Who would have thought: that jacking-up taxes on a good to an unbelievably high level would lower demand of said good by so much that it falls short of revenue targets? Well, that’s precisely what has happened to tobacco tax collections according to a new report by the Australian National Audit Office. From The AFR:
…the damning Australian National Audit Office report finds the system is so broken “there is limited assurance that the correct amount of tobacco customs duty is being collected and reported”.
Moreover, federal budget revenue estimates are unreliable because they do not factor in the illicit tobacco trade.
“There is uncertainty about forward estimates of tobacco revenue, as these estimates do not incorporate a change in supply and demand of dutiable tobacco arising from cheaper illicit product,” the report says.
…analysts questioned if tobacco revenue, which is being undermined by falling smoking rates, would keep pace over the longer term with the faster-growing policies it would have to pay for…
The ANAO report said budget assumptions did not “factor in the size of the illicit trade in tobacco and potential changes to the supply of and demand for dutiable goods as a result of the increase in costs in the legitimate market”.
As I noted in February, the cigarettes tax – adopted by both major parties – was never going to raise the forecast $47.7 billion over 10 years. With smoking rates falling, it is a declining tax base anyway and this decline would only accelerate the further taxes are increased.
Moreover, with the cost of a cigarette rising to nearly $2 a dart, there was always the prospect of a lucrative black market developing, which would dramatically undercut the Government’s forecast tax take. It appears from the above that this black market is already in motion.
There was also the problem that raising cigarette excise would be highly regressive. That is, the majority of smokers are from lower income brackets, so any increase in excise would adversely affect them the most. In turn, their disposable income would be significantly reduced, thus forcing them to cut back expenditure (lowering tax revenues) elsewhere.
One option to potentially plug the Budget hole and improve outcomes would be to legalise and tax marijuana. There is no good public policy reason why alcohol and tobacco are legal and pot isn’t. Moreover, legalisation of marijuana would ensure purity of supply, reduce profits to organised crime, and lower law enforcement costs. It’s a win, win, win.
