Imagine that someone invents a new cigarette that produces even more tar and harmful chemicals.

Nobody is quite sure how much worse it is than a standard cigarette. Anywhere from 20% to 70% seems plausible. It would be hard to tell until people start getting sick.

The American Food and Drug Administration warns it significantly increases the production of harmful and potentially harmful chemicals. Scientific studies show that switching completely from conventional cigarettes to this new worse cigarette significantly increases your body’s exposure to harmful or potentially harmful chemicals.

Suppose the Minister of Health proposes a 50% higher excise tax on that kind of cigarette, as a precautionary measure until the science settles. And the Ministry of Health produces some estimates of the number of people discouraged from smoking the worse cigarette because of the tax, as well as the effect on overall tobacco excise revenue.

Focusing on the revenue side would miss the point.

Obviously, that new worse cigarette does not exist. I’m really talking about Minister Costello setting a lower excise category for heated tobacco products – which the FDA has assessed as significantly reducing exposure to risky chemicals. The wording I used above is straight from their website; I just flipped it to refer to a worse tobacco product.

There has been a lot of focus on the effects on government revenue. Excise collected from heated tobacco amounts to rounding errors relative to annual total tobacco excise revenue because few people currently use heated tobacco.

So the change in excise is not primarily about less tax being paid by current users of heated tobacco. Instead, the projected change is based on people flipping from cigarettes to heated tobacco because of the change in excise.  

I was curious about the Ministry of Health’s estimates. This week, the Ministry provided me with the background paper that provides the workings.

The Ministry’s figures suggest that, over a four-year period, the government would collect $211 million less in tobacco excise and GST from spending on tobacco products.

It is not normal to include GST in these kinds of calculations. Normally, analysts assume that money not spent in one area is spent in another area that is subject to GST, so the government’s GST take is not affected.

Including GST in the figure obviously inflates the estimated fiscal effect. If the workings are otherwise correct, the government would see a cumulative excise drop  of $183.5 million over four years and a shift of $27.5 million in GST from spending on tobacco products to GST from spending on other things.

The Ministry makes very clear that its workings are tentative. It’s impossible to really tell how many cigarette smokers would flip to heated tobacco with the change in excise. The Ministry makes its best guesses and is realistic about the limitations of those guesses.

Its modelling is based heavily on Japanese smokers’ decisions to take up heated tobacco, where heated tobacco shifted from 2.9% of the tobacco market to 23.5% in only three years. But vaping has not been an option in Japan. Many New Zealand smokers have already shifted to vaping. Whether the proportion of remaining smokers who might be tempted by lower-cost heated tobacco would be higher or lower than that in Japan is impossible to tell.

Unfortunately, the most important parts of the Ministry’s workings were redacted. But the Ministry provided more detail on its guesses about the number of smokers who would flip to the less risky alternative because of the excise reduction.

A two-year total had previously been reported: some 7,200 smokers might shift to heated tobacco because of the tax change. The Ministry expects 1,553 fewer smokers in 2025 and 5,659 fewer in 2026 – matching the previously-reported 7,200.

It does not provide estimates for 2027 or 2028, but those are the years in which the Ministry expects the largest effects on tax. The drop in tobacco excise and GST for 2026 was expected to be $44 million; the drop for 2028 was expected to be $82 million. More smokers would flip to heated tobacco in those later years.

The most important details were redacted, so it is impossible to reverse-engineer the figures accurately. But we can take a punt.

By 2028, some 8,700 to 13,400 people would have shifted from smoking to heated tobacco, because of the change in excise. The figure is based on the Ministry’s projected decline in excise and GST revenue but depends on the assumptions one makes about the Ministry’s workings.

I do not put a lot of confidence in any of these numbers. But there is a real trade-off.

The greater the drop in government revenue, the larger must be the number of smokers who have found a viable way out, shifting to an alternative that provides significantly reduced exposure to harmful or potentially harmful chemicals.

If you think that a special higher excise rate on a riskier kind of cigarette would make sense, reduced excise on a less risky alternative ought to make sense too.

To read the full article on the NZ Herald website, click here.