
11. Tobacco Institute of Australia. A profile of household expenditure on tobacco products. Sydney: Tobacco Institute of Australia, 1992.
html
13. Joossens L, Chaloupka F, Merriman D and Yurekli A. Chapter 16 Issues in tobacco smuggling. In: Jha, P and Chaloupka, F, eds. Tobacco control policies in developing countries. London:
Oxford University Press, 2000. .
14. Collins D and Lapsley H. Weighing the evidence: evaluating the social benefits and costs of the Australian tobacco industry. Perth: Cancer Council WA, 2009. Available from: http://www.
cancerwa.asn.au/resources/2009-10-21-Report-Weighing-the-evidence.pdf
15. Warner K. The economics of tobacco: myths and realities. Tobacco Control 2000;9(1):78-89. Available from: http://tobaccocontrol.bmj.com/cgi/content/full/9/1/78
16. The Census and Statistics (Alcohol and Tobacco Statistics) Amendment Bill 1992 (Cth),
17. European Bureau for Action on Smoking Prevention. Tobacco and health in the European Union: an overview. Brussels: European Union, 1994.
18. Australian Bureau of Statistics. The Australian Consumer Price Index concepts, source and methods, 1987 edition, eleventh Series Canberra: ABS, 1988.
19. Australian Bureau of Statistics. 6431.0 Consumer Price Index: historical weighting patterns, 1948–2011 Canberra: ABS, 2011. Updated 26 October 2011 [viewed 29 April 2012]. Available
from: http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6431.01948-2011?OpenDocument
20. Australian Bureau of Statistics. 6470.0 Information paper: introduction of the 16th Series Australian Consumer Price Index, 2011 Canberra: ABS, 2011. Updated 22 September 2011
[viewed April 2012]. Available from: http://www.abs.gov.au/AUSSTATS/abs@.nsf/DetailsPage/6470.02011?OpenDocument
22. Evans W and Farrelly M. The compensating behavior of smokers: taxes, tar, and nicotine. The Rand Journal of Economics 1998;29(3):578–95. Available from: http://www.ncbi.nlm.nih.
gov/pubmed/11794360
23. Gray N and Hill D. Patterns of tobacco smoking in Australia. Medical Journal of Australia 1975;2(22):819–22. Available from: http://www.ncbi.nlm.nih.gov/pubmed/1207580
24. Gray N and Hill D. Patterns of tobacco smoking in Australia II. Medical Journal of Australia 1977;2(10):327–8. Available from: http://www.ncbi.nlm.nih.gov/pubmed/927253
25. Hill D and Gray N. Patterns of tobacco smoking in Australia. Medical Journal of Australia 1982;1(1):23–5. Available from: http://www.ncbi.nlm.nih.gov/pubmed/7062879
26. Hill D and Gray N. Australian patterns of smoking and related health beliefs in 1983. Community Health Studies 1984;8(3):307–16. Available from: http://www.ncbi.nlm.nih.gov/
pubmed/6518750
27. Hill D and White V. Australian adult smoking prevalence in 1992. Australian Journal of Public Health 1995;19(3):305–8. Available from: http://www.ncbi.nlm.nih.gov/pubmed/7626682
28. Euromonitor International. Tobacco in Australia, Global Market Information Database, 2010. London: Euromonitor International, 2011. Updated September 2010 [viewed 9 December
2011]. Available from: http://www.euromonitor.com
29. Courtemanche C. Rising cigarette prices and rising obesity: coincidence or unintended consequence? Journal of Health Economics 2009;28(4):781–98. Available from: http://www.
sciencedirect.com/science/article/pii/S016762960900037X
30. Flegal K. The effects of changes in smoking prevalence on obesity prevalence in the United States. American Journal of Public Health 2007;97(8):1510–4. Available from: http://www.
ajph.org/cgi/reprint/97/8/1510
31. Flegal K, Graubard B, Williamson D and Gail M. Impact of smoking and preexisting illness on estimates of the fractions of deaths associated with underweight, overweight, and obesity in
the US population. American Journal of Epidemiology 2007;166(8):975–82. Available from: http://aje.oxfordjournals.org/cgi/reprint/166/8/975
Section: 13.10.5
in Australia
121
32. Laffer AB. The Laffer Curve: Past, Present, and Future. Washington: The Heritage Foundation, 2004. Available from: http://news.heartland.org/sites/all/modules/custom/
heartland_migration/files/pdfs/15245.pdf
36. Levy DT, Chaloupka F and Gitchell J. The effects of tobacco control policies on smoking rates: a tobacco control scorecard. Journal of Public Health Management & Practice
2004;10(4):338–53. Available from: http://www.lphi.org/LPHIadmin/uploads/TobaccoControlPolicies-56291.pdf
37. Wakefield M, Durkin S, Spittal M, Siahpush M, Scollo M, Simpson J, et al. Impact of tobacco control policies and mass media campaigns on monthly adult smoking prevalence: time series
analysis. American Journal of Public Health 2008;98:1443-50. Available from: http://www.ajph.org/cgi/content/abstract/98/8/1443
38. Fong G, Hammond D, Laux F, Zanna M, Cummings K, Borland R, et al. The near-universal experience of regret among smokers in four countries: findings from the International Tobacco
Control Policy Evaluation Survey. Nicotine & Tobacco Research 2004;6(suppl. 3):S341–51. Available from: http://www.informaworld.com/smpp/content~content=a753998174~db=a
ll~order=page
39. Collins D and Lapsley H. The costs of tobacco, alcohol and illicit drug abuse to Australian society in 2004/05. P3 2625. Canberra: Department of Health and Ageing, 2008. Available from:
http://www.nationaldrugstrategy.gov.au/internet/drugstrategy/publishing.nsf/Content/mono64/$File/mono64.pdf
Section: 13.10.5
122
Facts and Issues
13.11
Are tobacco taxes regressive?
Increases in tobacco taxes are sometimes described as being ‘regressive’, in that poorer groups in the community
are likely to pay a greater percentage of their income on tobacco taxes compared with more affluent groups. Since
it is precisely the poorer, less educated and younger population sub-groups that provide a large proportion of the
tobacco industry’s customers, it could equally be argued that the tobacco market itself is regressive.
Tobacco use is more prevalent1 and quit rates2 are lower and duration of smoking longer3 among low compared
with high socio-economic groups4 (see Chapter 1, sections 1.7 to 1.10 and Chapter 9, sections 9.1 and 9.2). There
is no doubt that this creates a large financial burden in many low-income households5,2,6 (see Chapter 2, Section 2.4
and Chapter 9, Section 9.5) and in particular in many Aboriginal communities.7,8 Despite these factors, increases in
tobacco taxes have been justified on the following grounds.
<< Smoking, within the limits of addiction, is discretionary. Tobacco is used by only one-fifth of the adult
population (including less than one-third of low-income adults—see Section 1.7) and cannot be considered a
majority behavior: cigarettes are not a ‘staple item’. The tax can be avoided by remaining a non-smoker, or giving
up smoking, and those who quit smoking realise substantial financial savings immediately. Even the most
addicted smokers unable or unwilling to quit are able to reduce consumption to at least some extent.
<< Due to their higher smoking rates, a disproportionate amount of ill-health and premature death due to
smoking-caused illness is experienced by lower socio-economic groups (see Chapter 9, Section 9.3). These
groups stand to gain most in health terms from tax increases that provide an additional incentive to quit.
<< Raising tobacco taxes is beneficial in revenue terms for government and revenue from increases can help to
cover the cost of comprehensive smoking-control programs including campaigns, services and treatments to
assist smokers or the cost of other programs that benefit low-income groups.
<< Taxation increases have been considered an appropriate tool for prevention by all major health organisations,9,10
and community support for such taxes has increased over the years in Australia, particularly if the taxes are
used to promote health education (see Section 13.12).
It is clear that increases in tobacco taxes are most felt among poorer sub-groups:11 that is what makes them an
effective preventive tool. The key issues in determining whether tobacco taxes are regressive are: first, the extent to
which people in various socio-economic groups actually do quit in response to price increases; and second, what
the consequences are for those low socio-economic smokers who do not quit.
13.11.1
Findings from early overseas studies
Early research suggests that people on lower incomes tend to be more price sensitive than higher income groups.12,13
Analysis of British data from the 1980s, for instance, has shown that men and women in lower socio-economic
groups are more likely to reduce their cigarette consumption because of price increases than in response to health
publicity about tobacco.14,12 Considered from this angle, tobacco taxes can be described as progressive in their
deterrent effects on uptake or influence on quitting. The US Centers for Disease Control analysis of data from
the US National Health Interview Survey indicated that (while smoking intensity was less responsive) smoking
prevalence among people below the median income level was more price responsive than among people above the
median income level.15 Analysis of some later US data challenged this view, finding that low income smokers in
the US in the late 1990s were less likely than middle or high income smokers to quit following price increases, and
that among remaining smokers, consumption was likely to fall equally among all income groups.11,16 As time has
gone on, evidence has strengthened that low income smokers are more price sensitive.17–20 DeCicca and McLeod
notably detected increase cessation among in response to large price rises among older, less educated adults on low
incomes.21
Section: 13.11.1
in Australia
123
13.11.2
Conclusions of major reviews
Three major reviews have analysed multiple studies examining whether tax increases are effective (or more
effective) in reducing smoking among disadvantaged groups. These are:
1. Thomas S, Fayter D, Misso K, Ogilvie D, Petticrew M, Sowden A, et al. Population tobacco control interventions
and their effects on social inequalities in smoking: systematic review. Tobacco Control 2008;17(4):230–717
2. Bader P, Boisclair D and Ferrence R. Effects of tobacco taxation and pricing on smoking behavior in high
risk populations: a knowledge synthesis. International Journal of Environmental Research and Public Health
2011;8:4118-3922
3. The International Agency for Research on Cancer. Effectiveness of tax and price policies for tobacco control.
Handbooks of cancer prevention, tobacco control. Vol. 14. Lyon, France: IARC, 201123 summarised in
Chaloupka FJ, Straif K and Leon ME. Effectiveness of tax and price policies in tobacco control. Tobacco Control
2011;20(3):235-8.20
13.11.2.1
Thomas et al 2008
In their review of the effects of six different population
Negative gradient
No gradient
Positive gradient
interventions on social inequalities in smoking, Thomas and
colleagues17 used a ‘harvest plot’ methodology to show the
3313
Income
strength of evidence for the hypothesis of negative gradient
22
2
(greater effect on the more disadvantaged) and the competing Occupation
hypothesis of a positive gradient (greater effect on the more
2
3
3
13
Education
advantaged). Twenty-eight studies concerning price increase
were assessed. Each study was represented by a mark in each
332
3333
1223
Gender
row for which that study had reported relevant results. Studies
with hard behavioural outcome measures are indicated with
33
32
3
Ethnicity
full-tone (black) bars, and studies with intermediate outcome
measures with half-tone (grey) bars. The suitability of study
design is indicated by the height of the bar, where the highest
bars represent the most suitable study designs (categories
Figure 13.11.1 A and B) and the lowest bars represent the least suitable
Extract from Thomas et al 2008 harvest plot of studies examining
(category D). Each bar is annotated with the number of other relative effectiveness of cigarette price increases among
methodological criteria (maximum six) met by that study.
disadvantaged groups
The authors concluded that price increases was the only one Source: Thomas et al 200817
of the six population strategies studied for which there was
strong evidence of a negative gradient for income, occupation,
employment, education or ethnicity. The evidence was
strongest for income and occupation, with some indication
that the gradient may have been positive for education.
13.11.2.2
Bader et al 2011
Several years after the publication of the Thomas review, Canadian researchers Bader and colleagues undertook
a further synthesis of the results of studies that examined the effects of price increases among low-income or
low-education populations. The majority of studies (rated strong or moderate) reported significant smoking
participation and consumption effects. Twenty-four studies (22 published, two unpublished) met selection criteria.
Nineteen published and two unpublished studies were rated as strong or moderate. Studies were conducted in
Section: 13.11.2.2
124
Facts and Issues
Canada, the US, the UK, other European countries, New Zealand, China/Russia and Mexico. Twelve studies
found that persons of low socio-economic status (SES) were more responsive to price than the general
population3, 11,12,14,17, 24–29 Five indicated that low SES groups had the same responsiveness to price as the general
population, that is, increased price appears to benefit all socio-economic groups equally in terms of reducing
smoking participation and consumption30,16,31 32, 33
13.11.2.3
IARC review 2010
The International Agency for Research on Cancer convened an expert scientific panel that in 2010 undertook a
major review of international evidence of the effectiveness of tax policies in reducing smoking.23 It commented that
while some studies found no differences between SES groups, the majority were consistent with economic theory
in finding greater price sensitivity among low-income populations. The panel noted that some of the inconsistent
findings might be attributable to differential access over time to cheap tobacco products.19 The panel concluded
that there was ‘strong’ evidence at least in high-income countries of stronger responsiveness to price among lowerincome populations.19,20
13.11.3
Findings of research in Australia
After several years of no change, it is interesting that smoking rates fell significantly among Australians in the most
disadvantaged social group between the 200734 and 20101 National Drug Strategy Household Surveys following
the first real increase in excise and customs duty in Australia in 10 years. Three Australian studies suggest that tax
increases over time in Australia have indeed had greater effects among those on low incomes.35,36,37
A study published in 200335 examined changes in the prevalence of smoking over the period of the National
Tobacco Campaign (May 1997 to November 2000) based on interviews with 2 969 to 5 112 people who also
reported on smoking among other members of their household (bringing the total enumerated sample to
between 6 536 and 11 923). During the first stage of the campaign (which comprised a number of TV and other
advertisements graphically explaining the health effects of smoking) the prevalence of smoking declined more
sharply among white collar than blue collar groups. During the second stage of the campaign (when advertising
continued at a somewhat lower rate but
the prices of large packs increased sharply
Table 13.11.1 due to the reforms introduced between
Summary of changes in smoking prevalence over the period of the Australian National
November 1999 and June 2000—see
Tobacco Campaign in adults 18–40 years (manufactured and RYO cigarettes)
Section 13.2), smoking declined much
more sharply among blue collar smokers—
Benchmark Follow-up 2 Follow-up 4 % change % change
refer Table 13.11.1
A study by Siahpush and colleagues
used Australian population survey data
collected monthly from January 1991
to December 2006 to estimate Poisson
regression models to assess the impact
of the price of cigarettes on smoking
prevalence across three income groups.
Analyses conducted in 2008 found strong
evidence that real price and prevalence
were negatively associated (p<0.001) and
that the association was stronger in lowerincome groups (p<0.001). One Australian
dollar increase in price was associated
Section: 13.11.3
Enumerated sample
(total)
Blue collar
White collar
Informant sample
(total)
Blue collar
White collar
May 1997
(%)
29.5
(n=6536)
33.4
25.1
30.8
(n=2969)
34.1
Nov 1998
(%)
27.9
(n=10306)
32.6
23.0
28.6
(n=4562)
33.1
Nov 2000
(%)
26.7
(n=11923)
30.6
23.2
27.1
(n=5112)
32.1
May 97 to
Nov 1998
Nov 98 to
Nov 2000
−5.42
−4.30
−2.4
−7.6
−6.1
0.9
−7.1
−5.2
−2.9
−3.0
25.6
22.6
22.0
−11.7
−2
Source: Scollo et al 200335
Note: From National Tobacco Campaign evaluation respondent surveys
in Australia
125
with a decline of 2.6%, 0.3% and 0.2% in the prevalence of smoking among low, medium and high-income groups,
respectively. They concluded that increasing the price of cigarettes not only is an effective tobacco-control strategy
to lower smoking prevalence in the general population, but also may provide a means of reducing social disparities
in smoking.36
A more recent study in New South Wales examined the impact of the April 2010 increase in customs and excise
duty among various income groups. Responses to the price increase included smoking-related changes (trying to
quit, cut down) and product-related changes (changing to lower priced brands, started using loose tobacco, bought
in bulk). Recent quitters were asked how much the increasing price of cigarettes influenced them to quit. Overall,
47.5% of smokers made smoking-related changes and 11.4% made product-related changes without making
smoking-related changes. Multinomial logistic regressions showed that low or moderate income smokers (vs. high
income) were more likely to make smoking-related changes compared with no changes.37
13.11.4
What about highly disadvantaged groups suffering entrenched
disadvantage?
There is little research about the effects of tax increases among those with psychotic illnesses, the homeless and
so on. A study by Ong et al in 201038 found that a 10% increase in cigarette prices was associated with 18.2% less
smoking participation among individuals with alcohol, drug, or mental disorders, except those with alcohol
dependence. They conclude that increasing cigarette taxes could be effective in reducing smoking among
individuals with alcohol, drug, or mental disorders.
Section: 13.11.4
126
Facts and Issues
References
1. Australian Institute of Health and Welfare. 2010 National Drug Strategy Household Survey: survey report. Drug statistics series no. 25, AIHW cat. no. PHE 145. Canberra: AIHW, 2011.
Available from: http://www.aihw.gov.au/publication-detail/?id=32212254712&libID=32212254712&tab=2
2. Siahpush M and Carlin JB. Financial stress, smoking cessation and relapse: results from a prospective study of an Australian national sample. Addiction 2006;101(1):121–7. Available
from: http://www.blackwell-synergy.com/doi/abs/10.1111/j.1360-0443.2005.01292.x
3. Siahpush M, Heller G and Singh G. Lower levels of occupation, income and education are strongly associated with a longer smoking duration: multivariate results from the 2001 Australian
National Drug Strategy survey. Public Health 2005;119:1105-10. Available from: http://www.ncbi.nlm.nih.gov/pubmed/16085150
4. Dobson R. Poor more likely to smoke and less likely to quit. British Medical Journal 2004;328(7445):914. Available from: http://www.bmj.com/cgi/content/full/328/7445/914-e
5. Siahpush M, Borland R and Scollo M. Smoking and financial stress. Tobacco Control 2003;12(1):60–6. Available from: http://tobaccocontrol.bmj.com/cgi/content/full/12/1/60
6. Siahpush M, Spittal M and Singh GK. Association of smoking cessation with financial stress and material well-being: results from a prospective study of a population-based national
survey. American Journal of Public Health 2007;97(12):2281–7. Available from: http://www.ajph.org/cgi/content/abstract/97/12/2281
7. Hoy W, Norman R, Hayhurst B and Pugsley D. Health profile of adults in a Northern Territory Aboriginal community, with an emphasis on preventable morbidities. Australian and New
Zealand Journal of Public Health 1997;21(2):121−6. Available from: www.blackwell-synergy.com/doi/pdf/10.1111/j.1467-842X.1977.tb01356.x
8. Lindorff KJ. Tobacco time for action: National Aboriginal and Torres Strait Islander Tobacco Control Project final report. Canberra: National Aboriginal Community Controlled Organisations,
2002. Available from: http://www.naccho.org.au/Files/Documents/NACCHO_Tobacco_report.pdf
9. The Royal Australasian College of Physicians (RACP) and The Royal Australian and New Zealand College of Psychiatrists (RANZCP). Tobacco policy: using evidence for better outcomes.
Melbourne: RACP, 2005. Available from: http://www.racp.edu.au/page/policy-and-advocacy/public-health-and-social-policy
10. Winstanley M, Woodward S and Walker N. Tobacco in Australia: facts and issues, 1995. 2nd edn. Carlton South: Victorian Smoking and Health Program, 1995. Available from: http://www.
quit.org.au/quit/FandI/welcome.htm
11. Colman G and Remler D. Vertical equity consequences of very high cigarette tax increases: if the poor are the ones smoking, how could cigarette tax increases be progressive? Cambridge,
Massachusetts: National Bureau of Economic Research, 2004. Available from: http://www.nber.org/papers/w10906
12. Townsend JL, Roderick P and Cooper J. Cigarette smoking by socioeconomic group, sex, and age: effects of price, income, and health publicity. British Medical Journal
13. Chaloupka FJ and Pacula RL. Sex and race differences in young people’s responsiveness to price and tobacco control policies. Tobacco Control 1999;8(4):373-7. Available from: http://
tobaccocontrol.bmj.com/cgi/content/abstract/8/4/373
14. Townsend JL. Cigarette tax, economic welfare and social class patterns of smoking. Applied Economics 1987;19:355-65. Available from: http://www.tandfonline.com/doi/abs/10.1080/0
0036848700000007#preview
15. Centers for Disease Control and Prevention. Response to increases in cigarette prices by race/ethnicity, income and age groups --US, 1976 -1993. MMWR: Morbidity and Mortality Weekly
Report 1998;47(29):605-9. Available from: http://www.cdc.gov/mmwr/preview/mmwrhtml/00054047.htm
16. Franks P, Jerant A, Leigh J, Lee D, Chiem A and Lewis I. Cigarette prices, smoking, and the poor: implications of recent trends. American Journal of Public Health 2007;97(10):1873–7.
Available from: http://www.ajph.org/cgi/content/full/97/10/1873
17. Thomas S, Fayter D, Misso K, Ogilvie D, Petticrew M, Sowden A, et al. Population tobacco control interventions and their effects on social inequalities in smoking: systematic review.
Tobacco Control 2008;17(4):230–7. Available from: http://tobaccocontrol.bmj.com/cgi/content/abstract/17/4/230
18. Bader P, Boisclair D, Cohen JE, Jha P, Perley M, Luk R, et al. Effects of tobacco taxation and pricing on smoking behavior in high risk populations [Conference presentation]. 2009 Joint
Conference of SRNT and SRNT-Europe, Dublin, Ireland, 29 April 2009. Madison, Wisconsin: Society for Research on Nicotine and Tobacco, 2009. Available from: http://www.srnt.org/
meeting/2009/pdf/2009_Paper_Sessions.pdf
19. International Agency for Research on Cancer. Chapter 7. Tax, price and tobacco use among the poor. Effectiveness of tax and price policies for tobacco control. Lyon, France: IARC, 2011.
Available from: http://www.iarc.fr/en/publications/list/handbooks/
21. DeCicca P and McLeod L. Cigarette taxes and older adult smoking: evidence from recent large tax increases. Jounral ofHealth Economics 2008;27:918-29. Available from: http://www.
ncbi.nlm.nih.gov/pubmed/18178277
22. Bader P, Boisclair D and Ferrence R. Effects of tobacco taxation and pricing on smoking behavior in high risk populations: a knowledge synthesis. International Journal of Environmental
Research and Public Health 2011;8:4118-39. Available from: www.mdpi.com/1660-4601/8/11/4118/pdf
23. International Agency for Research on Cancer. Effectiveness of tax and price policies for tobacco control. Handbooks of Cancer Prevention, Vol.14. Lyon, France: IARC, 2011. Available from:
24. Madden D. Tobacco taxes and starting and quitting smoking: does the effect differ by education? Applied Economics 2007;39(5):613–27. Available from: http://www.informaworld.
com/smpp/content~content=a773341739~db=all~order=page
25. Farrelly M and Bray J. Response to increases in cigarette prices by race/ethnicity, income, and age groups—United States, 1976-1993. Morbidity and Mortality Weekly Report
1998;47(29):605-9. Available from: http://www.cdc.gov/mmwr/preview/mmwrhtml/00054047.htm
26. Farrelly M, Bray J, Pechacek T and Woollery T. Response by adults to increases in cigarette prices by sociodemographic characteristics. Southern Economic Journal 2001;68(1):156–65.
Available from: http://findarticles.com/p/articles/mi_qa5421/is_200107/ai_n21475043
Section: 13.11.4
in Australia
127
28. Jha P, Musgrove P, Chaloupka F and Yach D. Story on smoking and poor people is incomplete. British Medical Journal 2001;323(7320):1070-1. Available from: http://www.ncbi.nlm.nih.
gov/pubmed/11691774
29. Levy D, Mumford E and Compton C. Tobacco control policies and smoking in a population of low education women, 1992-2002. Journal of Epidemiology and Community Health
2006;60(suppl. 2):ii20-26. Available from: http://jech.bmj.com/cgi/reprint/60/suppl_2/ii20.pdf
30. Dinno A and Glantz S. Tobacco control policies are egalitarian: a vulnerabilities perspective on clean indoor air laws, cigarette prices, and tobacco use disparities. Social Science & Medicine
2009;68(8):1439–47. Available from: http://www.ncbi.nlm.nih.gov/pubmed/19282078
31. Gospodinov N and Irvine I. Tobacco taxes and regressivity. Journal of Health Economics 2008;28(2):375–84. Available from: http://www.ncbi.nlm.nih.gov/pubmed/19091432
32. Lance P, Akin J, Dow W and Loh C. Is cigarette smoking in poorer nations highly sensitive to price? Evidence from Russia and China. Journal of Health Economics 2004;23(1):173–89.
33. Wiltshire S, Bancroft A, Amos A and Parry O. ‘They’re doing people a service’: qualitative study of smoking, smuggling, and social deprivation. British Medical Journal
35. Scollo M, Younie S, Wakefield M, Freeman J and Icasiano F. Impact of tobacco tax reforms on tobacco prices and tobacco use in Australia. Tobacco Control 2003;12(suppl. 2):ii59–66.
36. Siahpush M, Wakefield M, Spittal M, Durkin S and Scollo M. Taxation reduces social disparities in adult smoking prevalence. American Journal of Preventive Medicine 2009;36(4):285-91.
Available from: http://www.ncbi.nlm.nih.gov/pubmed/19201146?ordinalpos=19&itool=EntrezSystem2.PEntrez.Pubmed.Pubmed_ResultsPanel.Pubmed_RVBrief
38. Ong M, Zhou Q and Sung H. Sensitivity to cigarette prices among individuals with alcohol, drug, or mental disorders. American Journal of Public Health 2010;100(7):1243-5. Available
from: http://ajph.aphapublications.org/cgi/reprint/AJPH.2009.159962v1?view=long&pmid=20466972
Section: 13.11.4
128
Facts and Issues
13.12
Public opinion about tobacco tax increases
Australians have been generally supportive of the idea of taxing tobacco products, and levels of support have grown
over time.
13.12.1
Results of early state-based public opinion surveys
A study by The University of Melbourne
in 1985 examined public attitudes
towards a variety of government taxes
and expenditures1 including income
taxes, taxes on motor vehicles, sales taxes,
company tax, import duty and customs
and taxes on alcohol. The only tax for
which a majority (51.8%) supported an
increase was tax on tobacco products.
Table 13.12.1 Results of early surveys of public opinion on tobacco tax increases in six Australian states and
nationally, selected years 1987–98
Vic
SA
NSW
Tas
Qld
June
December
July
August
July
1987
1987
1988
1989
1990
Approve unconditional increase in tax (% of adults approving)
47
55
56
59
66
WA
May
1993
Australia
February
1998
60
A number of subsequent statewide polls
Approve tax inc. funds being used to discourage children from smoking (% of adults approving)
assessing public opinion about tobacco
84
82
88
89
92
88*
96
tax increases have been undertaken in
successive decades. Findings of some
of the early surveys are summarised in
Sources: Anti-Cancer Council of Victoria,2 Anti-Cancer Foundation of the University of South Australia,3 New South Wales Cancer
Table 13.12.1. In general, the surveys
Council,4 Tasmanian Cancer Committee,5-7 Queensland Cancer Fund,7 Australian Medical Association,8 and Anti-Cancer
Council
of Victoria9
have shown broad and growing support
*
In Western Australia the question concerned funding directed to health services.
for increased tobacco taxes, especially if
revenue from the tax increases is used for
health education among children. (Most of the earlier surveys
Table 13.12.2 also examined public attitudes towards tobacco advertising and
Daily smokers’ views on how much the tax on cigarettes
sponsorship. This information is not included in Table 13.12.1.)
should be increased if the revenue raised were to go to
quit-smoking resources, Victoria, Australia, 2003
A later study in Victoria in 2003 found that, even among daily
smokers, almost half (48%) would support an increase in taxes if
the money were directed to quit smoking efforts.10 Of those who
approved of a rise in cigarette tax, over half (51%) thought that
the increases should be 50 cents or more per pack of 25 cigarettes
(Table 13.12.2).
Daily smokers who approved of
tax increase
(n = 215)
% of smokers approving
1 cent
9.9
10 cents
12.2
25 cents
13.3
50 cents
22.7
1 dollar
18.0
2 dollars or more
10.0
Another amount
4.6
Don’t know / Can’t say
9.3
Response
In further studies in 2008 and 2009, more than 80% of
Victorians approved of a tax increase on cigarettes if some of
the money were to be used to fund services to help smokers
quit (communicated by M McCarthy, Centre for Behavioural
Research in Cancer to Quit Victoria, 2009 and 2010). Approval
was significantly higher among former smokers and never
smokers, compared with current smokers (83% and 88%
compared to 61%, respectively (Table 13.12.3).
Approval for increasing the tax on cigarettes was also higher with
higher with socio-economic status (Table 13.12.4).
Source: Memorandum from Centre for Behavioural Research in Cancer to Todd Harper
and Jane Martin of the Victorian Smoking and Health Program, 2004
*
Section: 13.12.1
Data are weighted by age and sex to Victorian ABS 2003 figures. Figures do
not sum to 100 due to weighting.
in Australia
13.12.2
Results of national
surveys
The National Drug Strategy Household
Survey has collected data on public opinion
on tax increases in its three-yearly surveys
since 1998.
Support for increasing the tax on tobacco
products to pay for health education has
risen steadily over time. Analysis of data
by gender indicates that the increase in
support has occurred among men and
women (Table 13.12.6).
13.12.3 Results of focus group
research
Focus group research described by Carter
and Chapman in 2006 indicated that
Australian smokers were cynical about
tax increases when revenue is not used
for programs to discourage smoking.
Without such investment in programs,
smokers who participated in the study felt
that governments did not have the moral
authority to further raise taxes.14
Table 13.12.5 Support for increasing the tax on tobacco products to pay
for health education, proportion of the population aged 14
years or older, Australia, 1998–2010
Support for
increase in taxes
on tobacco to:
Pay for health
education
Contribute to
treatment costs
Discourage
smoking
129
Table 13.12.3 Approval for a tax increase on cigarettes if extra funding were given to services to help
smokers quit: current smokers, former smokers, never smokers and total population,
Victoria, Australia, November 2009
Current
Former
Never
smokers (%) smokers (%) smokers (%)
(n=823)
(n=1346)
(n=2334)
Approve
65.0
84.4
89.9
Neither approve nor disapprove
2.4
2.0
1.6
Disapprove
32.0
12.8
7.3
0.6
0.8
1.2
Total (%)
(n=4503)
Response
83.6
1.8
13.5
1.0
Source: Communication from M McCarthy, Centre for Behavioural Research in Cancer, to Quit Victoria, 2010
Note: Respondents were asked: ‘As you may know, governments raise money by taxing tobacco products. Some of the money
raised from taxes could be used to fund services that help smokers to quit smoking, such as the Quitline telephone
service. Would you approve or disapprove of an increase in the tax on cigarettes if the government gave extra funding to
services to help smokers quit?’
Table 13.12.4 Approval for a tax increase on cigarettes if extra funding were given to services to help
smokers quit: total population and by socio-economic status, Victoria, Australia,
November 2008
Total (%)
(n=4503)
Response
Approve
Neither approve nor disapprove
Disapprove
81.2
2.9
14.3
1.7
Low SES (%) Mid SES (%) High SES (%)
(n=1600)
(n=1686)
(n=1217)
77.5
3.7
16.9
1.9
82.0
2.6
13.7
1.7
84.8
2.2
11.6
1.4
Source: Communication from M McCarthy, Centre for Behavioural Research in Cancer, to Quit Victoria, 2009
Table 13.12.6 Support for increasing the tax on tobacco products to pay for health education, proportion of
the population aged 14 years or older, Australia, 2004 to 2010: females compared to males
1998 2001 2004 2007 2010
(%) (%) (%) (%) (%)
61.6 64.3 64.5 67.1 68.7
65.9 67.0 67.1 68.6 70.2
60.4 61.1 63.3 65.7 66.7
Source: Australian Institute of Health and Welfare 2002,11 2005,12 200813
and 201113
Males (%)
Support for increase in
taxes on tobacco to:
... pay for health education
... contribute to treatment
costs
...discourage smoking
Females (%)
Persons (%)
2004 2007 2010 2004 2007 2010 2004 2007 2010
61.8 65.1 66.6 67.0 69.1 70.7 64.5 67.1 68.7
64.9 66.9 68.4 69.2 70.2 71.9 67.1 68.6 70.2
60.3 63.7 64.6 66.1 67.6 68.7 63.3 65.7 66.7
Source: Australian Institute of Health and Welfare 2002,11 2005,12 200813 and 201113
Section: 13.12.3
130
Facts and Issues
References
1. Heady B, Holmstrom E and Wearing A. Government taxes and expenditures: what does the public want? Melbourne, Australia: University of Melbourne, 1985.
2. Hill D. Public opinion on tobacco advertising, sports sponsorships and taxation prior to the Victorian Tobacco Act, 1987. Community Health Studies 1988;12(3):282–8. Available from:
http://www.quit.org.au/downloads/QE/QE3/HomeQE3.html
3. Vernon-Roberts B. Morgan Gallup poll on smoking issues in South Australia [Media release]. Adelaide: 1988 [viewed January 1988].
4. Steel K. 2.8 million electors approve of changes in law [Media release]. Sydney: 1988 [viewed August 1988].
5. Gazette no. s317 2004. 4 August
6. ASH Australia. Results of Morgan research on support for tax increases, Unpublished data. Hobart: Tasmanian Cancer Committee. 1989.
7. Brien G. Queenslanders demand action on cigarettes [Media release]. Brisbane, Australia: 1990 [viewed July 1990].
8. Woollard K and Walker N. Western Australian’s support for tobacco control, Unpublished data. Perth: Australian Medical Association and Australian Council on Smoking and Health. Media
release, 27 May 1993.
9. Borland R and Boulter J. Public Opinion about use of Tobacco Taxes for Tobacco Control and other issues. Melbourne, Australia: Centre for Behavioural Research in Cancer, Anti-Cancer
Council of Victoria., 1998.
10. Centre for Behavioural Research in Cancer, The Cancer Council Victoria Melbourne, Australia. View about increasing the tax on cigarettes for increased funding for quit smoking resources
(personal communication). Memorandum to Todd Harper and Jane Martin of the Victorian Smoking and Health Program, 2004.
14. Carter SM and Chapman S. Smokers and non-smokers talk about regulatory options in tobacco control. Tobacco Control 2006;15(5):398-404. Available from: http://tc.bmjjournals.com/
cgi/content/abstract/15/5/398
Section: 13.12.3