The Tax Working Group’s high-level advice is absolutely correct: The government should simplify the alcohol excise structure, put tobacco excise increases on hold, and not proceed with any sugar taxes until it figures out what it is trying to achieve.
This sound advice relies on a rather reasonable summary of the issues produced by the Tax Working Group’s secretariat.
The secretariat surveyed the substantial differences in alcohol excise rates by type and concentration of alcohol. For example, a litre of spirits containing 26% alcohol carries roughly quadruple the excise of a litre of 13% wine; double the excise would be proportionate, quadruple is not.
The Tax Working Group recommended simplifying alcohol excise rates but did not specify a level. Rounding all rates up to the spirits’ level would simplify matters but not in a good way. While the secretariat noted work by the Ministry of Justice suggesting excise increases could provide net benefits, it also noted those calculations relied on nonstandard assumptions about how drinkers respond to price increases. The ministry’s main calculations had assumed that heavier, and presumably more harmful, drinkers were more price responsive than moderate drinkers – that is hardly the case. Consumption by moderate drinkers seems far more price sensitive than consumption by heavy drinkers.
The secretariat suggested the burden of alcohol excise may fall more heavily on richer people and may consequently even be progressive; I have substantial doubts. While richer households do spend more on alcohol than poorer households, alcohol excise is (appropriately) volumetric. The more expensive your drink, the smaller the proportion of your spending on excise.
The secretariat noted that poorer households spend only 1.9% of their income on alcohol and richer households spend 2.8% of their income on alcohol. But if the poor household mostly bought $15 cask wine and the richer household mostly bought $30 bottles of wine, the poorer household would be spending 0.74% of its income on alcohol excise while the richer household would be spending only 0.21% of its income on excise.
Burden on poorest
Shifting to tobacco, advice from the secretariat and from the working group was sound, as far as it went. If the government wants to further reduce harms from tobacco, it should seek measures other than excise increases. The burden of excise increases is felt most heavily by poor households that continue to smoke.
But the secretariat and the working group missed an opportunity to recommend excise changes that could do a lot to assist in harm reduction.
Vaping in New Zealand is not taxed – and that is as it should be. While vaping is not risk-free, the risks are trivial compared to the proven substantial health costs of smoking; the difference in price between smoking and vaping can help encourage smokers to switch.
Vaping is not exempt from tax because of its low risk but rather because it does not involve tobacco – at least for vaping liquids where the nicotine is not obviously derived from tobacco.
But vaping is not for everyone. Earlier this year, the courts ruled that heated tobacco products like Philip Morris’s Iqos system do not fall under the SmokeFree Environment Act’s prohibitions on the sale of oral tobacco. Since then, Swedish snus has become available in New Zealand as well. Both are much less harmful than smoked tobacco.
New Zealand’s excise regime is fairly blunt.
Tobacco intended for smoking in cigarettes or roll-your-owns attracts excise of $1177.87 per kilogram – or about $0.83 per cigarette. All other tobacco products attract excise of $1033.20 per kilogram of tobacco.
While that relativity might have made sense when other tobacco products were just things like cigars and cigarillos, non-combusted tobacco finds itself in the same category. So cigars and cigarillos draw the same excise, per gram of tobacco as non-combusted alternatives like snus and heated tobacco.
Lower excise rates
In 2015, work published in the New England Journal of Medicine recommended lower excise rates for less harmful ways of getting nicotine. Authors Frank Chaloupka, David Sweanor and Kenneth Warner noted that Sweden has Europe’s lowest tobacco-related male mortality, and that lower taxes on snus contributed to switching away from cigarettes – at least for male smokers.
The main health risks of smoking are from combustion. Does it make sense to apply the excise levied on smoked tobacco to reduced harm products? Excise is slightly lower for tobacco products other than cigarettes but still seems excessive for reduced-harm products that do not involve combustion.
A 10-gram package of snus selling for $18, containing 15 sachets, would draw $10.33 in excise if the 10-gram weight is an accurate measure of the taxable weight – about $0.69 per sachet. Excise is more than 130% of the cost of the base product. The excise content of the cost of a HEETS stick is lower than the excise content of a cigarette but mostly because HEETS contain less tobacco.
It does not help encourage people to switch to less harmful alternatives when those less harmful alternatives draw substantial excise levies.
Scaling tobacco excise to harms would be one approach that would help encourage smokers to try less harmful alternatives. But setting lower excise categories can be complicated, and setting potentially dozens of different excise categories to fit every newly developed product would be unmanageable.
Jenesa Jeram’s recent report, Smoke and Vapour, made the case for encouraging less harmful alternatives through lower excise. One catch-all low-tax category for lower risk non-combusted products would be a vast improvement on the status quo. Zero-rating non-combusted tobacco products, at least until the government’s Smokefree 2025 goal is achieved, would be another way of encouraging switching.
Either would certainly be preferable to continued tobacco excise increases, the burden of which falls very heavily on the poor – as even Statistics New Zealand pointed out in its May inflation update.
While neither option was considered by the Tax Working Group, both should be on the table as the government considers the next round of tobacco excise inflation adjustments – and its response to the Tax Working Group’s report.
Dr Crampton is chief economist with The New Zealand Initiative