Cutting tobacco excise could spark a price war, boost smoking rates and undermine decades of public health progress, writes Stephen Koukoulas.
SOME OF THE MOST basic issues in economics are price signals, demand and supply.
If the price of something increases, either because of a shortage or a government-administered tax, demand will fall. In simple terms, there will be lower usage of that product.
Conversely, if the price of something falls or is low, demand will increase.
Nothing could be simpler.
Think housing. Over the past few decades, as house prices have risen, home ownership rates have fallen. Higher prices, lower demand.
In the case of tobacco, with the price being increased substantially over the years as the excise charged by the Government has risen, demand has slumped and the number of smokers has fallen. To be sure, there are other issues at play to account for the fall in smoking such as plain packaging, an advertising ban and even the premature death of smokers, but the higher price has been critical in reducing demand.
Which brings us to the next instalment of dumb policy proposals.
One Nation wants to cut the excise on tobacco by 75%. This has been gazumped by the Coalition, who want it reduced by a staggering 80%. In the process, the retail price of a packet of cigarettes will fall by around $25 per packet, which will encourage non-smokers to take up the habit and existing smokers to keep smoking.
The reason for this radical slashing of tobacco excise and therefore prices is ostensibly a reaction to the hopelessly inadequate and ineffective law enforcement of illegal sales of tobacco, which are sold without any excise at all. This black market for tobacco is undermining the revenue to the Government and has sparked unseemly and often very public violence among the crooks importing, distributing and selling illegal tobacco.
(Which begs a question: if smokers know where to find the cheap, tax-free illegal tobacco, why can’t law enforcement officers?)
The cutting of excise, it is claimed, would lower the profits for the illegal tobacco gangs, which it is claimed would lower the tensions among the tobacco gangs.
It is not clear this would happen.
Ramping up law enforcement and prosecuting anyone handling illegal tobacco would be more immediate, would not undermine the progress in lowering the number of smokers and would see legal tobacco sales increase, boosting revenue for the Government. Strict and decisive application of the law would see the illegal tobacco business fall away.
Bizarrely, the scheme to cut excise would see the Government be in direct competition with the tobacco gangs in a price war on who can sell the cheapest tobacco.
The crooks or the Government? What a sick joke that would be.
Lower prices would see the number of smokers increase.
There is tentative evidence that this might already be occurring as the bargain-basement illegal tobacco sales boom. And this is without any government excise cut, which could be seen as legitimising the illegal operators.
In 2021, 19.5% of Australians aged 14 years and over smoked daily. Now that figure is just 5.6%.
This is a fantastic result that has delivered not only health benefits to those who have given up or never started smoking, but has also meant huge savings to the economy.
Five years ago, the annual cost to the economy from high smoking rates was $136.9 billion. This was made up of lost productivity and worker absences, family member absenteeism from family members caring for a sick smoking family member, hospital admissions, medicines and ultimately premature death.
These costs will have come down in line with the fall in the proportion of the population smoking.
Suffice to say, the One Nation and Coalition plans to substantially lower the price of tobacco would add significant costs to the economy, including the health system.
Any modelling done to the excise cut proposals must include these costs to the economy and society via the health system and workforce.
Interestingly, there has not been much industry or wider public support for the excise cut proposals, but you can rest assured the tobacco companies and funeral industry are likely to be on side.
One Nation and the Coalition should drop their offensive proposal to cut tobacco prices, which would trigger a price war with the tobacco gangs and instead work to empower law enforcement bodies to find and prosecute the criminals.
Finding the bulk of the tobacco crooks is an easy place to start.
It is easier, cheaper and better for society than cutting the excise rate.
Stephen Koukoulas is one of Australia’s most respected economists, a past chief economist of Citibank and senior economic advisor to an Australian Prime Minister. You can follow Stephen on Twitter/X @TheKouk and on Bluesky @thekouk.bsky.social.
This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Australia License
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