Sunday, August 04, 2013

Rudd's hike in cigarette tax is far bigger than you think. And it should be

So you’ve heard cigarette taxes will soar 60 per cent. You don’t know the half of it.

Buried within the budget proper in May was a time bomb, which when taken together with the measures confirmed Friday will send cigarette prices through the roof.

The budget changed the method by which the excise on tobacco products is regularly increased. From March the half-yearly increases will no longer be determined by inflation (which was 0.8 per cent in the past half year) but by the growth in average ordinary time earnings (which was nearer 3 per cent).

It’s a big difference, and as the higher growth rate compounds it gets bigger. Putting it together with the four promised four increases of 12.5 per cent means the cigarette excise will double in five years.

Which is just as well, if we want smokers to give up.

Giving up turns out to be much harder than the anti-smoking brigade would have you believe.

A new survey from the US National Bureau of Economic Research finds that for adults the effect of cigarette taxes on smoking is “small and not usually statistically significant”. After examining the relationship between smoking and cigarette taxes in fifty states over twelve years the authors find that “at best, increases in cigarette taxes will be associated with a small decrease in cigarette consumption”.

The author’s stark summation: “It will take sizable tax increases, on the order of 100 per cent, to decrease adult smoking by as much as 5 per cent”.

As it happens, an increase of 100 per cent - a doubling - is exactly what Kevin Rudd has set in motion. It’s the only sort of increase the US authors believe will have much effect. Which doesn’t mean smoking hasn’t been sliding for other reasons...

A graph prepared by the Australian Treasury shows tobacco use per person slipping in what looks like a straight line since the start of the 1980s. The end of television advertising, smoke-free workplaces and changing social norms would be among the reasons. The occasional excise hike scarcely registers. A University of Sydney study of the 25 per cent hike in 2010 found it almost doubled the proportion of smokers who quit or tied to quit, but only for a few months. After a short time the proportion trying to quit returned to where it had been.

The study concluded that in order to consistently boost quitting the tax hikes would need to be regular, which is also was Kevin Rudd has set in motion.

A much-quoted Treasury study of the 2010 tax hike finds it cut tobacco imports by 11 per cent (all of Australia's’ tobacco is imported). But that “cut” was over a two-year period, meaning some of it was the slide that is occurring all the time. And it doesn’t mean 11 per cent of Australia’s smokers quit. Far from it. Many would have simply smoked less. If you are one of those who smoked less, I have grim news. It probably doesn’t mean you took in less nicotine. A US survey of smokers who cut back found the concentrations of nicotine-related substances in their blood remained just as high. Although they smoked fewer cigarettes, they smoked each one "more intensively,” using mechanisms such as inhaling for longer, having more puffs per stick and (perhaps subconsciously) blocking the ventilation holes on the filters.

Another reason the 2010 tax hike cut tobacco imports was that it stopped some young people from ever smoking in the first place. Unlike adults, teens and sub teens are incredibly sensitive to price when it comes to buying cigarettes. They don’t have much access to money. It’s why the manufacturers used to sell cigarettes in packets of four. One estimate is that a 50 per cent increase in cigarette prices will cut teenage smoking by 41 per cent. It will cut adult smoking by 5 per cent.

Once we get money and we are already smoking we will spend it on cigarettes rather than save it (although we won’t go so far as to go without food). It might be why smokers are poorer than non-smokers, even where their incomes are the same. A US finding is that each year of adult smoking is associated with a 4 per cent cut in net worth.

The stickiness of smoking (addiction is the word) means that hikes in cigarette taxes can be very effective in raising more money. Yes, they raise it from poor people, but it is partly the smoking that is making them poor. If the tax hikes are really big, and repeated, they might just do those people a favour. And they are highly likely to stop young people from ever being sucked in in the first place.

In The Canberra Times

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