Tobacco in Australia Facts & Issues A comprehensive online resource
tobaccoinaustralia.org.au Book excerpt
List of chapters available at tobaccoinaustralia.org.au 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
Chapter 13 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 Michelle Scollo life, which are become objects of almost universal consumption, and which are therefore extremely proper subjects of taxation. […] In the meantime, the Quit Victoria people might be relieved from some of the most burdensome taxes: from those Cancer Council Victoria 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. 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 Tobacco in Australia: ii 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
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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
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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 Technical Appendix 13.7.1...... Industry involvement in large-scale smuggling...... 100
Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products in Australia v
Technical Appendix 13.7.2...... Australian Taxation Office action to address the problem of illicit tobacco growing...... 102 Technical Appendix 13.7.3...... 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
Date of last update: 10 October 2012 Tobacco in Australia: 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 Thomaset 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
Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products 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)
Date of last update: 10 October 2012 Tobacco in Australia: 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 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(%)
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 Sub- group 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
Figure 13.3.13 Prices of cigarettes sold in selected cities around the world, 2011: 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
Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products 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
Figure 13.5.4 Real tobacco prices and tobacco consumption in Australia, 1990–91 to 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
Date of last update: 10 October 2012 Tobacco in Australia: 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
Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products in Australia xi
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
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 make- up 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
Date of last update: 10 October 2012 Tobacco in Australia: xii Facts and Issues
Table 13.10.1 Weighting of cigarettes and tobacco sub-group in overall CPI, 1948–2011, Australia
Figure 13.11.1 Extract from Thomaset 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
Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products in Australia 1 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 Evidence Sufficient* Strong† Limited‡ Increases in tobacco excise taxes that increase prices result in a decline in overall tobacco use. X Increases in tobacco excise taxes that increase prices reduce the prevalence of adult tobacco use. X Increases in tobacco excise taxes that increase prices induce current tobacco users to quit. X Increases in tobacco excise taxes that increase prices reduce the prevalence of tobacco use among young people. X Increases in tobacco excise taxes that increase prices reduce the initiation and uptake of tobacco use among young people with a X 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. X Tobacco use among young people responds more to changes in tobacco product taxes and prices than does tobacco use among adults. X The demand for tobacco products in low-income countries is more responsive to price than is the demand for tobacco products in X high-income countries. In high-income countries tobacco use among lower-income populations is more responsive to tax and price increases than is tobacco X 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 X 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. X Tobacco industry price discounting strategies price-reducing marketing activities and lobbying efforts mitigate the impact of tobacco X excise tax increases. Tobacco tax increases that increase prices improve population health. X Higher and more uniform specific excise taxes result in higher tobacco product prices and increase the effectiveness of taxation policies X in reducing tobacco use. Tax avoidance and tax evasion reduce but do not eliminate the public health and revenue impact of tobacco tax increases. X A co-ordinated set of interventions (a set of interventions that includes international collaborations strengthened tax administration X increased enforcement and swift severe penalties) reduces illicit trade in tobacco products. Increases in tobacco tax increase tobacco tax revenues. X Increases in tobacco tax do not increase unemployment. 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 Date of last update: 10 October 2012 Tobacco in Australia: 2 Facts and Issues
While evidence was limited about the relative price sensitivity of low-income people Goods and Services tax in developing countries, the panel concluded ‘strong’ evidence for four statements @ 1/11th of nal price and ‘sufficient’ evidence of a causal association for 12 of the policy elements. 9.1% In addition to summarising research on the price elasticity of demand for cigarettes Retail margin (Section 13.1) this chapter also provides data on the taxes applicable to tobacco @ 16.5% of wholesale price excluding GST products in this country (Section 13.2). In Australia federal excise or customs duty 12.9% 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 Federal excise duty and customs duty (Section 13.2.1) and state licence feeds (Section 13.2.2) and the @ 34.681 cents per cigarette GST (Section 13.2.3) as well as comparisons of the proportion that taxes make up of 50.6% 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: Manufacturing costs and pro t the Cigarettes and Tobacco Sub-Group of the Consumer Price Index (Section 27.5% 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 priceper se is what determines consumer responses to price increases. At present in Australia the Recommended average smoker on average weekly earnings would have to work for 23 minutes in retail price $17.15*, order to earn enough to buy a day’s worth of cigarettes at recommended retail prices. taxes = 59.7% Section 13.4 describes changes over time in the price of cigarettes in comparison of nal price 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 Figure 13.0.1 each day. Section 13.4.3 and 13.4.4 provide compares the affordability of cigarettes in Price breakdown for a pack of Australia with those elsewhere in the world. Winfield 25s February–April 2012 Australia Currently in Australia taxpayers receive more than $8.7 billion in taxes paid by Sources: Calculated from price information in smokers on tobacco products totaling about 2.5% of total government revenue Australian Retail Tobacconist7 and received in Australia (Section 13.6.5) comparable as a percentage with that received 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 year; no adjustment has been made for Sections 13.6.1 to 13.6.4 document changes over time in the amounts of revenue inflation received by government from duties, fees and taxes on tobacco products. Section 13.7 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 smokersSection ( 13.11). Finally it describes public attitudes to tobacco taxes and the uses of the revenue they generate (Section 13.12).
Section: 13.0 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products in Australia 3 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 Date of last update: 10 October 2012 Tobacco in Australia: 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. Theextent 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 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products 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 < i 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. ii See Figure 5.1 in Chapter 5 of the IARC review, p176. Section: 13.1.3 Date of last update: 10 October 2012 Tobacco in Australia: 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 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. ii See IARC Chapter 5, Figure 5.2 page 176 Section: 13.1.5 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products 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. Themyopic 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. Therational 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. Therational 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 Date of last update: 10 October 2012 Tobacco in Australia: 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 (seeSection 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 tobacco- control 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 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products in Australia 9 References 1. 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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 Date of last update: 10 October 2012 Tobacco in Australia: 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/ abstract?CRETRY=1&SRETRY=0 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/pr2000- 53.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 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products 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 perx 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 Table 13.2.1 at a rate of one shilling per pound (of product weight) and cigars were Rates of federal excise duty, August, selected years taxed at one shilling and sixpence per pound. Since 1920, the rate of the 1965–87: cigarettes, cigars and tobacco, Australia duty has been set out in (frequently amended) schedules to the Excise Tar iff Act passed in 1921.10 Historically, duty on tobacco in cigarettes was levied at a higher rate than duty on non-cigarette tobacco (Table $ per kg $ per kg $ per kg 13.2.1). In November 1983, the then federal treasurer, the Hon. Paul Year smoking cigarettes* cigars* Keating, changed customs and excise policy in several ways. First, the tobacco* rate of federal excise and customs duty was linked with the Australian 1965 9.26 7.39 4.94 Consumer Price Index (CPI),11 meaning that since that time, excise and 1970 10.36 8.49 5.38 customs duty have automatically increased in February and August each 1975 19.36 16.56 9.88 year in line with the CPI for the six months to the previous December 1982 29.70 25.34 15.10 and June. Second, the rate of duty for cigars was immediately made 1983 30.98 30.98 20.10 equal to that of cigarettes. Third, the rate for non-cigarette tobacco 1984 32.25 32.25 25.92 was increased by $5 a kilo. In subsequent budgets the rate for smoking 1985 34.35 34.35 32.60 35.36, tobacco was increased further (by another $5 a kilo in the 1984 and 1986 37.26 37.26 37.26 1985 budgetsii, and then by $1.90 in the 1986 budget). 1987 40.73 40.73 40.73 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 Source: Australian Tobacco Marketing Advisory Committee Annual Report 12 cigarettes in 1986. 1994 * Current dollars: the price in the applicable year; no adjustment has Historically, tobacco products produced in Australia were subject to a been made for inflation lower rate of duty than that applicable to imported tobacco products. Customs duty was brought into line with excise duty following i 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. ii The duty rate increased to $35.36 on 1 August 1986 and to $37.26 on 19 August 1986. Section: 13.2.1 Date of last update: 10 October 2012 Tobacco in Australia: 12 Facts and Issues the publication in June 1994 of a report of an inquiry Table 13.2.2 by the Industry Commission into tobacco growing and Rates of federal duty per kilo of manufacturing industries in Australia.13 Coinciding with the weight, all tobacco products, as at end of the Tobacco Stabilisation Plan (see Chapter 10, Section June 1987 to 1999—excise and 10.8.2), the harmonisation of customs and excise duty was customs, Australia 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 Excise Customs rates of excise and customs duty (per kilo of tobacco weight) Year from 1987 to 1999. rate* rate* 1987 39.35 41.79 As can be seen in Table 13.2.2, customs duty became equal to 1988 41.75 44.19 excise duty in 1995. 1989 44.94 47.38 1990 48.42 50.86 Throughout the 1990s, health groups lobbied for increases 1991 51.72 54.16 in federal excise duty.16,17 In addition to the six-monthly CPI 1992 52.50 54.94 increases, the government increased the rate of federal excise 1993 57.67 60.11 applicable to cigarettes and other tobacco products on several 1994 63.56 66.00 18 occasions. These included a $5 per kilo increase in 1992 and 1995 79.02 79.02 19 increases announced in the 1993 budget of 3% in August 1996 83.02 83.02 1993 and 5% in February and August 1994 and February 1997 84.27 84.27 20i 1995. The final increment rise of 5% planned for August 1995 1998 86.92 86.92 was brought forward and increased to an immediate 10% rise 1999 88.03 88.03 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 Sources: 1987 to 1989: Australian Tobacco Marketing Advisory Committee Annual Report 1994;12 constant 1989–90 dollars to take into account rising prices over 1990 to 1999: Scollo and Lal 200714 using that time.ii rates specified in amended schedules to the Excise Tariff Act10 and the Customs Tariff Act It is evident from Figure 13.2.1 that, once its value was restored 199515 by the increase and introduction of indexation in the 1983 * Current rate: the rate in the applicable year; no budget, federal duty on cigarettes remained fairly steady in adjustment has been made for inflation real terms over the late 1980s and early 1990s, increasing significantly only in the late 1990s. The level of federal duty 80 on cigarettes in 1998 was about 50% higher in real terms 70 automatic than it was at its lowest point in the early 1960s. indexation 60 In 1999, after extensive lobbying by health groups,16 the 50 government moved from levying excise and customs duty 40 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). 30 Excise and customs rates on cigarettes and other tobacco 20 products applicable since 1999 are set out in Table 13.2.3. 10 0 Between 1999 and 2010 there were no increases in tobacco 1958 1962 1966 1970 1974 1978 1982 1986 1990 1994 1998 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). 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 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. ii 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 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products in Australia 13 Table 13.2.3 $0.35 Excise and customs duty applicable to cigarettes and other tobacco products since November 1999, Australia $0.30 $0.25 $0.20 Dollars per kg of smoking Dollars per cigarette or tobacco, or cigarettes or $0.15 cigar weighing less than cigars weighing greater 0.8 g* $0.10 than 0.8 g* November 1999 0.18872 235.90 $0.05 February 2000 0.19155 239.44 $0.00 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 August 2000 0.19481 243.51 February 2001 0.20260 253.25 August 2001 0.20260 253.25 Figure 13.2.2 February 2002 0.20893 261.16 Value of excise and customs duty on tobacco: 2000–11, Australia August 2002 0.21227 265.34 Sources: As for Table 13.2.3 using rates from Australian Taxation Office38 adjusted by the Consumer February 2003 0.21524 269.05 Price Index39 August 2003 0.21804 272.55 Note: Rate expressed in 2010 dollars February 2004 0.22044 275.55 August 2004 0.22353 279.41 February 2005 0.22621 282.76 13.2.2 August 2005 0.22915 286.44 February 2006 0.23259 290.74 State tobacco licence fees August 2006 0.23840 298.01 February 2007 0.24031 300.39 In November 1974 Victoria became the first August 2007 0.24343 304.30 Australian jurisdiction to introduce a licence fee February 2008 0.24757 309.47 (known as a business franchise fee) on the sale August 2008 0.2545 318.14 of tobacco products.40 The business franchise fee February 2008 0.25679 321.00 on tobacco had two components. The first was August 2008 0.25833 322.93 a set amount charged each year. The second was February 2008 0.2622 327.77 an amount based on the value of tobacco sold in August 2008 0.33267 415.86 the immediately preceding month. The monthly February 2008 0.33633 420.43 (variable) rate was set at 2.5% in 1974 increasing to August 2008 0.34474 430.94 10% in 1975. Between 1975 and 1989, all state and February 2012 0.34681 433.53 territory governments introduced similar fees.41–47 The fixed licence fee and the percentage levy Source: Rates published by the Australian Taxation Office and also published in Federal Budget papers, varied from state to state. Generally the fees were Costello 1998–200625-32 and Swan 2008–1233-37 forwarded to state or territory government revenue * Current dollars: the price in the applicable year; no adjustment has been made for inflation. collection offices by tobacco wholesalers; however, 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 Date of last update: 10 October 2012 Tobacco in Australia: 14 Facts and Issues Table 13.2.4 Rates for business franchise fees on tobacco 1974–97 in each $3.00 Australian state and territory $2.50 $2.00 Calendar Vic NSW SA WA Tas NT ACT Qld $1.50 year Rate as % of value of total sales in preceding month 1974 2.5 – – – – – – – $1.00 1975 10 10 10 – – – – – $0.50 1976 10 10 10 10 – – – – 1977 10 10 10 10 – – – – 0 1978 10 10 10 10 – – – – 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 1979 12 10 10 10 – – – – 1980 12 10 10 10 – – – – Figure 13.2.3 1981 12 10 12.5 10 10 12 – – Dollar value of the tobacco business franchise fee applicable on a 1982 12 10 12.5 12.5 12 12 – – typical packet of Winfield 25s in New South Wales between 1976 and 1983 25 15 25 35 24 12 – – 1984 25 15 25 35 35 25 – – 1998 50-52 1985 25 25 25 35 35 35 15 – Sources: Scollo unpublished data, based on Australian Retail Tobacconist price lists, adjusted by the Consumer Price Index39 25 – Note: Dollar rate expressed in 1980–90 dollars 1986 25 30 25 35 35 35 30 – 1987 30 30 25 35 50 35 30 – 1988 30 30 28 35 50 35 30 – value (in constant $ 1989–90) of the fee applicable 1989 30 30 28 35 50 35 30 30 on a typical packet of cigarettes, Winfield 25s, in 1990 50 35 50 50 50 50 35 30 New South Wales between 1975 and 1999.i 1991 50 50 50 50 50 50 35 30 1992 50 50 50 50 50 50 50 30 In New South Wales, the dollar value of the fee 75 75 60 75 75 doubled in real terms between 1976 and 1986. 1993 75 75 75 50 50 60 75 75 Between 1986 and 1996, it increased by a further 100 400% in real terms. Similar increases occurred in 1994 75 75 100 100 100 85 75 75 the other states and territories. 1995 75 75 100 100 100 85 75 75 Since they were first introduced, the state business 100 100 100 100 100 100 100 franchise fees were somewhat controversial and 1996 100 100 100 100 100 100 100 100 several legal challenges were mounted asserting 1997 100 100 100 100 100 100 100 100 that the schemes were in breach of s. 90 of the Australian Constitution, which prohibits 48 Australian states and territories from raising Sources: Australian Tobacco Board 1987, Australian Tobacco Marketing Advisory Committee ii 199149 and 1994,12 NSW Retail Tobacco Traders’ Association 199750 revenue from the sale of products . The wording Note: Citing cigarette price lists June and September editions 1995, 1996, 1997 from the NSW of the various pieces of state business franchise Retail Tobacco Traders’ Association50 legislation attempted to ensure that the fees were 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 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. ii 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 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products 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 Date of last update: 10 October 2012 Tobacco in Australia: 16 Facts and Issues 13.2.4 Tax levels in Australia compared 0 10 20 30 40 50 60 70 80 90 100 Australia 63.10% Canada with overseas (average of provinces) 64.45% Denmark 78.67% As indicated in Figure 13.0.1, taxes in Australia made up about 60% of the final price of a typical packet of cigarettes Finland 79.83% in 2012.i France 79.98% 74.51% Figure 13.2.4 shows tax levels in Australia compared with Germany other countries for the year 2012. Ireland 78.82% Italy 75.47% Netherlands 73.13% New Zealand 73.27% Norway 72.80% Singapore 70.37% Spain 79.16% Sweden 73.83% Switzerland 63.60% United States of America (excludes settlement) 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 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products in Australia 17 References 1. Harvard University Institute for the Study of Smoking Behavior and Policy. The cigarette excise tax. Smoking Behavior and Policy Conference Series. Cambridge Massachusetts, April 17, 1985. Cambridge, Massachusetts: John F Kennedy School of Government, Harvard University, 1985. 2. US Department of Health and Human Services. Reducing the health consequences of smoking: 25 years of progress. A report of the Surgeon General. 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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 Date of last update: 10 October 2012 Tobacco in Australia: 18 Facts and Issues 34. Swan W. Budget 2009-10. Budget paper no. 1. Statement 5: Revenue, Revenue estimates by revenue head. Canberra: Australian Government, 2009. Available from: http://www.budget. gov.au/2009-10/content/bp1/html/bp1_bst5-06.htm 35. Swan W. Budget 2010-11. Budget paper no. 1. Statement 5: Revenue, Revenue estimates by revenue head. Canberra: Australian Government, 2010. Available from: http://www.budget. gov.au/2010-11/content/bp1/html/bp1_bst5.htm 36. Swan W. Budget 2011-12. Budget paper no. 1. Statement 5: Revenue, Revenue estimates by revenue head. Canberra: Australian Government, 2011. Available from: http://www.budget. gov.au/2011-12/content/bp1/html/index.htm 37. Swan W. Budget 2012-13. Budget paper no. 1. Statement 5: Revenue, Revenue estimates by revenue head. Canberra: Australian Government, 2012. Available from: http://www.budget. gov.au/2012-13/content/bp1/html/bp1_bst5-04.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 39. 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, 2012. Updated 24 April 2012 [viewed 25 April 2012]. Available from: http://www.abs.gov.au/AUSSTATS/[email protected]/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. 51. NSW Retail Tobacco Traders’ Association. Price lists--cigarettes. The Australian Retail Tobacconist 1970s;31 to 40(February editions):x-x. 52. NSW Retail Tobacco Traders’ Association. Price lists--cigarettes. The Australian Retail Tobacconist 1980s;41 to 50(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/1999- 2000/2000bd123.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 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products 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 Date of last update: 10 October 2012 Tobacco in Australia: 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. Section: Technical appendix 13.2.1 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products 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 $3.75 $3.95 Figure 13.3.1 plots the price of Craven As in $1989–90 at 4 $3.46 $3.22 $2.80 five-year intervals between 1940 and 2010. 3 $2.40 $2.57 $2.34 $2.43 $2.37 $2.26 $2.26 Table 13.3.1 shows that the price of a packet of Craven As 2 increased 85-fold between 1940 and 2010. However, as is 1 evident from Table 13.3.1 and Figure 13.3.1, adjusting for 0 194019481950195519601965197019751980198519901995200020052010 inflation, Craven As cost no more in the early 1990s than they did in real terms during and immediately after the Second World War. Prices increased substantially from Figure 13.3.1 the early 1990s. In real terms the price in 2010 was almost Price of Craven A 20s, Australia, 1940–2010 double what it was in 1940—a real price increase of 99%. Sources: NSW Retail Tobacco Traders’ Association 1940 and 1948;1 1950 1955, 1960 and 1965;2 1970 and 1975;4 1980 and 1985;5 1990 and 1995,6 2000 and 20057 and 201010 Note: Dollar rate expressed in 1980–90 dollars i A small number of brands (such as Tradition, Deal, Harvest and Bayside are sold only from Coles, produced under special arrangement with a manufacturer in Germany. ii Other brands available over the entire period include Ardath, Black and White, Camel, Dunhill, Du Maurier, Kool and Lucky Strike. Craven A cork-tipped was replaced by Craven A classic in 2005 and removed from retail price lists in 2006. From 2006, Craven A was only available with filters. From 2007 it was available only in packs of 25. Section: 13.3.1.1 Date of last update: 10 October 2012 Tobacco in Australia: 22 Facts and Issues 13.3.1.2 Table 13.3.1 The large pack: a peculiarly Price of a packet of 20 Craven As, Australia, 1940–80, selected years, then 1980–2012 Australian phenomenon Price pxer pack ($) Price per pack ($) Price per pack ($) Year In response to rising awareness about health (current dollars*) (1989–90 dollars) (2000 dollars) effects and the introduction and steady 1940 1 shilling sixpence (15 cents) 3.75 increase in state business franchise fees on 1948 2 shillings threepence (23 cents) 3.46 1950 2 shillings fivepence (24 cents) 3.22 tobacco, over the 1960s, 1970s and 1980s 1955 2 shillings ninepence (28 cents) 2.40 manufacturers introduced many new brands 1960 3 shillings twopence (32 cents) 2.37 and variants of existing brands that differed in 1965 3 shillings sixpence (38 cents) 2.57 the amount of tar measured and the number of 1970 0.39 2.26 3.86 cigarettes in each pack. 1975 0.63 2.34 3.99 Most cigarettes were unfiltered in the early 1980 1.02 2.26 3.84 part of the century but by the end of the 1960s 1981 1.05 2.12 3.62 most were sold with filters. Cigarettes in the 1982 1.31 2.40 4.09 early part of the century were also commonly 1983 1.31 2.15 3.67 sold in packets of 10 or 20 or in tins of 50. 1984 1.54 2.37 4.03 These were similar in size to the tins in which 1985 1.65 2.43 4.14 loose tobacco was commonly sold. With the 1986 1.89 2.57 4.38 1987 2.13 2.65 4.51 advent of plastic wrapping, however, these 1988 2.28 2.64 4.50 tins disappeared and by 1960 the vast majority 1989 2.44 2.64 4.49 of cigarettes were sold in packets of 20. The 1990 2.80 2.80 4.77 increasing rate of state licence fees had a 1991 3.01 2.86 4.87 significant impact on the price of brands that 1992 3.42 3.19 5.43 were popular until the early 1970s. However 1993 4.15 3.83 6.52 the tobacco industry fought back to retain its 1994 4.37 3.96 6.74 customers and the introduction of Winfield 25s 1995 4.50 3.95 6.73 ‘5 smokes ahead of the rest’ in 1976 marked the 1996 5.08 4.28 7.29 advent of the large pack size in Australia. 1997 5.90 4.91 8.35 Until 1999, Australia was virtually the only 1998 6.10 5.07 8.64 1999 6.40 5.25 8.95 country in the world that combined an excise 2000 6.80 5.45 9.28 based on weight and ad valorem fees based on 2001 7.95 6.01 10.24 wholesale value of sales. Until 1999, lighter 2002 8.25 6.07 10.33 cigarettes attracted less federal excise and 2003 8.60 6.14 10.45 customs duty than heavier cigarettes. This 2004 8.75 6.10 10.39 effect was amplified by the manner in whichad 2005 9.70 6.60 11.24 valorem fees were imposed and final retail price 2006 10.25 6.76 11.51 calculated, providing an incentive for lighter 2007 10.36 6.64 11.30 cigarettes and for packaging many cigarettes 2008 10.72 6.64 11.31 11 in the same packet. The introduction of 2009 11.60 6.97 11.87 large pack sizes in Australia closely followed 2010 12.68 7.45 12.68 the introduction in 1975 and the subsequent 2011 15.52 8.84 15.05 doubling in about 1987 of state franchise fees 2012 10.36 6.64 throughout Australian states. In most other countries in the world, cigarettes are virtually always sold in packets of 20. Sources: NSW Retail Traders’ Association 1940 and 1948;1 1950 1955 1960 and 1965;2 1970 and 1975;4 and 1980 to 20125–9 While the price per stick of the most popular * Current price: the price in the applicable year; no adjustment has been made for inflation 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 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products in Australia 23 pack on the market (Winfield 25s in the 1970s, Peter Jackson 30s in the 1980s, Longbeach 40s briefly in the 1990s and then Holiday 70 50s) increased only in line with the CPI. 60 20s 25 30s to 50s Not surprisingly, large packs quickly became a dominant 50 component of the market (see Figure 13.3.2). 40 While the recommended retail prices of premium brands of 30 cigarettes such as Marlboro, Dunhill, Benson and Hedges and 20 Craven A rose steadily from the early 1980s, consumers concerned about price have always been able to purchase cigarettes that are 10 substantially cheaper per stick. 0 1981 1985 1987 1990 1993 1997 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 Figure 13.3.2 2011, and some of the major innovations with which the industry Market share for 20s, 25s and larger pack sizes in Australia, 1981 to responded to those changes. 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 Notes: Using Nielsen data for the months November and December (all sectors), published in state licence fees were mitigated by the introduction of larger irregularly in The Australian Retail Tobacconist;5,6 for the 12 months to September 1997, and larger pack sizes providing cigarettes at a cheaper cost per grocery only Retail World, 24 December 1997 stick than those available in smaller pack sizes. 40 Increase in excise 35 and customs duty Excise increases Introduction 30 Excise reform of GST Catch up excise 25 increase plus Steep increases commencement in state fees 20 High in ation of indexation erodes value 15 of excise Health groups campaign for excise reform 10 Introduction of 50s Win eld –‘5 Introduction 5 smokes ahead Introduction Victorian O ce of Prices report of 40s of the rest’ of 30s, 35s highlights problem of large packs 0 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 Date of last update: 10 October 2012 Tobacco in Australia: 24 Facts and Issues Figure 13.3.4 plots price movements since 1990, reflecting 800 Price per stick, the effects of increases in excise duty and state fees cheapest brand, cents throughout the 1990s and the impact of the implementation 700 Price per stick, between November 1999 and February 2001 of the most popular brand, cents 600 Price per stick, government’s new tax system. Note that in this index, 500 premium brand, cents all prices are set to 100 in the base year (1990), so that CPI 400 increases are relative to 1990 prices for the same brand. Tobacco price index 300 Figure 13.3.4 shows that between 1990 and 2001 cigarette 200 prices increased well above the inflation rate. The biggest 100 increases occurred in the cheapest and most popular brands 0 corresponding with the change to the per stick system in 1990 1993 1996 1999 2002 2005 2008 2011 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 Figure 13.3.4 Cigarette price movements in Australia, 1990–2011 (NB: this is an While prices of cheapest and premium brands rose in index rather than actual prices, with all notional prices set to 100 at parallel in the early 1990s, from 1999 the cheapest brands 1990) increased to a much larger extent than the premium brands, Sources: Australian Bureau of Statistics 2021 13 Table 18; NSW Retail Tobacco Traders Association thus demonstrating the effectiveness of the November 1999 2000s and 19997,19 tax reforms. With the pack price for Horizon and Holiday 50s 35 approaching $30 in April 2012 (Table 13.3.2 and Figure 30 Win eld 25s 13.3.5), it seems that the dominance of large packs in Peter Jackson 30s Australia may have ended. In February 2012, it cost almost 25 Benson & Hedges 25s 20 Longbeach 40s $13 more to buy a pack of 50s than a pack of 25s. Horizon 50s Sales of larger pack sizes in Australia in 2010 were lower 15 Holiday 50s than they had been since any time before they first emerged 10 in the mid-1980s—refer Table 13.3.3. 5 Use of packs of 30s and 35s also declined among secondary 0 Feb Jan Jan Feb Feb Feb Feb Feb Feb Feb Feb Feb Feb Feb school students although there has been little change in 72 75 78 81 84 87 90 93 96 99 02 05 08 11 Figure 13.3.5 70 20s Recommended retail price of top five-selling brands of cigarettes, 25 60 February 1970 to February 2012 30s to 50s 50 Sources: NSW Retail Tobacco Traders’ Association 1990s6 and 2000s7,10,8,9 and author calculations 40 * In current dollars: the price in the applicable year; no adjustment has been made for 30 inflation 20 the proportion of regular student smokers using 40s and 10 50s—see Figure 13.3.7. 0 Between 1999 and 2002, during the period of reform of the 1981 1985 1987 1990 1993 1997 2001 2004 2007 2010 tax system, the percentages of secondary school students using large packs declined by about 18%, which included Figure 13.3.6 a 29% reduction in the percentage of teenage smokers Percentages of sales of each pack size of cigarettes in Australia 1981 preferring 40s, and a 32% reduction in the percentage to 2010—20s, 25s, 30s and 35s, 40s and 50s preferring 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 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products 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 % largest pack $ difference Peter Jackson Benson & Winfield 25s Longbeach 40s Horizon 50s Holiday 50s size cheaper per highest to 30s Hedges 25s stick lowest cost $* Feb-90 2.94 3.14 3.20 3.08 Feb-91 3.08 3.32 3.68 3.47 3.57 –51 0.60 Feb-92 3.57 3.87 4.56 4.25 4.68 4.56 –50 0.99 Feb-93 4.45 4.85 4.84 5.86 6.75 6.65 –31 2.30 Feb-94 4.72 5.22 5.20 6.39 7.42 7.19 –31 2.70 Feb-95 5.11 5.66 6.57 7.01 8.25 7.91 –40 3.14 Feb-96 6.47 7.15 6.70 9.01 10.39 9.70 –28 3.92 Feb-97 6.53 7.22 6.90 8.76 10.52 9.65 –30 3.99 Feb-98 6.70 7.4 6.90 9.00 10.80 9.90 –28 4.10 Feb-99 7.05 7.81 7.50 9.51 11.45 10.55 –30 4.40 Feb-00 7.35 8.41 8.95 10.81 13.13 12.75 –29 5.78 Feb-01 8.70 9.95 8.95 12.75 15.42 15.00 –16 6.72 Feb-02 9.10 10.45 9.35 13.25 16.10 15.60 –17 7.00 Feb-03 9.50 10.85 9.80 13.70 16.65 16.15 –18 7.15 Feb-04 9.85 11.25 10.15 14.25 17.35 16.40 –19 7.50 Feb-05 10.30 11.7 10.60 14.95 17.95 17.50 –17 7.65 Feb-06 10.70 11.99 11.05 15.25 18.60 18.15 –18 7.90 Feb-07 11.25 12.6 11.55 15.95 19.45 19.00 –18 8.20 Feb-08 11.70 13.1 12.00 16.70 20.30 19.85 –17 8.60 Feb-09 12.40 13.85 12.70 17.50 21.30 21.25 –16 8.90 Feb-10 12.95 14.45 13.40 18.10 22.10 21.90 –18 9.15 Feb-11 16.45 18.25 16.85 23.10 27.75 27.55 –18 11.30 Feb-12 17.15 18.9 17.95 24.80 29.80 29.80 –17 12.65 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 20s 25s 30s and 35s 40s 50s 30s to 50s 1981 37.3 62.1 0 1985 22.6 47.1 29.1 29.1 1987 13 48.3 37.1 37.1 1990 6.7 41.8 37.3 14.2 51.5 1993 4.6 35.2 20.7 19.1 19 58.8 1997 2.1 29.8 21.5 23.3 23.3 68.1 2001 11.5 37 23 15.5 13 51.5 2004 13.5 39.5 22 14.5 10.5 47 2007 15 43.5 21.5 11.5 8.5 42.5 2010 15.9 44.7 21.0 10.6 7.8 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 Date of last update: 10 October 2012 Tobacco in Australia: 26 Facts and Issues 45 20s 25s 30s to 35s 40s 50s 60 40 51.1 50 48.5 35 39.6 30 40 35.0 35.7 25 32.3 30 20 15 20 10 10 5 0 0 1996 1999 2002 2005 2008 2011 1996 1999 2002 2005 2008 2011 Figure 13.3.7 Figure 13.3.8 Students preferring large pack sizes (30, 35, 40 or 50), secondary Students preferring large pack sizes (30, 35, 40 or 50), secondary school students 12–17 years who smoked in last week—1996, 1999, school students 12–17 years who smoked in last week—1996, 1999, 2002, 2005, 2008 and 2011 (%) 2002, 2005, 2008 and 2011(%) Sources: White V personal communication, using data from surveys of secondary school students 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 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] 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 thoserecommended 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 In the US, tobacco companies publish detailed information on the average price of each brand based on sales data. ii 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 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products 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 Cigarettes and Year Cigarettes and Year Cigarettes and Year Cigarettes and ending Tobacco Sub-group ending Tobacco Sub-group ending Tobacco Sub-group ending Tobacco Sub-group June of CPI June of CPI June of CPI June of CPI 1973 14.8 1983 45.0 1993 149.4 2003 358.5 1974 16.3 1984 54.5 1994 171.0 2004 374.3 1975 19.4 1985 59.7 1995 186.1 2005 388.5 1976 24.2 1986 66.7 1996 222.8 2006 405.35 1977 26.5 1987 74.8 1997 232.1 2007 423.1 1978 27.3 1988 81.0 1998 239.8 2008 438.1 1979 31.0 1989 88.7 1999 249.3 2009 464.3 1980 33.7 1990 100.0 2000 268.2 2010 496.2 1981 35.4 1991 112.8 2001 320.1 2011 608.6 1982 38.4 1992 124.0 2002 343.5 Sources: Australian Bureau of Statistics 201230 Note: Cigarettes and Tobacco Sub-group averaged for each year 700 600 Tobacco CPI Figure 13.3.9 plots the Cigarettes and Tobacco Sub-group of 500 the CPI against the overall index since 1973. 400 It is evident from Table 13.3.4 and Figure 13.3.9 that prices 300 as determined in the Australian Bureau of Statistics price survey have risen significantly over time, and have been 200 well above increases in other goods and services since the 100 Annual CPI early 1990s. Prices rose above CPI even between 2001 and 0 2009, during which time the excise and customs duty on Jun-73 Jun-78 1983 1988 1993 1998 2003 2008 2011 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). Figure 13.3.9 The Consumer Price Index, 1973–2011: Cigarettes and Tobacco Sub-group compared with overall index 13.3.2.2 Sources: Australian Bureau of Statistics 201213 18 Discounting in the tobacco market Note: Consumer Price Index and CPI Cigarettes and Tobacco Sub-group 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 Date of last update: 10 October 2012 Tobacco in Australia: 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 cigarettes at slightly higher Table 13.3.5 than the recommended Retail prices of leading brands, Melbourne, Australia, April 2012: recommended retail price and supermarket retail price (about 0.3% price per pack, per carton and per stick higher across the study period) but discounting was Recommended common in supermarkets and Supermarket price tobacconists (with an average retail price 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 Peter Jackson Rich 30s hardpack 0.6300 18.9 16.11 0.6065 109.17 –3.7 Table 13.3.5 sets out the Benson & Hedges Smooth 25s hardpack 0.7200 17.95 17.67 0.7267 145.34 0.9 retail prices of a number of Dunhill Distinct 25s hardpack 0.7200 17.95 17.63 0.6786 135.72 –5.8 popular brands, comparing Longbeach Rich 40s hardpack 0.6200 24.8 25.12 0.6044 96.71 –2.5 the recommended retail Marlboro Gold 25s 0.7200 17.95 17.77 0.6862 137.24 –4.7 price with pack and carton Horizon Blue 50s 0.6000 29.80 28.03 0.5382 107.64 –10.3 prices as at April 2012 at one of Australia’s major supermarkets. 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’ (seeSection 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 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products in Australia 29 As is evident from Figure 13.3.10, the actual price that consumers report they pay is significantly lower than 35 the recommended retail price and the average price 30 of packets of cigarettes sold in convenience stores. It 25 is much closer to the average price of packets sold in 20 cartons from discount outlets. Recommended 15 Monitored packs, Technical attachment 13.3.2 sets out data on prices paid convenience sector only 10 for nine different brands of cigarettes collected from Reported Australian smokers interviewed as part the International 5 Monitored price cartons only discount sector only Tobacco Control Policy Evaluation Study for the years 0 37 Nov Mar Jul Nov Mar Nov Mar Jul Nov Mar Jul Nov 2002–10. Figure 13.3.11 plots the average reported 1996 1997 1997 1997 1998 1998 1999 1999 1999 2000 2000 2000 prices paid for all brands (weighted by brand share) against average recommended retail prices (weighted for brand share and not weighted). Figure 13.3.10 Price of one Peter Jackson 30s cigarette, 1997–2000, Australia: Between 2002 and 2010, the prices reported paid by recommended retail price, monitored price and price reported paid by consumers continued to be substantially lower than those smokers recommended by retail trade associations. Sources: NSW Retail Tobacco Traders’ Association 1990s and 2000s;6, 7 Scollo et al 200320 While it is possible that consumers misremember and Note: In current dollars: the price in the applicable year; no adjustment has been made for inflation round down prices, clearly the recommended retail prices overestimate the actual prices paid by consumers. 0.7 Indexes such as the CPI based on price monitoring surveys may also significantly overestimate prices 0.6 experienced by consumers unless sampling is adjusted 0.5 to take account of changing sales patterns, in particular 0.4 those reflecting consumer efforts to seek lower prices. 0.3 Average RRP, unweighted 0.2 13.3.3 RRP weighted by use 0.1 Weighted reported average 0.0 International comparisons of the 2002 2003 2004 2005 2006 2007 2008 2009 2010 price of tobacco products To accurately assess the pricesi of Australian cigarettes Figure 13.3.11 compared with those sold in other countries, it is Recommended retail prices per cigarette of leading brands in 2002–10 important to use consistent methods for collecting versus reported prices paid by consumers (cents per stick) Sources: NSW Retail Tobacco Traders’ Association 2000s;7 Email to Michelle Scollo, Cancer Council price data. Estimated prices for a single country will Victoria, 2006, from Li Q, Roswell Park Cancer Institute Buffalo, NY, on prices of Australian vary widely depending on the brand and brand variant cigarettes from Waves 2 to 4 of the International Tobacco Control Policy Evaluation Study and selected and the sorts of retail outlets from which data by Timea Partos, Cancer Council Victoria, Waves 5 to 10, 2012 are collected. Note: In current dollars: the price in the applicable year; no adjustment has been made for inflation 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 Date of last update: 10 October 2012 Tobacco in Australia: 30 Facts and Issues and the majority of smokers regularly use much cheaper locally produced brands. Figure 13.3.13 shows the prices Oslo in 2011 of Marlboros in moderately priced stores and the Sydney price charged by supermarkets for the most popular brand London of cigarettes in each of a number of cities comparable with Ireland major Australian capital cities. Toronto Marlboro cigarettes in Australia were among the most Auckland expensive in the world in 2011, cheaper only than Singapore Marlboros sold in the Oslo. The most popular brand of 20s Paris sold in Australia also appears to be more expensive that Geneva the most popular brand in every other country other than Iceland i Norway. New York Stockholm 13.3.3.2 Helsinki Amsterdam International comparisons of prices paid Brussels Copenhagen The International Tobacco Control Policy Evaluation Berlin Study provides ongoing data for the countries involved in Rome the study, on a range of tobacco-control policy indicators, Luxembourg including the type of venue from which smokers purchased Madrid 41 cigarettes and what they paid. Analysis of data from the first Tokyo two waves of the study (between October and December Prague 2002, and then May to July 2003) shows that, while Johannesburg less Australian smokers were much likely to purchase from Warsaw untaxed sources, they were much more likely to purchase Budapest from groceries and other discount stores in preference to Kuala Lumpur petrol stations and other convenience stores. The average Bangkok price per stick paid by smokers in each country in phase Mexico City two of the study—excluding prices paid for untaxed Beijing cigarettes—adjusted to 2002 US dollars—were 35c in the Moscow UK, 23c in Canada and the US, and 20c in Australia. Cairo Buenos Aries Jakarta Manilla $0.00 $2.00 $4.00 $6.00 $8.00 $10.00 $12.00 $14.00 $16.00 Figure 13.3.12 Prices of cigarettes sold in selected cities around the world, 2010: 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 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products 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 Figure 13.3.13 Prices of cigarettes sold in selected cities around the world, 2011: 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 Date of last update: 10 October 2012 Tobacco in Australia: 32 Facts and Issues References 1. NSW Retail Tobacco Traders’ Association. Price lists--cigarettes. The Retail Tobacconist of NSW 1940 and 1948;9 and 12(February editions):x-x. 2. NSW Retail Tobacco Traders’ Association. Price lists--cigarettes. 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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/[email protected]/DetailsPage/6431.01948-2011?OpenDocument 31. Prices Surveillance Authority. Report no. 52: inquiry into cigarettes declaration. Matter no: PI/94/1. Melbourne, Australia: PSA, 1994. Section: 13.3.3.2 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products in Australia 33 32. Scollo M, Owen T and Boulter J. Price discounting of cigarettes during the National Tobacco Campaign. In: Hassard, K, ed. Australia’s National Tobacco Campaign: evaluation report vol. 2. Canberra: Commonwealth Department of Health and Aged Care, 2000. 155-200. Available from: http://www.health.gov.au/internet/main/publishing.nsf/Content/7E318B2BCB5DAE26C A256F190004524F/$File/tobccamp_2-ch5.pdf 33. Convenience & Impulse Retailing. Nielsen convenience and impulse sales report. Balmain, NSW: Berg Bennett, 2009 [viewed 1 July 2011]. Available from: http://www.c-store.com.au/ industry/acn/acn2009.pdf 34. Woolworths. Browse aisles. Baulkham Hills, New South Wales: Woolworths, 2012 Last modified May 2012 [viewed 2 May 2012]. Available from:http://www2.woolworthsonline.com. au/#url=/Shop/Department/37%3Fname%3Dtobacco-cigarettes 35. Hyland A, Higbee C, Li Q, Bauer J, Giovino G, Alford T, et al. Access to low-taxed cigarettes deters smoking cessation attempts. American Journal of Public Health 2005;95(6):994–5. Available from: http://www.ajph.org/cgi/reprint/95/6/994 36. Blecher E. A mountain or a molehill: is the illicit trade in cigarettes undermining tobacco control policy in South Africa? Trends in Organized Crime 2010;13(4):299–315. Available from: http://www.springerlink.com/content/q852738qk5761088/ 37. Li Q, Roswell Park Cancer Institute Buffalo, NY. Prices of Australian cigarettes from Waves 2 to 4 of the International Tobacco Control Policy Evaluation Study (personal communication). Email to Michelle Scollo of The Cancer Council Victoria, 2006, and data provided to Michelle Scollo by Timea Portos, Cancer Council Victoria 2012. 38. Eriksen M, Mackay J and Ross H. The tobacco atlas. 4th edn. New York and Atlanta, Georgia: World Lung Foundation and American Cancer Society, 2012. Available from: http://www. tobaccoatlas.org/ 39. Economic Intelligence Unit. Cigarette prices in selected cities, 2010. London: The Economist, 2011. [viewed 2011]. Available from: http://www.eiu.com/ 40. Economic Intelligence Unit. Cigarette prices in selected cities, 2011. London: The Economist, 2012. Updated March 2012 [viewed 20 May 2012]. Available from: http://www.eiu.com/ 41. Hyland A, Laux FL, Higbee C, Hastings G, Ross H, Chaloupka FJ, et al. Cigarette purchase patterns in four countries and the relationship with cessation: findings from the International Tobacco Control (ITC) Four Country Survey. Tobacco Control 2006;15(suppl. 3):iii59–64. Available from: http://tc.bmjjournals.com/cgi/content/abstract/15/suppl_3/iii59 42. Beirot C. Tobacco Prices, Taxes and Consumption in Australia. Melbourne, Australia: Victorian Smoking and Health Program, 1993. 43. Hill D, White V and Segan C. Prevalence of cigarette smoking among Australian secondary school students in 1993. Australian Journal of Public Health 1995;19(5):445–9. Available from: http://lib.bioinfo.pl/pmid:8713191 44. Scollo M. Federal excise duty on tobacco--proposals for reform. Melbourne, Australia: Anti-Cancer Council of Victoria, 1998. 45. NSW Retail Tobacco Traders’ Association. Price lists--cigarettes. The Australian Retail Tobacconist 2002;62(no. 8/9 Aug-Sep):13-15. 46. NSW Retail Tobacco Traders’ Association. Price lists--cigarettes. The Australian Retail Tobacconist 2003;63(no. 8/9 Aug-Sep):6-8. 47. NSW Retail Tobacco Traders’ Association. Price lists-cigarettes. The Australian Retail Tobacconist 2003;64(no. 5 Aug-Sep):x-x. 48. NSW Retail Tobacco Traders’ Association. Price lists-cigarettes. The Australian Retail Tobacconist 2005;65(no. 5 Aug-Sep):4-8. 49. NSW Retail Tobacco Traders’ Association. Price lists-cigarettes. The Australian Retail Tobacconist 2006;66(no. 5 Aug-Sep):3-5. 50. NSW Retail Tobacco Traders’ Association. Price lists-cigarettes. The Australian Retail Tobacconist 2007;68(no. 5 Aug-Sep):x-x. 51. NSW Retail Tobacco Traders’ Association. Price lists-cigarettes. The Australian Retail Tobacconist 2008;68(no. 5 Aug-Sep):3-6. 52. NSW Retail Tobacco Traders’ Association. Price lists-cigarettes. The Australian Retail Tobacconist 2009;72(no.5 Aug-Sep):2-6. 53. NSW Retail Tobacco Traders’ Association. Price lists-cigarettes. The Australian Retail Tobacconist 2010;79(no. 6 Nov-Dec 2010 and Jan 2011):1-2. Section: 13.3.3.2 Date of last update: 10 October 2012 Tobacco in Australia: 34 Facts and Issues Technical appendix 13.3.1 Why health groups were concerned about large pack sizes Budget brands in Australia were on average about 10% Table TA 13.3.1 lighter per stick than premium brands, however they Recommended price per stick, Rothmans brands Melbourne, Australia, attracted almost 20% less tax and were more than 20% 1980–81 to 1992–93: cigarettes in pack sizes 20, 25, 30, 35, 40 and 50 and cheaper.11 Table TA13.3.1 sets out the recommended weighted average price 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 Recommended price per stick: recommended account the actual prices for which cigarettes were retail price divided by number of sticks in pack (cents)* Weighted sold and the market share of each brand. 20s 25s 30s 35s 40s 50s average price Figure TA13.3.1.1 plots the recommended prices for 1980–81 5.50 4.70 – – – – 4.67 each price category. 1983–84 7.50 6.50 5.50 – – – 6.70 As can be seen from Table TA13.3.1.1 and Figure 1986–87 10.90 9.00 7.50 – – – 8.68 TA13.3.1.1, while the recommended retail price of 1987–88 12.10 9.90 8.00 8.10 – – 9.42 premium cigarettes sold in packs of 20 rose sharply, 1988–89 12.90 10.70 9.00 8.20 7.30 10.12 1989–90 14.10 11.76 9.90 9.10 7.80 – manufacturers such as Rothmans were able to cushion 1990–91 16.15 13.72 11.50 10.71 9.42 7.94 12.53 consumers by providing cigarettes in larger pack sizes 1991–92 16.95 14.40 12.30 11.50 10.80 9.70 13.33 that were substantially cheaper per stick. Each year, 1992–93 20.75 17.00 16.17 14.86 14.85 13.30 16.42 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). Price per stick, 25 cheapest brand, cents 1200 Price per stick, 20 most popular brand, cents 1000 Price per stick, premium brand, cents 15 800 CPI Tobacco price index 10 600 20s 35s 40s 50s 5 400 25s 30s 200 0 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, Figure TA13.3.2 1980–81 to 1992–93: cigarettes in pack sizes 20, 25, 30, 35, 40 and 50 Recommended retail price most popular brands, cheapest brand per (cents per stick) stick, Melbourne 1973 to 1992 (using 1973 as index year, = 100 for all 42 Source: Beirot C 1993 Table 5.2 (p32) indicators) Note: In current dollars: the price in the applicable year; no adjustment has been made for inflation Source: Updating Beirot 199342 Section: Technical appendix 13.3.1 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products 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 roll- your-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 Section: Technical appendix 13.3.1 Date of last update: 10 October 2012 Tobacco in Australia: 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. Section: Technical appendix 13.3.1 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products in Australia 37 Technical appendix 13.3.2 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 2002 2003 2004 2005 2006 2007 2008 2009 2010 Winfield 25s 0.3700 0.3860 0.4000 0.4200 0.4380 0.4560 0.4800 0.5020 0.6300 Longbeach 40s 0.3350 0.3475 0.3625 0.3750 0.3888 0.4038 0.4300 0.4425 0.5563 Peter Jackson 30s 0.3533 0.3667 0.3800 0.3950 0.4083 0.4250 0.4500 0.4650 0.5867 Horizon 50s 0.3260 0.3390 0.3510 0.3640 0.3800 0.3930 0.4180 0.4310 0.5360 Benson & Hedges 25s 0.3800 0.3980 0.4120 0.4320 0.4500 0.4680 0.4920 0.5140 0.6480 Holiday 50s 0.3160 0.3280 0.3420 0.3550 0.3710 0.3840 0.4080 0.4270 0.5320 Alpine 35s 0.3800 0.3940 0.4060 0.4220 0.4380 0.4560 0.4820 0.5020 0.6300 Dunhill 25s 0.3840 0.4040 0.4200 0.4400 0.4580 0.4760 0.5020 0.5280 0.6480 Marlboro 25s 0.3800 0.3980 0.4140 0.4320 0.4500 0.4680 0.4920 0.5140 0.6480 Escort 35s 0.3443 0.3571 0.3714 0.3886 0.4057 0.4257 0.4529 0.4629 0.5557 Average all brands (unweighted for RRPs) 0.3569 0.3718 0.3859 0.4024 0.4188 0.4355 0.4607 0.4788 0.5971 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 2003 2004 2005 2006 2007 2008 2009 2010 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 0.3391 0.3430 0.3589 0.3742 0.3844 0.4015 0.4235 0.4400 0.5370 % by which reported price different to RRP weighted -4.4% -7.0% -6.3% -5.7% -6.3% -6.4% -6.3% -5.9% -8.6% % by which reported price different to RRP unweighted -5.0% -7.8% -7.0% -7.0% -8.2% -7.8% -8.1% -8.1% -10.1% Section: Technical appendix 13.3.2 Date of last update: 10 October 2012 Tobacco in Australia: 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% -4.6% -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% -5.9% -9.4% 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% -5.3% Escort -2.6% -3.1% -2.5% -4.8% -6.6% -4.5% -2.5% -10.9% -8.6% Source: International Tobacco Control Policy Evaluation Study, unpublished data provided by Timea Partos 2012 Section: Technical appendix 13.3.1 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products in Australia 39 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. 215 220 209 200 177 174 175 175 175 176 180 176 180 162 161 160 146 134 132 140 126 126 120 102 107 100 83 82 82 83 74 75 70 73 80 66 70 60 40 20 0 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 Date of last update: 10 October 2012 Tobacco in Australia: 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 Average weekly Average number of Minutes per Minutes required Price of a single earnings for all hours worked non- Seconds to earn a Minutes to earn week to earn 20 to earn 15 cigarette, leading earnings* Persons managerial, all hours, single cigarette 20 cigarettes cigarettes per cigarettes per brand (cents)* (males and females) all persons, May* day day 1984 321.30 39.25 6.40 28 9 66 9 1985 340.10 39.35 7.16 30 10 70 10 1986 364.10 39.70 8.08 32 11 74 11 1987 381.30 39.90 9.40 35 12 83 13 1988 408.80 40.10 9.92 35 12 82 13 1989 436.30 39.90 10.64 35 12 82 13 1990 464.80 39.50 10.47 32 11 75 11 1991 496.90 39.40 10.47 30 10 70 10 1992 507.90 39.70 11.07 31 10 73 11 1993 518.30 39.90 12.90 36 12 83 11 1994 529.00 39.90 16.17 44 15 102 14 1995 549.20 39.80 17.53 46 15 107 15 1996 563.80 39.80 22.53 57 19 134 18 1997 582.20 39.80 21.90 54 18 126 17 1998 597.70 39.80 22.50 54 18 126 17 1999 607.90 40.05 23.78 56 19 132 15 2000 625.00 40.30 27.03 63 20.9 146 17 2001 658.40 39.90 31.88 70 23.2 162 19 2002 684.60 39.50 33.13 69 22.9 161 18 2003 713.90 39.50 38.00 76 25.2 177 20 2004 749.80 39.50 39.40 75 24.9 174 19 2005 783.20 39.60 41.20 75 25.0 175 19 2006 816.50 39.70 42.80 75 25.0 175 19 2007 857.10 39.70 45.00 75 25.0 175 19 2008 886.60 39.70 46.80 75 25.1 176 19 2009 921.10 39.70 49.60 77 25.7 180 19 2010 973.80 39.40 51.80 75 25.1 176 19 May-10 977.10 39.40 61.80 90 29.9 209 22 2011 1011.80 39.40 65.80 92 30.7 215 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 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products 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 1996 and 1999 relative to 102 Recommended Average money ‘to 100 the amount of money they retail price of a spend on myself’ Year 95 had available to spend on packet of Peter among students 92 91 90 Jackson 30s aged 15 years 86 themselves. This reversed 85 $* $* 83 markedly after 1999, 80 1996 7.20 22.00 since which time pocket 75 1999 7.96 27.00 73 money has increased 70 enough to almost keep 2002 10.60 32.00 1996 1999 2002 2005 2008 2011 2005 11.85 34.00 pace with rising cigarette 2008 13.50 37.31 prices. On average pocket 2011 18.70 45.48 Figure 13.4.2 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 Sources: NSW Retail Tobacco Traders’ Association 1984, 1987, 1990, 1993, (number of cigarettes that could have been purchased 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) Some commentators have Survey of Smoking and Alcohol, 1996 to 2011, CBRC, unpublished * 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 Date of last update: 10 October 2012 Tobacco in Australia: 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 Philippines 72.4 of assessing the relative affordability of cigarettes Argentina 55.6 36 Costa Rica 52.5 internationally. The index calculates the number of Columbia 51.9 cigarettes that can be bought for the price of a Big Mac Pakistan 47.0 hamburger in each country. The index uses figures Brazil 41.6 from the Big Mac index published every few years by Indonesia 35.1 UAE The Economist magazine,37 which lists the price of a 34.2 Saudi Arabia 34.0 Big Mac in US dollars in a range of countries. Despite Ukraine 33.5 distortions caused by trade barriers on beef and other Egypt 30.4 differences in input costs, several academic studies Peru 29.3 have concluded that the Big Mac index provides a Russia 29.3 South Korea 28.5 good indicator of purchasing power in each country, Uruguay 25.7 and an unexpectedly accurate predictor of exchange China 21.7 rates in the long run.38 39 Mexico 21.6 Chile 21.3 A comparison of the Big Mac Index of Cigarette Thailand 19.2 Affordability for 1996 and 200240 showed that 15 of the Latvia 18.0 16 countries included in both analyses reported declines Lithuania 17.1 Switzerland in this indicator of affordability over the period. A 16.4 Turkey 16.2 further update showed that 12 of the 20 countries for India 16.0 which data were collected in both periods showed Czech Republic 15.9 declines between 2002 and 2006.41 42 Israel 15.7 Japan 15.6 Figure 13.4.3 shows relative affordability for 40 Denmark 15.5 countries for which data were available in 2011 on Sweden 15.3 both Big Mac and cigarette prices. Hungary 14.8 Malaysia 14.2 Figure 13.4.3 indicates that in 2011 Australia ranked Sri Lanka 14.1 fourth in the Big Mac Index of Cigarette Affordabilityi United States 13.2 Poland 13.1 meaning that cigarettes in Australia were much less South Africa 11.8 affordable relative to the price of McDonald’s fast Norway 9.0 foods than cigarettes and McDonald’s fast foods in Canada 8.8 most other countries. Australia 8.1 Singapore 8.1 New Zealand 7.8 Britain 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 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products 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. 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Australian Bureau of Statistics. 6306.0 Distribution and Composition of Employee Earnings and Hours-Australia, May 1990, Table 16 Composition of average weekly earnings and average weekly hours paid for Non-Managerial Employees, Industries. Canberra: ABS, 1990. 10. Australian Bureau of Statistics. 6306.0 Distribution and Composition of Employee Earnings and Hours-Australia, May 1991, Table 12 Composition of average weekly earnings and average weekly hours paid for Non-Managerial Employees, Industries. Canberra: ABS, 1991. 11. Australian Bureau of Statistics. 6306.0 Distribution and Composition of Employee Earnings and Hours-Australia, May 1992, Table 12 Composition of average weekly earnings and average weekly hours paid for Non-Managerial Employees, Industries. Canberra: ABS, 1992. 12. Australian Bureau of Statistics. 6306.0 Distribution and Composition of Employee Earnings and Hours-Australia, May 1993, Table 11 Composition of average weekly earnings and average weekly hours paid for Non-Managerial Employees, States and Territories. Canberra: ABS, 1993. Available from: http://www.abs.gov.au/AUSSTATS/[email protected]/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/[email protected]/allprimarymainfeatures/5C1FEAB47E5BB381CA25722E001B0399?opendocument 14. Australian Bureau of Statistics. 6306.0 Employee Earning and Hours, Australia, May 1996, Table 17 Earnings and Hours, Full-time Adult Non-Managerial Employees, Occupation. Canberra: ABS, 1996. Available from: http://www.abs.gov.au/AUSSTATS/[email protected]/allprimarymainfeatures/7BA0CD3439BA16A9CA25722E001B0065?opendocument 15. Australian Bureau of Statistics. 6306.0 Employee Earning and Hours, Australia, May 1998, Table 17 Earnings and Hours, Full-time Adult Non-Managerial Employees, Occupation. Canberra: ABS, 1998. Available from: http://www.abs.gov.au/AUSSTATS/[email protected]/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 employees- occupation. ABS, 1999. Available from: http://www.abs.gov.au/AUSSTATS/[email protected]/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/[email protected]/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/[email protected]/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/[email protected]/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/[email protected]/mf/6302.0/ 23. NSW Retail Tobacco Traders’ Association. Price lists--cigarettes. The Australian Retail Tobacconist 1980s;41 to 50(February editions):x-x. 24. NSW Retail Tobacco Traders’ Association. Price lists--cigarettes. The Australian Retail Tobacconist 1990s;51 to 59(February editions):x-x. 25. NSW Retail Tobacco Traders’ Association. Price lists--cigarettes. The Australian Retail Tobacconist 2000s;60 to 79(February editions):x-x. 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 Date of last update: 10 October 2012 Tobacco in Australia: 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 35. Eriksen M, Mackay J and Ross H. The tobacco atlas. 4th edn. New York and Atlanta, Georgia: World Lung Foundation and American Cancer Society, 2012. Available from: http://www. 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 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products in Australia 45 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 Figure 13.5.2 Tobacco sales compared with price of a pack of cigarettes, US Tobacco sales compared with price of a pack of cigarettes, South Africa, 1970–2007 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 Date of last update: 10 October 2012 Tobacco in Australia: 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 Tobacco CPI 3000 per person 15 years and over, gms 600 2500 500 2000 400 1500 300 1000 200 500 100 0 0 1973 1975 1977 1979 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Figure 13.5.3 Real tobacco prices and tobacco consumption in Australia, 1972–73 to 2010–11 Sources: ABS 2012,10 Scollo 20129 2500 220 200 Minutes required 2000 180 2500 700 Cigarette equivalents 160 Tobacco products excised Tobacco CPI per person 15 years and over 140 per person 15 years and over, gms 600 1500 2000 120 500 100 1000 80 1500 400 60 500 40 1000 300 20 200 0 0 500 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 100 0 0 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 Figure 13.5.5 Affordability of cigarettes and apparent tobacco consumption in Australia, 1998–99 to 2010–11 Figure 13.5.4 9 Real tobacco prices and tobacco consumption in Australia, 1990–91 to Sources: Refer to sources for Figure 13.4.1; and Scollo 2012 2010–11 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; 10 9 Sources: ABS 2012, Scollo 2012 Scollo estimates of numbers of cigarettes dutied based on reports from the Australian Note: Based on estimates of weight of tobacco dutied9 Bureau of Statistics and Australian Taxation Office9 Section: 13.5.1 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products 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 60 prices of tobacco products are a key factor motivating 54.0 their attempts to quit or cut down smoking. Data from 50 the National Drug Strategy Household Survey shows high 43.9 44.1 levels of agreement that price was an important factor 40 35.8 in 2001 shortly after the 1999–2001 reforms in tobacco 30 taxation. Levels fell in the subsequent surveys and then increased again following the large increase in excise and 20 customs duty in April 2010—see Figure 13.5.6. 10 0 13.5.2.1 2001 2004 2007 2010 Smoking cessation Figure 13.5.6 A study in New South Wales used data from the Cancer Percentages of smokers and recent ex-smokers agreeing that tobacco Institute NSW Tracking Survey (which interviews 50 prices were an important factor motivating their recent attempts to smokers and recent quitters each week by telephone) to change smoking behaviour examine rates of recent quitting activity (stopping smoking Sources: AIHW 2002,11 2005,12 200813 and 201113 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 product- related 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 product- related changes and less likely to make smoking-related changes. The proportion of smokers making only product- related 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 Date of last update: 10 October 2012 Tobacco in Australia: 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 Looked for Bought Changed Switched Changed Smoked Changed cheaper smaller Bought Bought purchasing Tried to a Bought smoking fewer purchasing source of number of cigarettes unbranded behaviour to quit cheaper R.Y.O. behaviours cigarettes behaviour regular cigarettes in bulk tobacco without brand brand in one go smoking change All (n=604) 45.0 28.2 33.7 48.2 14.5 21.0 21.4 13.8 9.0 3.0 18.0 Sex Males (n=294) 42.6 28.2 28.9 45.7 10.4 17.0 20.4 13.6 9.6 3.5 18.8 Females (n=349) 47.8 28.2 39.3* 51.1 19.3* 25.6t 22.5 14.1 8.3 2.5 17.1 Age group 18 to 29 yearsa (n=162) 49.7 36.5 31.4 66.8 22.5 26.7 26.8 18.4 19.0 3.0 27.2 30 to 49 yearsb (n=279) 44.0 26.5at 33.7 39.4a** 10.8a* 17.3at 17.6at 11.1at 5.6a** 3.1 12.9a** 50 plus (n=163) 42.1 22.7a* 35.8 44.9a** 12.9at 21.6 22.5 13.8 4.9a** 3.0 17.6at SEIFA Low SESc (n=223) 50.5 33.4 37.8 48.9 13.4 20.2 24.8 14.5 8.7 3.3 17.8 Mid SES (n=253) 44.5 26.1 32.4 48.7 17.1 22.2 17.6 12.1 9.7 3.4 16.1 High SES (n=128) 36.7ct 23.2ct 29.0 46.1 11.4 19.9 22.8 16.1 8.1 1.9 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 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products 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 350 120 Consumption per student evidence of reduced tobacco consumption corresponding 300 100 with significant declines in the affordability of cigarettes A ordability 250 and other tobacco products, both among adults19 and 80 200 among children. 60 150 Figure 13.5.7 plots reported consumption per student 40 against the affordability of cigarettes for young people. 100 Affordability is calculated by dividing the average amount 50 20 of pocket money reported among students aged 15 years by 0 0 the cost per stick of the leading brand of cigarettes among 1990 1993 1996 1999 2002 2005 2008 2011 the same group. Figure 13.5.7 shows that the reported number of cigarettes Figure 13.5.7 smoked per secondary school student in Australia Reported consumption per secondary school student in Australia per increased between 1990 and 1996 in line with increases in year vs. affordability, 1990–2011 (number of cigarettes affordable per affordability. It dropped between 1996 and 1999 despite a week to an average 15-year-old) small increase in affordability. (The hard-hitting National Sources: Chikritzhs et al 1997,20 NSW Retail Tobacco Traders’ Association 1990s,21 Hill and Alcock Tobacco Campaign was most prominent between May 1999,22 Hill, White and Effendi 2002,23 White and Hayman 200424 and 2006,25 White 26 27 1997 and December 1998.) It then dropped even more and Smith 2009, and White and Bariola 2012 dramatically between 1999 and 2005 in line with a further Note: reported consumption for those who smoke weekly is divided by all secondary school students to calculate per capita consumption. big drop in affordability following the reforms to Australia’s tax system between 1991 and 2001 (see Section 13.2). 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 policies implemented over the same period. Alchin 1992 Harrison, Chetynd 1990 A number of economic studies were Herington 1990 published in the 1970s to early 1990s Chetwynd et al 1989 attempting to quantify price elasticity of McLeod demand in Australia. These were summarised Johnson 1986 by economist Terry Alchin in 199228—see Clements, McLeod, Slevanathan 1985 Figure 13.5.8. Salter 1980 Koutoyannis 1963 All these estimates were very close to the -0.7 -0.6 -0.5 -0.4 -0.3 -0.2 -0.1 0.0 –0.4% international approximate mean for developed country established by the World Bank in 1999.29 Figure 13.5.8 Early price elasticity of demand estimates for Australia In a University of Melbourne study Source: Alchin 199228 examining factors affecting sales of tobacco products in Australia published in 1999,30 Section: 13.5.4 Date of last update: 10 October 2012 Tobacco in Australia: 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. 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Available from: http://tc.bmjjournals.com/cgi/content/abstract/15/suppl_3/iii3 19. 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. Available from: http://tc.bmjjournals.com/cgi/content/abstract/12/suppl_2/ii59 20. 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. 21. NSW Retail Tobacco Traders’ Association. Price lists--cigarettes. The Australian Retail Tobacconist 1990s;51 to 59(February editions):x-x. 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/ Publishing.nsf/content/school08 Section: 13.5.4 Date of last update: 10 October 2012 Tobacco in Australia: 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/ Publishing.nsf/content/school11 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. 29. 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 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 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products 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 Excise duty Duty paid dutied (customs paid in constant Year ended (excise only) 13.6.1 30 June plus excise) dollars million kg $,000* $,000† Federal revenue from tobacco 1965 26.89 188 980 1 259 867 1970 29.61 245 860 1 429 419 products to June 2000 1975 33.09 472 914 1 758 045 1980 31.46 703 214 1 555 783 As described in Section 13.2.1, the value in real terms of 1981 31.53 706 812 1 430 070 the federal duty payable on tobacco products remained 1982 31.90 724 410 1 327 366 fairly steady in the early part of the century but fell in 1983 30.37 794 039 1 304 912 the late 1970s and the early 1980s due to the effects 1984 29.83 856 245 1 316 794 of inflation. The value of the duty was restored with 1985 29.32 889 017 1 311 235 indexation in 1983 and once again remained steady until a 1986 29.17 961 072 1 307 581 series of increases in the early 1990s. 1987 28.12 1 009 203 1 256 009 Table 13.6.1 shows the total revenue received by the federal 1988 27.85 1 091 776 1 265 827 government from excise duty on tobacco products for 1989 27.43 1 145 787 1 237 685 selected years until 1980 and then for every year until 2000. 1990 28.01 1 262 427 1 262 427 It shows the amount of tobacco dutied in each year, the 1991 26.44 1 274 043 1 210 205 total revenue from excise duty collected in current dollars, 1992 26.76 1 330 278 1 240 063 and the same total expressed in constant 1989–90 dollars. 1993 24.01 1 299 711 1 199 272 1994 23.70 1 347 842 1 221 425 Figure 13.6.1 plots excise collected per person (Australians 1995 23.48 1 509 058 1 324 897 of all ages) in $1989–90 for every fifth year since 1965. 1996 21.18 1 614 386 1 359 769 Total revenue increased in current dollars in every year 1997 21.52 1 713 085 1 424 307 apart from 1993, 1998 and 1999. In real terms, revenue 1998 20.26 1 648 740 1 371 094 fell between 1980 and 1986 and fluctuated between 1987 1999 20.42 1 633 736 1 341 051 and 2000. Revenue from federal duty was highest in real 2000 n/a 1 658 906 1 330 051 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 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 declined in real terms until, by 1999–2000, it was just a Advisory Board 1994,2 Willis1995,3 Australian Taxation Office 20064 little over half of what it had been at its peak in 1975. * Current rate: the rate in the applicable year; no adjustment has been made for inflation The large real reduction in per capita federal revenue † Expressed in 1989–90 dollars between 1965 and 2000 results from an 85% increase in Note: Figures include only revenue from excise duty. Revenue from customs duty would have the population,5 and a 20% reduction in the total amount added a further 5% to 10% to these figures—for instance an extra $92 million in 1998–99. Section: 13.6.1 Date of last update: 10 October 2012 Tobacco in Australia: 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). 140 13.6.2 $127 120 $114 $111 $106 State revenue from tobacco 100 $83 80 $74 $73 products to June 2000 $69 60 Over the late 1980s and early 1990s, licence fees on tobacco wholesalers or retailers were an increasingly important 40 source of revenue for state and territory governments. 20 Table 13.6.2 shows the revenue to each jurisdiction between 0 1974, when business franchise fees on tobacco were first 1965 1970 1975 1980 1985 1990 1995 2000 introduced in Victoria, and 1997, when the fees were effectively invalidated by the High Court ruling (see Section Figure 13.6.1 13.2.2 for a full explanation). It also shows revenue from Excise collected per person, 1965 to 2000, Australia i 1997–98 to June 2000 from tobacco replacement fees. Sources: Australian Bureau of Statistics 2010 Australian Bureau of Statistics, as for Table 13.6.1; Tobacco replacement fees ended in July 2000 under the 3201.0 Population by Age and Sex, Australia, States and Territories5 terms of the Intergovernmental Agreement on the Reform 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 NSW Vic Qld WA SA Tas ACT NT Total Year ended NSW Vic Qld WA SA Tas ACT NT Total 30 June $million* 30 June $million* 1975 – 1 – – 1 – – – 2 1990 282 174 126 93 55 33 11 13 788 1976 19 12 – 4 6 – – – 41 1991 297 224 136 111 85 34 11 17 916 1977 31 25 – 8 7 – – – 71 1992 388 268 159 108 92 34 16 18 1 058 1978 36 26 – 8 8 – – – 78 1993 585 360 271 129 145 41 22 22 1 568 1979 39 30 – 9 10 – – – 88 1994 633 446 367 212 192 63 31 31 1 971 1980 42 35 – 10 12 – – – 98 1995 647 439 403 248 185 76 33 36 2 067 1981 45 38 – 10 11 2 – – 106 1996 871 591 501 282 212 83 39 43 2 622 1982 46 42 – 12 15 4 – 1 120 1997 947 651 554 293 236 86 41 48 2 855 1983 51 48 – 17 16 5 – 2 139 1998a 82 59 48 24 21 7 4 4 2 497 1984 70 84 – 47 29 10 – 2 241 1998b 811 544 476 277 224 80 36 47 249 1985 78 105 – 50 39 14 – 5 291 1998 total 894 604 524 301 245 88 40 51 2 746 1986 113 107 – 57 39 19 5 9 349 1999 1044 701 613 357 289 104 47 60 3 214 1987 157 113 – 62 41 19 8 10 410 2000 1083 727 635 370 299 108 49 62 3 332 1988 170 113 – 65 44 26 8 10 436 2001 21 14 12 7 6 2 1 1 64 1989 204 127 50 71 51 27 9 11 548 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 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products 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 13.6.4 Annual customs revenue from tobacco products, Australia, 1999–2000 to 2010–11: cigarettes, cigars, other tobacco products and total Table 13.6.3 Annual excise revenue from tobacco products, Australia, 2000–01 to 2010–11 Customs revenue Total customs revenue Customs Customs Year from smoking from cigarettes, cigars, revenue from revenue from ending tobacco and smoking tobacco and cigarettes cigars Total excise revenue Total excise revenue June smokeless tobacco other tobacco products Year from cigarettes, from cigarettes, $million* ending cigars, smoking cigars, smoking 1999 63.48 22.27 168.59 254.34 June tobacco and other tobacco and other 2000 132.58 22.82 130.94 286.34 tobacco products tobacco products 2001 174.31 24.09 178.05 376.45 $million* $million† 2002 170.34 25.54 203.46 399.34 2001 4 637.48 4 376.10 2003 205.97 27.56 216.75 450.28 2002 4 840.58 4 441.09 2004 147.14 27.89 272.94 447.17 2003 5 212.26 4 638.78 2005 194.45 31.05 293.23 518.74 2004 5 240.00 4 556.19 2006 209.26 28.24 302.76 540.26 2005 5 293.00 4 492.66 2007 237.4 28.26 317.74 583.40 2006 5 290.00 4 350.95 2008 238.75 22.98 345.17 606.91 2007 5 387.00 4 300.98 2009 291.04 23.02 332.72 646.80 2008 5 657.00 4 352.18 2010 334.60 26.16 352.31 713.07 2009 5 711.00 4 237.36 2011 620.87 30.00 446.52 1097.37 2010 5 742.00 4 140.33 2011 6 420.00 4 560.69 2012 6 449.00 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 Sources: Australian Taxation Office 2006,4 201114 and Swan 201215 5372.0.55.001 – International Merchandise Trade: Confidential Commodities List * Current rate: the rate in the applicable year; no adjustment has been made 5439.0 – International Merchandise Imports, Australia for inflation 5487.0 – Information Paper: International Merchandise Trade Statistics, Australia: Data Confidentiality, 1999 † Expressed in 2000 dollars 5489.0 – International Merchandise Trade, Australia, Concepts, Sources and Methods, 2001 5498.0.55.001 – Information Paper: Ensuring International Trade Data Quality, 2008 ** Listed as $6 387 in the Final Budget Outcomes released six months earlier in October 2011 * Current rate: the rate in the applicable year; no adjustment has been made for inflation Section: 13.6.3 Date of last update: 10 October 2012 Tobacco in Australia: 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). Table 13.6.5 13.6.4 Federal and state/territory revenue arising from excise duty, tobacco licensing fees, tobacco replacement fees and GST, 1974–75 to Total federal and state revenue 1999–2000, Australia from tobacco products Total federal and Table 13.6.5 sets out total excise revenue from tobacco Federal excise Total state/ Year state tax revenue revenue* territory revenue products combined with total revenue from state fees and ending from tobacco i tobacco replacement payments until 2000. June 30 $,000† From July 2001 under the new tax system tobacco 1975 472 914 2 496 475 410 replacement payments to states and territories ceased, and 1976 541 537 40 922 582 459 all federal excise duty on tobacco products was retained 1977 561 310 70 533 631 843 by the federal government. All revenue from the GST has 1978 559 228 77 890 637 118 been distributed to states in line with the terms of the 1979 653 409 88 209 741 618 Intergovernmental Agreement.6 Revenue from the GST 1980 703 214 98 223 801 437 on tobacco products is not reported separately from other 1981 706 812 105 968 812 780 GST revenue but can be calculated based on information 1982 724 410 120 374 844 784 about revenue from tobacco sales. Estimated total revenue 1983 794 039 138 906 932 945 from the GST on tobacco products is also set out in 1984 856 245 241 386 1 097 631 Table 13.6.6. The proportion of revenue going to each 1985 889 017 290 908 1 179 925 state and territory is adjusted for various demographic 1986 961 072 348 880 1 309 952 and economic factors as per the Intergovernmental 1987 1 009 203 410 025 1 419 228 6 Agreement, spelled out in detail each year in Part IV of 1988 1 091 776 435 583 1 527 359 the Federal Financial Relations sections of Final Budget 1989 1 145 787 548 297 1 694 084 19ii Outcome reports. 1990 1 262 427 788 323 2 050 750 Data on revenue from excise and customs duty (from 1991 1 274 043 916 050 2 190 093 Tables 13.6.3 and 13.6.4) are provided in Table 13.6.6 1992 1 330 278 1 057 781 2 388 059 along with estimates of GST revenue from the sale of 1993 1 299 711 1 568 203 2 867 914 cigarettes and other tobacco products since 2000–01. This 1994 1 347 842 1 971 223 3 319 065 represents total tax revenue from sales of tobacco products 1995 1 509 058 2 067 000 3 576 058 in Australia for the 11 years to 2010–11. 1996 1 614 386 2 622 000 4 236 386 1997 1 713 085 2 855 684 4 568 085 Total revenue in 2010 was no higher than it was in 1998 1 648 740 ‡2 746 353 4 395 093 2001. Revenue has increased by about 13% in real terms 1999 1 633 736 3 213 700 4 847 436 between 2001 and 2011. 2000 1 658 906 3 332 200 4 991 106 Increases in state and territory licence fees resulted in considerable real increases in state and territory Sources: Australian Tobacco Marketing Advisory Council 1994,2 Appendices O and Q; ABS 19978 and income from this source, in contrast to the much more 21 iii 2006 Table 4, 1999–2000, Table 5, 2000–01; Victorian Office of Revenue Compilations limited growth in federal income. Between 1984–85 and 1997;9 Willis3 1998,10 (and Fahey) 1999,11 200012 and 2001;13 Australian Taxation Office 1999–2000, revenue to the federal government almost 2007;21 Costello 200722 doubled, but revenue to states and territories increased * Revenue from customs duty is not included in these figures. 10-fold. Revenue to both the federal government and to † Current rate: the rate in the applicable year; no adjustment has been made for inflation ‡ The revenue going to state and territories between 1997–98 and 2000–01 is in the form of tobacco revenue replacement grants. i Revenue from customs duty is not included in this table. ii 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 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products in Australia 57 states and territories has also increased Table 13.6.6 since 2000–01 in current dollar terms. Annual revenue from tobacco products, Australia, 2000–01 to 2010–11: excise revenue, Total revenue per capita (federal and state customs revenue and estimated GST revenue combined) in constant dollar terms is plotted in Figure 13.6.3. Total excise and Estimated Total estimated Total estimated As can be seen from Figure 13.6.3, in real customs revenue from GST revenue revenue from revenue from Year terms total revenue per head of population cigarettes, cigars, from sales excise and customs excise and customs ending smoking tobacco and of tobacco duties and GST on duties and GST on increased sharply between 1990 and 1995 June and then again between 1995 and 2000. other tobacco products products tobacco products tobacco products Total revenue per head of population in $million* $million 2010† 2010 was lower in real terms than it was in 2001 5 013.93 783.27 5 797.21 7 469.37 2002 5 239.93 821.18 6 061.11 7 984.58 2000 and 2005. 2003 5 662.54 862.90 6 525.45 7 929.25 2004 5 687.96 875.81 6 563.78 7 794.34 13.6.5 2005 5 811.73 932.81 6 744.64 7 816.35 2006 5 830.27 940.00 6 770.27 7 602.88 Revenue from tobacco 2007 5 970.40 956.36 6 926.76 7 558.08 2008 6 263.91 989.09 7 253.00 7 654.13 taxes as a proportion 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 of total government 2011 7 517.37 1 225.36 8 742.74 8 480.07 revenue Sources: Excise and customs revenue data to 2003 provided by email by the Australian Taxation Office to K Lindorff of The Cancer It is sometimes said that governments Council Victoria 2006; Australian Taxation Office 200721; GST revenue calculated from the value of retail sales on tobacco are reluctant to tackle tobacco use in the products, Australian Bureau of Statistics 2011 ABS 5206.0 Australian National Accounts, Private Final Consumption23 community because of reliance on income * Current rate: the rate in the applicable year; no adjustment has been made for inflation from tobacco taxes. Table 13.6.7 sets † Expressed in 2010 dollars 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. 7000 Federal 250 $6,455 $225 State/ $209 6000 Territorial $5,812 $197 200 $174 5000 4000 150 $120 $121 $120 $3,332 $110 3000 100 $2,067 2000 $1,059 $1,659 $1,262 $889 $933 $1,037 50 1000 $703 $788 $473 $291 $98 0 $2 0 1975 1980 1985 1990 1995 2000 2005 2010 1975 1980 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 Sources: As for tables 13.6.5 and 13.6.6 combined): 1975 to 2010, Australia Notes: Federal data prior to 2000 is excise revenue only. Data for 2000, 2005 and 2010 includes Sources: As for Table 13.6.6 revenue from customs duty. Customs duty prior to 2000 was very low. Note: Revenue expressed in 1989–90 dollars Section: 13.6.5 Date of last update: 10 October 2012 Tobacco in Australia: 58 Facts and Issues As can be seen from Table 13.6.7, tobacco tax revenue Table 13.6.7 as a percentage of total government revenue declined Tobacco tax revenue as a percentage of total government revenue: Australian sharply for states and territories following introduction government and state and territory governments combined, 1998–99, of the reforms associated with the new tax system.7 2003–04 and 2010–11 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 1998–99 2003–04 2010–11 government revenue—less than 2.5% in 2010–11. $million* Australian government Tobacco tax revenue (customs and excise) 1 888.1 5 688.0 7 517.37 13.6.6 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 International comparisons State and territory governments combined Tobacco tax revenue †3 213.6 875.8 1 225.4 in tobacco tax revenue as a Total government revenue 34 426.0 40 394.0 58 121.0 Tobacco tax as a % of total revenue 9.3 2.2 2.1 proportion of total government Total Australian and state and territory governments revenue Tobacco tax revenue 5 101.8 6 563.8 8 742.7 Total government revenue 171 648.0 249 954.0 346 196.0 Table 13.6.8 lists tobacco excise tax revenue as a Tobacco tax as a % of revenue 3.0 2.6 2.5 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 * Current rate: the rate in the applicable year; no adjustment has been made for inflation of revenue from tobacco to total government revenue † This figure is from the Final Budget Outcomes Statement. The figure listed in the ABS publication was comparable in percentage terms in Australia was $3 217.0, possibly a transcription error. compared with most other high-income countries for which data are available, but lower than for most middle-income and low-income countries. Table 13.6.8 Tobacco excise tax revenue as a proportion of total tax revenue, selected countries, 2005 % tobacco excise made up of % tobacco excise made up of total government revenue in total government revenue in EU member states and other EU member states and other selected countries selected countries Sweden 0.7 Spain 2.9 Slovenia 0.8 Hungary 3.2 Denmark 0.9 Estonia 3.4 Finland 1.2 Cyprus 3.6 Netherlands 1.5 Portugal 3.7 Belgium 1.8 Slovakia 4.0 Lithuania 1.8 Czech Republic 4.0 Ukraine 1.8 Poland 4.8 Austria 2.0 Malta 4.9 France 2.1 Greece 5.6 United Kingdom 2.2 Romania 5.8 Italy 2.3 Bulgaria 6.8 Latvia 2.3 Luxembourg 7.3 Ireland 2.6 Indonesia (2007) 8.4 Germany 2.8 Source: European Commission 200825 Section: 13.6.6 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products 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. 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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/2011- 12/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. 18. Australian Bureau of Statistics. International trade, customised report. Australian clearance data on tobacco products by quantity, by customs value, 2004-05 to 2005-06. Canberra: ABS, 2007. 19. Australian Bureau of Statistics. International trade, customised report. Australian clearance data on tobacco products by quantity, by customs value, 2006-07 to 2010-11. Canberra: ABS, 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/[email protected]/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 Date of last update: 10 October 2012 Tobacco in Australia: 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 well- known 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 Definitions as used in this section Duty-free Purchases that have no federal excise or import duties applied to the sale price. Purchases without duty payment are subject to restrictions on volume Free zone 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 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products in Australia 61 Terms Definitions as used in this section Illicit trade 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 < Section: 13.7.1.1 Date of last update: 10 October 2012 Tobacco in Australia: 62 Facts and Issues < 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 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products 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 Date of last update: 10 October 2012 Tobacco in Australia: 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 Theprices 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 Thecosts for the supplier to be involved in the illicit tobacco market include < Nature of international trade Illicit trade can be more attractive in situations where < 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 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products 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 Date of last update: 10 October 2012 Tobacco in Australia: 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: < 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 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products in Australia 67 under-reporting of consumption by smokers. It is unknown whether the extent of such under- reporting 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 Date of last update: 10 October 2012 Tobacco in Australia: 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 state- specific 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 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products 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 scare- mongering? 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 inSection 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 Date of last update: 10 October 2012 Tobacco in Australia: 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 See YouTube clip at http://www.bat.com/group/sites/UK__3MNFEN.nsf/vwPagesWebLive/DO6TNKVW?opendocument&SKN=1&TMP=1 ii See Section 19 http://www.tobaccoatlas.org/uploads/Images/PDFs/TA4_pdf_sourcesandmethods.pdf Section: 13.7.4 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products 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 inSection 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 Date of last update: 10 October 2012 Tobacco in Australia: 72 Facts and Issues < 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 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products in Australia 73 unlikely to be representative. Table 13.7.1 They also suggest that consultants Estimates of the quantities of tobacco grown, diverted to the illegal market and seized by the Australian have prepared estimates based Taxation Office, 2000–01 to 2004–05, (kgs) on quantities purchased by frequent users rather than all users. The estimates fail to take 2000–01 2001–02 2002–03 2003–04 2004–05 account of the trends reported in Legally grown tobacco, kgs 4 068 180 3 808 148 3 496 505 3 598 880 Estimate of diverted tobacco, kgs (rounded to nearest Australian National Drug Strategy 243 000 295 000 313 000 347 000 Household Surveys102,103 showing thousand) that the majority of people Total seized illegal tobacco, cut and leaf, kgs: 129 554 33 637 59 525 68 205 22 444 who have ever used unbranded tobacco no longer use it and that Source: The Auditor General, 200696 among those that do still use it the majority use it only occasionally. The Australian Taxation Table 13.7.2 Office (ATO) put considerable resources Number of detections and quantities of tobacco and numbers of cigarettes seized by into pursuing growers and distributors Australian customs authorities, 2006–07 to 2010–11 of chop-chop and its annual reports suggest that it believed that these activities successfully prevented any major growth in 2006-07 2007-08 2008-09 2009-10 2010-11 diversions of tobacco to the illegal market No. detections loose tobacco 18 28 in Australia— see Technical Appendix 13.7.2 for further details. The Australian Quantity of loose tobacco, ‘000 kgs 67 287 180 311 258 Taxation Office’s estimates of the quantities No. detections cigarettes 15 14 of tobacco grown and the quantities diverted Quantity of sticks, ‘000 pieces 42 000 107 000 50 176 68 728 82 000 to the illegal market are presented in Table Total number of seizures: 19 58 33 42 55 13.7.1. The table also includes records of the quantities seized by the ATO and other law enforcement agencies. Source: Australian Customs and Border Protection annual reports104-107 In its 2007 report on compliance activities,34 the ATO stated: ‘The end of Australia’s legal tobacco Table 13.7.3 Responses to the question ‘How often do you smoke this type of tobacco?’, current smokers growing industry in 2006 has 14 years and over, 2010 meant that the mischief involved in illicit tobacco has changed from the diversion of legally grown tobacco % of current % of current users to illicit importation and growing. % of all current smokers who have of unbranded smokers We are monitoring this issue and ever used illicit tobacco will undertake enforcement action Currently use every day, some 4.9% 20.5% 100% with the Australian Customs days or only occasionally Service as required.’ Have used it but no longer use it 19.0% 79.5% n.a. Reports on seizures of tobacco products Have never used unbranded 76.1% n.a. n.a. by the Customs and Border Protection Total: 100% 100.0% 100% Service since 2006–07 are set out in Table 13.7.2. 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 Date of last update: 10 October 2012 Tobacco in Australia: 74 Facts and Issues Table 13.7.4 Table 13.7.5 Responses to question to those who have ever used, ‘Would you say that when Percentage of Australians 14 years and older (smokers and all you smoke you...?’ Australians) reporting currently using unbranded tobacco and using ‘half the time’ or more often % of current users % of all of unbranded current Currently using Using unbranded tobacco tobacco smokers unbranded tobacco half the time or more Only smoke this type of tobacco 12.7% 0.6% % of all % of total % of all % of total Mainly smoke this type of tobacco 11.9% 0.6% current Australian current Australian smokers population smokers population Smoke this tobacco about half of the time 6.1% 0.3% 2004 not reported not reported not reported 0.4% Smoke this tobacco less than half the time 2.2% 0.1% 2007 6.1% 1.4% 1.1% 0.2% Occasionally smoke this type of tobacco 67.1% 3.1% 4.9% 1.1% 1.5% Have never used unbranded or no longer use it 95.3% 2010 0.3% Total (valid cases only): 100% 100% Source: Table 3.11, p 39 and A1.2 p 203, AIHW 2011103 and National Drug Strategy Household Survey 2004, AIHW 2005108 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 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 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products 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 Date of last update: 10 October 2012 Tobacco in Australia: 76 Facts and Issues This information is of little help in Table 13.7.6 determining the total extent of use in the Estimated penetration of contraband cigarettes in Australia, 1998–99 to 2004–05, Australian market. It is not known whether (millions of cigarettes) seizures represent a tiny per cent of the total amount of contraband stock coming into the 115 country or—at the other extreme—all or Estimated actual Estimated Penetration of close to all of the stock that would have been Year Legal sales consumption of contraband sales contraband sales imported had the stock not been seized. cigarettes 1998–99 2.5% Table 13.7.6 below provides an estimate 1999–00 3.0% published by Euromonitor International 2000–01 3.1% of the penetration of counterfeit and other 2001–02 3.1% contraband cigarettes in Australia. 2002–03 3.3% No information is provided about the 2003–04 3.6% source of the data for this estimate so it 2004–05 Data available on subscription to Euromonitor 4.0% is impossible to judge its accuracy. The 2005–06 4.3% industry-sponsored Deloitte reports put 2006–07 3.3% the size of the market for contraband and 2007–08 3.1% counterfeit cigarettes in Australia at 1.3% in 2008–09 3.1% 201097 and 4.4% in 2011.99 2009–10 3.4% 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 80.3% 76.9% 78.8% counterfeit cigarettes Believe that they may have purchased 19.7% 23.1% 21.2% 13.7.7.3 counterfeit cigarettes Frequency at which they bought cigarettes they believed may have been How reliable are consumer estimates of use counterfeit: of contraband cigarettes? Once a month 4.6% 4.7% 4.6% Once every six months 7.0% 8.3% 7.6% It is likely that respondents inadvertently over-estimated Once a year 8.1% 10.1% 9.0% the extent of their use in both the Roy Morgan survey used in the Deloitte report to estimate extent of 103 population use, and in the National Drug Strategy Source: National Drug Strategy Household Survey 2010, AIHW 2011 Household Survey. Levels of perceived use in both surveys could be unrealistically high due to people making any of the following erroneous assumptions: i 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 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products in Australia 77 < Brand Local manufacturer Country of origin RRPMay/June 2011 Australia (in addition to Malaysia and Dunhill British American Tobacco $13.90 for 20s, $17.20 for 25s Singapore) Winfield British American Tobacco Australia $13.45 for 20s, $16.55 for 25s But note: Brand Local importer Country of Origin Overseas manufacturer RRP as at May/June 2011 Carnival Pt Korea Pty Ltd Korea KT&G South Korea $9.90 Chunghwa Patron Group (Australia) Ltd China Shanghai Cigarette Factory $11.40 DJ Mix Special Feel Trojan Trading Company Hong Kong Not stated $12.64 Double Happiness Patron Group (Australia) Ltd China Shanghai Cigarette Factory $9.15 Esse Blue Pt Korea Pty Ltd Korea Not stated $10.70 Golden Deer Patron Group (Australia) Ltd China Not stated Panda Patron Group (Australia) Ltd China Shanghai Cigarette Factory $17.00 Peony Patron Group (Australia) Ltd China Shanghai Cigarette Factory Raison Blue Pt Korea Pty Ltd Korea KT&G South Korea $10.70 Shuangxi Everbright Int’n Trading Co Pty Ltd China China Tobacco Guandong Industry Corp $9.60 Yuxi ATA International Pty Ltd ATA International Not stated $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 Date of last update: 10 October 2012 Tobacco in Australia: 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 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products 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. Table 13.7.9 Tobacco industry estimates of size of illicit tobacco market in Australia based on consumer surveys, 2007, 2009, 2010 and 2011 13.7.8.4 Estimates based on Mid 2011 surveys of consumers 2007 2009 2010 (not 2011 released) Unbranded, ‘000 kg 1 827 2 119 2 430 2 193 1 427 Contraband, ‘000 kg 133 116 212 407 Tobacco industry Counterfeit, ‘000 kg 228 134 223 430 Total contraband & counterfeit, ‘000 kg 229 250 435 837 estimates based on Overlap between contraband & counterfeit 99.6% 0% 0% 0% (calculated from reported figures attached) consumer surveys, 2007, Total illicit market, ‘000 kg 1 827 2 348 2 680 2 628 2 264 2009, 2010 and 2011 Total legal market, ‘000 kg 28 547 19 089 16 853 16 853 16 861 Total illicit & legal market, ‘000 kg 30 374 21 341 19 399 19 258 18 695 The estimates prepared for Unbranded share of legal market 6.4% 11.1% 14.4% 13.0% 8.5% Australian tobacco companies Contraband & counterfeit share of legal market 0.0% 0.7% 0.7% 1.3% 2.4% over the four years from 2007 Unbranded share of total market 6.0% 9.9% 12.5% 11.4% 7.6% would seem to suggest an Contraband & counterfeit share of total market 0.0% 0.6% 0.6% 1.1% 2.2% Total illicit share of legal market: 6.4% 12.3% 15.9% 15.6% 13.4% increase and then tailing off Total illicit share of total market: 6.0% 11.0% 13.8% 13.6% 12.1% of use of unbranded tobacco, and small but growing use of illicit cigarettes—refer Table 59 60 97 98 99 13.7.9 below. Tabulating the Sources: PriceWaterHouseCooopers 2008 and 2010, Deloitte 2011a , 2011b and 2012 using Roy Morgan surveys 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 Date of last update: 10 October 2012 Tobacco in Australia: 80 Facts and Issues As discussed in Section 13.7.7, Table 13.7.10 estimates of use of counterfeit Number of detections and quantities of tobacco and numbers of cigarettes seized by Australian cigarettes drawn from the NDSHS are customs authorities, 2006–07 to 2010–11 not considered accurate. However, a rough indication of the size of the market for illicit branded cigarettes in 2006–07 2007–08 2008–09 2009–10 2010–11 Australia might be gained by looking Quantity of loose tobacco, ‘000 kgs 67 287 180 311 258 at the proportion of tobacco product Quantity of sticks, ‘000 pieces 42 000 107 000 50 176 68 728 82 000 seizures that are for branded cigarettes % that illicit cigarettes make up of total 39% 27% 22% 18% 24% rather than unbranded tobacco. quantity of illicit tobacco products seized Using these percentages, it is then possible to scale up the estimates of 104-107 the size of the market for unbranded Source: Australian Customs and Border Protection annual reports tobacco to generate an estimate of the total size of the market. 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 All smokers Number of current users 162 194 Average daily cigarette consumption 18 (chop-chop cigarettes) 14.7 Number of cigarettes smoked per year 347 816 599 17 913 604 187 Note: Population estimates based on NDSHS 2010 weightings. N cigarettes smoked per year Total: N cigarettes Frequency of chop-chop use N % per chop-chop smoker smoked per year Only use chop-chop 20 599 12.7% 6 570 135 333 052 Mainly use chop-chop 19 301 11.9% 5 256 101 446 508 Use chop-chop half the time or more 9 894 6.1% 3 285 32 501 245 Use chop-chop less than half the time 3 568 2.2% 1 971 7 033 056 Use chop-chop occasionally 108 832 67.1% 657 71 502 738 Total: 162 194 347 816 599 Estimated revenue forgone: $125m Estimated size of illicit Estimated size of market tobacco market (including Using different assumptions for unbranded tobacco both unbranded tobacco and regarding daily cigarette (chop chop) as share of total illicit branded cigarettes) consumption of chop-chop: smokers 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 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products 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 Date of last update: 10 October 2012 Tobacco in Australia: 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 industry- funded 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 thatno 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 136US 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 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products 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 Date of last update: 10 October 2012 Tobacco in Australia: 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 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products 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 environmentally- friendly 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 Date of last update: 10 October 2012 Tobacco in Australia: 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 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 For further information, see http://www.who.int/fctc/cop/sessions/second_session_cop/en/index.html ii For further information and documentation, see http://www.who.int/fctc/protocol/illicit_trade/first_session_inb/en/index.html iii See http://www.who.int/fctc/protocol/illicit_trade/second_session_inb/en/index.html iv See http://www.who.int/fctc/protocol/illicit_trade/third_session_inb/en/index.html v See http://www.who.int/fctc/protocol/illicit_trade/inb4/en/index.html vi See http://www.who.int/fctc/cop/sessions/fourth_session_cop/en/index.html vii See http://www.who.int/fctc/protocol/illicit_trade/inb5/en/index.html Section: 13.7.11.2 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products 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 < < 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 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products in Australia 89 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 Date of last update: 10 October 2012 Tobacco in Australia: 90 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 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products in Australia 91 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 banningsale 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: < 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 See http://www.austlii.edu.au/au/other/dfat/treaties/ATS/1967/1.html ii See http://www.austlii.edu.au/au/other/dfat/treaties/ATS/2006/22.html iii Not available on-line. iv See http://www.comlaw.gov.au/Details/C2012A00146 Section: 13.7.12.3 Date of last update: 10 October 2012 Tobacco in Australia: 92 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 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products in Australia 93 References 1. Joossens L and Raw M. Smuggling and cross-border shopping of tobacco in Europe. British Medical Journal 1995;310:1393-7. Available from: http://www.ncbi.nlm.nih.gov/ pubmed/7787549 2. Joossens L and Raw M. Cigarette smuggling in Europe: who really benefits? Tobacco Control 1998;7(1):66-71. Available from:http://www.ncbi.nlm.nih.gov/pubmed/9706757 3. Byrne F and Chapman S. 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Purchasing patterns and smoking behaviors after a large tobacco tax increase: a study of Chinese Americans living in New York City. Public Health Reports 2008;123(2):135–46. Available from: http://www.publichealthreports.org/archives/issuecontents.cfm?Volume=123&Issue=2 133. 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 2001;323(7306):203–7. Available from: http://www.bmj.com/cgi/content/full/323/7306/203 134. Aitken C, Fry T, Farrell L and Pellegrini B. Smokers of illicit tobacco report significantly worse health than other smokers. Nicotine & Tobacco Research 2009;11(8):996–1001. Available from: http://ntr.oxfordjournals.org/content/11/8/996.full 135. Hughes S, Hughes K, Atkinson A, Bellis M and Smallthwaite L. Smoking behaviours, access to cigarettes and relationships with alcohol in 15- and 16- year old schoolchildren. 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Elements of natural radioactive decay series in Iranian drinking water and cigarettes. Arh Hig Rada Toksiko 2010;61(2):235-9. 145. O’Connor RJ, Li Q, Stephens WE, Hammond D, Elton-Marshall T, Cummings KM, et al. Cigarettes sold in China: design, emissions and metals. Tobacco Control 2010;19(suppl. 2):i47-53. 146. Massadeh A, Gharibeh A, Omari K, Al-Momani I, Alomary A, Tumah H, et al. Simultaneous determination of Cd, Pb, Cu, Zn, and Se in human blood of jordanian smokers by ICP-OES. Biol Trace Elem Res 2010;133(1):1-11. 147. Hammond D and O’Connor RJ. Constituents in tobacco and smoke emissions from Canadian cigarettes. Tobacco Control 2008;17(suppl. 1):i24-31. Available from: http://www.ncbi.nlm. nih.gov/pubmed/18768456 148. Tahir SN and Alaamer AS. PB-210 concentrations in cigarettes tobaccos and radiation doses to the smokers. Radiat Prot Dosimetry 2008;130(3):389-91. 149. Arain MB, Kazi TG, Jamali MK, Jalbani N, Afridi HI, Kandhro GA, et al. Hazardous impact of toxic metals on tobacco leaves grown in contaminated soil by ultrasonic assisted pseudo- digestion: multivariate study. Journal of Hazard Materials 2008;155(1-2):216-24. 150. Galazyn-Sidorczuk M, Brzoska MM and Moniuszko-Jakoniuk J. Estimation of Polish cigarettes contamination with cadmium and lead, and exposure to these metals via smoking. Environmental Monitoring and Assessment 2008;137(1-3):481-93. 151. Cox LA, Jr. Quantifying potential health impacts of cadmium in cigarettes on smoker risk of lung cancer: a portfolio-of-mechanisms approach. Risk Analysis 2006;26(6):1581-99. Section: 13.7.12.4 Date of last update: 10 October 2012 Tobacco in Australia: 98 Facts and Issues 152. US Department of Health and Human Services. How tobacco smoke causes disease: the biology and behavioral basis for smoking-attributable disease. A report of the US Surgeon General. Atlanta, Georgia: U.S. 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, 2010. Available from: http://www.surgeongeneral.gov/library/tobaccosmoke/report/index.html 153. US General Accounting Office. Terrorist funding: US agencies should systematically assess terrorists’ use of alternative financing mechanisms. Washington: GAO-04-163, 2003. Available from: http://www.gao.gov/new.items/d04163.pdf 154. Sweeting J, Johnson T and Schwartz R. Anti-contraband policy measures: evidence for better practice. Special report series. Toronto: Ontario Tobacco Research Unit, 2008. Available from: http://www.otru.org/pdf/special/special_anti_contraband_measures.pdf 155. Odato J. State judge says police have no right to seize native cigarettes bound for out of state. Times Union, (Albany, New York) 2012:20 Jun. Available from: http://www.timesunion.com/ local/article/State-judge-says-police-have-no-right-to-seize-3650542.php#ixzz1zQqHm4td 156. Kim AE, Ribisi K, Delnevo CD and Hrywna M. Smokers’ beliefs and attitudes about purchasing cigarettes on the Internet. Public Health Rep 2006;121(5):594-602. Available from: http:// www.publichealthreports.org/issuecontents.cfm?Volume=121&Issue=5 157. Burstein A. Stopping Internet-based tobacco sales through domain name seizure. Health Matrix (Cleveland, Ohio) 2006;16(2):279-34. Available from: http://law.case.edu/student_life/ journals/health_matrix/default.htm 158. Ribisi K. A proposed strategy to regulate internet tobacco sales: The (Quarantine of Unhealthy Internet Trade) QUIT Framework [Conference presentation]. The 13th World Conference on Tobacco and Health Conference, Washington. Atlanta GA: American Cancer Society, 2006. Available from: http://2006.confex.com/uicc/wctoh/techprogram/MEETING.HTM 159. Ribisl K, Williams R and Kim A. Internet sales of cigarettes to minors. Journal of the American Medical Association 2003;290(10):1356–9. Available from: http://jama.ama-assn.org/cgi/ content/abstract/290/10/1356 160. Framework Convention Alliance. Tobacco smuggling: facts sheet no. 8. 20 October 2006. Geneva: Framework Convention Alliance on Tobacco, 2005. Available from: http://www.fctc.org/ docs/factsheets/fca_factsheet_008_en.pdf 161. Framework Convention Alliance. FCTC COP-1 Briefing Paper # 3 ... setting out why COP-1 should prioritise starting a process to develop a protocol to combat the illegal tobacco trade. Framework Convention Alliance for Tobacco Control, 2006. Available from: http://www.fctc.org/docs/documents/FCAbp3.pdf 162. 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=230 163. World Health Organization. About the WHO Framework Convention on Tobacco Control. Geneva: WHO, 2012 [viewed 1 July 2012]. Available from: http://www.who.int/fctc/about/en/ index.html 164. World Health Organization. Framework Convention on Tobacco Control. Geneva: World Health Organization, 2003 Last modified 2005 [viewed October 2006]. Available from:http:// www.who.int/tobacco/framework/WHO_FCTC_english.pdf 165. WHO Framework Convention on Tobacco Control. Geneva: World Health Organization, 2003. Available from: http://www.who.int/tobacco/framework/en/ 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 174. Swan W. Budget 2012-13. Budget paper no. 1. Statement 5: Revenue, Revenue estimates by revenue head. Canberra: Australian Government, 2012. Available from: http://www.budget. gov.au/2012-13/content/bp1/html/bp1_bst5-04.htm 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 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products 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 Date of last update: 10 October 2012 Tobacco in Australia: 100 Facts and Issues Technical appendix 13.7.1 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 vice- president, 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: < Section: Technical appendix 13.7.1 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products 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 Section: Technical appendix 13.7.1 Date of last update: 10 October 2012 Tobacco in Australia: 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: < i In 2003 it was reported that the ATO had some 100 excise staff investigating the illegalchop-chop trade. ii 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 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products in Australia 103 < Section: Technical Appendix 13.7.2 Date of last update: 10 October 2012 Tobacco in Australia: 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 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. . .? Only smoke this type of tobacco Mainly smoke this type of tobacco 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/ ii 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. . .? Only smoke this type of tobacco Mainly smoke this type of tobacco 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/ Section: Technical Appendix 13.7.3 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products 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 self- control 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 Date of last update: 10 October 2012 Tobacco in Australia: 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 mid-range of empirical estimates.’ Table 13.8.1 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 retail price of a pack of Winfield 25s would increase by about ‘sophisticated’ smokers 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 ‘naïve’ smokers 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 Source: Table E6–1 from K Henry et al 20105 individual’s current period preference. ii < i 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. ii 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 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products in Australia 107 their smoking responds more to price changes, so estimates for sophisticated smokers may underestimate the appropriate overall rate. < 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 Date of last update: 10 October 2012 Tobacco in Australia: 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 Date of last update: 10 October 2012 Chapter 13: The pricing and taxation of tobacco products 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 7. Gallet C and List J. Cigarette demand: a meta-analysis of elasticities. Health Economics 2003;12(10):821–35. Available from: http://www3.interscience.wiley.com/journal/101520325/ abstract?CRETRY=1&SRETRY=0 8. Dunlop SM, Perez D and Cotter T. Australian smokers’ and recent quitters’ responses to the increasing price of cigarettes in the context of a tobacco tax increase. Addiction 2011;106(9):1687-95. Available from: http://dx.doi.org/10.1111/j.1360-0443.2011.03492.x 9. 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 Section: 13.8.5 Date of last update: 10 October 2012 Tobacco in Australia: 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: <