In seeking to justify his regressive 35% tax hike on smokers (an additional $2 per pack, on top of some of the highest tobacco taxes internationally), Prime Minister Rudd put forward two primary justifications. Firstly, that the revenue from this great big tax will help fund his healthcare power grab. Secondly, that it will reduce the rates of smoking.
Considering the severely deleterious economic effects of such a tax, it is worth investigating these two claims in greater detail, and not simply take them on face value. After all, this will cause serious harm to Australia’s economy. It will cost jobs, hurt working families, and affect Australia’s economic growth. The reason for this is rather simple: tobacco products will cost consumers more, meaning decreased consumption (not necessarily on tobacco, but overall as they have less disposable income), and will hurt retailer revenue, forcing many small businesses to reduce costs through cutting down hours of employment, hurting their employees. Some small businesses may even shut their doors. The potential economic consequences of this are significant. Indeed, the one thing all economists – irrespective of political stripe – say is that you do not under any circumstances raise taxes in the midst of a global economic downturn. Yet this is precisely what Kevin Rudd is proposing to do. Actions have consequences. Taxes have wide-ranging effects. We must not forget this.
So let us examine his justification, and see if it is worth it. Firstly, will it really lead to increased revenue for the government? A lot of empirical evidence from overseas suggests not. This is not because people will quit smoking. Rather, it is through the rise in counterfeit tobacco, and internet purchases.
According a 2009 study by Americans for Tax Reform, only 29 percent of the cigarette tax increases in the United States over the past decade actually met revenue projections. Let us just look at a few examples. In 2007 New Jersey raised its cigarette tax by 17.5 cents per pack in an attempt to raise revenue. They predicted the tax would raise an additional $30 million: it actually came up $52 million short – a net loss of $22 million. Washington, D.C. experienced the same predictable phenomenon. After last year’s 50 cent per pack cigarette tax increase, the city saw a net revenue drop of $7.6 million, and Arkansas will face a $10.3 million drop in tobacco tax collections for fiscal year 2010 starting July 1 after their tax hike.The list goes on. Hence, we can not rely on this as a revenue raising tool. So on that front, Prime Minister Rudd’s argument fails.
Prime Minister Rudd also argued that this is worth it if it will decrease smoking rates. Yet, once again, the evidence is just not there. The most comprehensive longitudinal analysis of the relationship between smoking rates and tobacco taxes in the last decade comes from Canada, where HEC Montréal recently released a report examining the effects of a 1994 Canadian tobacco tax reduction on smoking rates. The report is based off of the largest study examining the effects of decreased tobacco taxes in the country to date. Through statistical analysis of the cigarette consumption of ten Canadian provinces, five of which lowered taxes with the 1994 tax reduction and five of which did not, the report concluded that decreasing excessive tobacco taxes does not increase smoking rates, even among the youth.
The reason for this is simple. People will not quit smoking, rather, they will substitute retailed cigarettes for other tobacco products, and will begin to purchase either counterfeit or smuggled tobacco, a trend that with the internet and cheaper international shipping costs, shall surely increase. So, on this second ground, Prime Minister Rudd’s argument fails also.
The evidence is pretty clear. Tax hikes on tobacco products do not achieve their stated objectives. Rather, they are enacted either simply as a tool of social control and reshaping society, or as a media smokescreen to divert attention from a week of backflips, embarrassments, and other failures. At the same time, they seriously hurt our economy.
For these reasons, this tax grab must be opposed.