Govt officials resist extension of tobacco excise increases

Thursday 20th December 2018

Government officials are resisting calls to continue a planned ramp-up of tobacco excise beyond 2020.

Accounting firm Ernst & Young has recommended the increases – set in legislation at consumer price inflation plus 10 percent – continue beyond 2020 when they are currently due to end.

It says the excise increases are having a greater financial impact on Maori and Pacific Island households, but are one of the few effective tools the government has for reducing tobacco use. It recommends they be continued, but also accompanied with other measures to support smokers, such as minimum prices, reducing the number of retailers selling tobacco, and reducing its nicotine content.

“Increasing the price of tobacco continues to be the single most effective tool for reducing tobacco use,” EY said in its just-released a 238-page report to the Ministry of Health.

“Medium-term increases to the excise are likely to continue to be effective at encouraging people to change their smoking behaviour. However, the extent to which smokers will continue to quit into the longer term is unclear, especially as those remaining smokers are more likely to be those who have a strong addiction, are less motivated to stop and inherently have more complex confounding factors to address,” it said.

“Without the introduction of further complementary initiatives that take a holistic approach, support harm reduction strategies and counter tobacco industry actions that minimise the impact of the tax increases, further price increases are likely to contribute to financial burden, health inequities, social exclusion and associated psychological harm for vulnerable individuals, households and communities.”

In 2011 the previous government introduced the Smokefree Aotearoa 2025 target – aimed at reducing daily smoking to less than 5 percent of the population by that date. Since then tobacco excises have increased annually by 10 percent, on top of their CPI adjustment, each January.

Last December the Labour-led coalition, concerned by the unintended consequences of the increases, agreed to undertake an independent study of their impact, particularly on Maori women, Pasifika people and those under 18 years.

In a paper to Cabinet, Associate Health Minister Jenny Salesa noted officials’ views that the data available to EY was insufficient to support “such a strong recommendation” to continue the increases.

She plans to report back in April with her recommendations on whether the scheduled increase in January 2020 should proceed, and ways to improve data collection and monitoring. She is also considering other “supply-side interventions” in the tobacco market and will bring recommendations on those during 2019.

Not proceeding with the 2020 increase would require amendment of the Customs and Excise Act 2018 before the end of next year. It would reduce Crown revenue by about $20 million in the year ending June 2020, and by about $91 million in each of the following three years, according to her paper.

Smoking has dropped sharply in the past decade but the 2025 target is unlikely to be met. About 13.8 percent of the population were daily smokers last year, down from 18.3 percent 10 years earlier. Only 3.2 percent of 15-17 year-olds smoke, down from 13.7 percent over the same period, EY said.

But smoking rates among Maori are about 2.7 times higher. About 36 percent of Maori women smoke daily, compared to 29 percent of Maori men and 13 percent of women overall.

The Ministry of Health hired EY in June to evaluate the role of the excise increases in reaching the Smokefree 2025 target. The work was specifically to consider their impact on Maori and Pacific households, and any unintended consequences in the form of dairy robberies, and illicit tobacco trading and importing.

The ministry received a draft report on Sept. 14 and promptly requested a greater level of detail on the impacts of the excise increases on Maori, Pasifika and youth – “the sub-populations of interest to the government.”

Officials were also critical that EY had not properly separated changes in smoking behaviour due to the excise increases from other factors – such as changing social norms - which they said risked overestimating the effect of the excise.

They challenged EY’s view that there was little evidence to support claims that price elasticity – the responsiveness of smokers to price rises – had reduced from 2010 to 2016.

They also cited a lack of effort to gather data on dairy robberies, and suggested EY check those trends to see whether they were occurring in areas where smoking was “more prevalent.”

“In the worst-case scenario that all of this is due to excise increases, what is the magnitude of this cost?” they asked in a table of follow-up questions.

Customs disputed that there was no evidence that the illicit trade in tobacco had increased. It cited its own experience of a shortening gap between commercial scale seizures.

And it considered the lack of comment on the likely future trajectory of the illicit market was a “major shortcoming” given what it considered the high risk the trade posed to Crown revenue and border protection.

In its final report, EY notes that 10 percent of smokers surveyed had gone without something in the preceding 12 months so they could buy tobacco. Going without was twice as likely in Maori households.

But it said there was insufficient data to say whether different groups - measured by age, ethnicity or income - were more or less responsive to changes in price.

It assessed price elasticity of demand for the whole population at minus 0.5 – meaning a 10 percent price increase will result in a 5 percent reduction in tobacco demand. That was consistent with international research suggesting a figure of -0.4.

EY said there are no reliable long-term data on tobacco-related crime in New Zealand. That makes it hard to say whether robberies are increasing because of tobacco taxes, or whether tobacco is increasingly being taken when robberies occur.

While Customs’ experience suggests black market tobacco trading may be increasing, EY said there is no means to estimate its potential growth. Experience of that trade among focus group participants was limited and predominately among young Maori, who reported those cigarettes were at least $5 cheaper per pack.

“The absence of reliable estimates of illicit tobacco importation and use represents a significant gap in New Zealand’s tobacco control information and, when combined with a lack of internal evidence, precludes the ability to determine the likely trajectory.

“The improvement of this information over time will allow materially more robust analysis around this issue.”

(BusinessDesk)

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