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Addiction to cigarette taxes rising to $2.2b

Tax hikes imposed or announced under the Labour Government have hurt the poorest the most, and it is planning more regressive taxes in the years to come, Thomas Coughlan reports.

The Government has been accused of launching a tax-and-spend programme aimed at soaking the rich, but its tax moves and its biggest lump of spending since the election have actually hurt the poor the most and benefited the rich. That pattern is expected to continue as the Labour-led Government has pledged to continue increasing taxes on cigarettes, fuel and small items imported from overseas, while at the same time reducing tertiary education costs in a way that benefits rich households more than poorer households.

Statistics New Zealand figures released this week bore out out this counter-intuitive trend. Poorer households experienced more inflation than rich households in the March quarter, partly because cigarettes and transport are a greater proportion of their living costs, according to inflation data released by Statistics New Zealand on Monday.

This raises questions about the fairness of the tobacco excise and fuel taxes. The Government collected $1.7 billion in tobacco excise last year, excluding GST. By 2021, that figure will be $2.2 billion according to Treasury because two more 10 percent tax increases are planned for the start of 2019 and 2020 - and that is before GST.

Treasury's most recent forecast was that Government expenditure will be $95.3 billion, meaning smokers will contribute over two percent of the revenue needed to fund Government operations.

Inflation for poorer households over the last decade was roughly double the rate for richer households at 22.2 percent and 11.7 percent respectively.

The perverse impacts of the increase in tobacco excise upon household spending will be examined by the Ministry of Health as it evaluates the effects of the increase in the excise and whether the policy is effective. It is due to report back by the end of the year and last month asked for contractors to bid to carry out an analysis of the financial effects on households and crime.

Tobacco excise increased 11.98 percent this year, pushing the price of the average packet of cigarettes to $35.14. This is part of a series of tax increases begun in 2010 that are scheduled to end in 2020. Each cigarette in a packet now carries a tax of 83 cents.

A key question for policymakers is whether the tobacco excise is excessively regressive. Consumption taxes like the tax on tobacco are considered to be regressive because they are levied at the same level on the poor and the wealthy, which means poorer people are taxed a greater proportion of their income than wealthier people.

Whether you earn the minimum wage of $34,320 a year or the $8.32 million banked by former Fonterra CEO Theo Spierings last year, the cost of a packet of cigarettes is the same.

But with a packet a day habit costing $12,826 a year, a person earning minimum wage would spend a more than a third of their gross income on cigarettes, whereas the same habit would make up less than 0.001 percent of Spierings’ income.

Unexpectedly regressive

Treasury concluded that tobacco excise might not actually be regressive because poorer people would be more price-sensitive than wealthier people.

Treasury published its findings in a 2016 regulatory impact statement on the increase in the excise.

“This would result in a greater proportion of the incidence of excise falling onto high-income groups, making the tax less regressive,” the report said, citing results from the USA and Turkey.

But this hasn’t been borne out by the inflation statistics. Cigarettes and tobacco make up approximately three percent of total household living costs for the poorest households last quarter, three times more than for the wealthiest households.

Addicted to revenue — or a fair reflection of the cost

The Government has defended the tobacco tax. Prime Minister Jacinda Ardern said on Monday her Government was not implementing a regressive tax regime.

She said that the families package and the winter fuel allowance will mean poorer New Zealanders will see an “overall boost” even when regressive taxes like tobacco and fuel excises are taken into account.

Ardern was asked whether her Government was taxing the rich more than the poor.

“We in effect have done that by cancelling the tax cuts which the last National Government brought in, which were giving $400 million to the top ten percent and reprioritising that using tax credits which are much more targeted,” she said.

Finance Minister Grant Robertson said that there were no plans to revise the next two 10 percent hikes in tobacco excise. He said that over time, Governments will need to look beyond tobacco excise for revenue.

However, the Government has also announced an 11.5 cents per litre regional fuel tax for Auckland from July 1, which is expected to hit poorer working families harder as a proportion of income. It has also foreshadowed a further 9-12 cents per litre in fuel levies over the next three years to help pay for rail and bus infrastructure and safety improvements for regional roads.

And Robertson noted smokers also represented a large cost to the Government.

A report published the Ministry of Health in 2016 estimated that the total cost of smoking to New Zealand’s health and welfare systems was $2.5 billion in 2014.

It found that just $61.7 million had been spent on smoking prevention programmes.