Treasury considering changes to Australia’s contentious tobacco excise, as calls grow for a freeze
Experts say a freeze on the federal government’s contentious tobacco excise should be considered, after the Treasury revealed it was modelling the impacts of cigarette prices on demand amid a booming black market.Lachlan Vass, a research manager at the e61 Institute, said the Treasury’s examination of “price elasticity” and demand for tobacco would be a necessary step to costing potential reforms to the excise.Jim Chalmers, the treasurer, and Mark Butler, the health minister, have previously rebuffed any suggestion that reducing the sky-high cost of cigarettes was the solution to curbing the black market trade, which has ballooned over the past five years and smashed a $17.8bn hole in the budget since 2020-21.Sign up: AU Breaking News emailBut when asked at Senate estimates last week why a cut to the excise couldn’t be considered as part of a wider strategy to curb the illegal tobacco trade, Katy Gallagher, the finance minister, left the door open to a change in excise policy.
“The government keeps all of these matters under review,” Gallagher said, adding that “there’s not a single solution” and that Treasury officials were consulting the departments of home affairs and health,Vass argued there was evidence that the excise policy was failing on multiple fronts,He said there was a case for at least freezing the excise to allow cigarettes to cost less in real terms over time, as part of a wider health and enforcement strategy,The fact, Treasury officials were modelling the price elasticity of demand for tobacco pointed towards policy costing, rather than the more usual budget projections, he said,“When they do a policy costing they explicitly take into account the elasticity because they have to make a judgment about what this relative increase in the prices of tobacco means for the demand of tobacco,” Vass said.
Black market cigarettes reportedly cost about $10 to $15 a packet, compared to about $40 or more for a legal 20-pack, and account for about half of all tobacco consumed in Australia, according to estimates by the Illicit Tobacco and E-cigarette commissioner (Itec).The tobacco excise, which has climbed by 60% since 2020 and is set to lift again next month, accounts for three-quarters of the legal cost of a packet of smokes.The government committed an extra $350m over the past two years to help state authorities battle the illicit trade.Excise revenue peaked at $16.3bn in 2019-20, but the tax was expected to generate only $5.
5bn this financial year, and $4.8bn in the next.The five years leading up to 2020 saw an even more rapid doubling in the excise, but economists say the level of the tax reached a “tipping point” around the turn of the decade.Several economists have called for a freeze or reduction in the tobacco excise, with Chris Richardson saying “we got the taxing of tobacco spectacularly wrong”.“That meant our policies have subsidised the fastest increase in the revenue of organised crime that Australia has ever seen,” Richardson said.
Under questioning about what work the Treasury was undertaking in the context of tobacco excise policy, Diane Brown, a deputy secretary, said: “We have done some work around the elasticity of demand for tobacco to see whether that’s changed, so there is modelling of that type that is going on.”Becky Freeman, a professor of public health at the University of Sydney and a leading tobacco expert, said she backed freezing the excise at current levels, and that the release of the Itec estimates showing the extraordinary prevalence of illicit smoking has only confirmed her opinion.“I only support tax increases if they are effective at reducing smoking,” Freeman said.“And now we know the size of the illicit market and how incredibly cheap those products are, I agree that a freeze at this time makes sense.There wouldn’t be any health gains by raising the price.
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