Tuesday 15 May 2018

Regressive excise

The latest inflation figures sort inflation by household expenditure quintiles. Poorer households are more likely to include smokers. The government continues its annual excise hikes on tobacco. Meanwhile, the government has made the first year of tertiary study free. Richer kids are more likely to take up tertiary study.

And so living costs for poorer households have gone up more than for richer households.
“Like the March 2017 quarter, prices for cigarettes and tobacco have seen large rises due to the annual tobacco tax increase,” consumer prices manager Geraldine Duoba said. “The tax increase was implemented at the beginning of the year, bringing the average price for a packet of 25 cigarettes up to $35.14.”

Of the different household groups measured, Māori households saw the highest inflation in the March 2018 quarter (up 1.3 percent), compared with 0.8 percent for all households. This increase for Māori households was driven by higher prices for cigarettes and tobacco, and interest payments.

The lowest-spending households experienced more inflation than the highest-spending households in the March quarter, partly because cigarettes and tobacco are a greater proportion of their living costs. Cigarettes and tobacco make up approximately 3 percent of total household living costs for the lowest-spending households, compared to 1 percent for the highest-spending households. Price increases for rent (up 0.7 percent) and petrol (up 2.5 percent) made the next-biggest contributions to price rises for the lowest-spending households.

The introduction of the Government’s new ‘first year free’ policy for tertiary education had a dampening effect on inflation for all households. The highest-spending households received the greatest benefit because they spend proportionally more on tertiary education. These households also experienced the greatest effect from the seasonal price drop in international air transport.
We warned about these distributional effects around education in our report on zero-percent loans a couple of years ago.

I'd run the numbers on the effects of National's tobacco excise hikes back in 2016. They'd then locked in 10% excise hikes every year through 2020. I'd focused on effects on Maori households, using the Otago public health peoples' numbers on quit rates.
So for every 1000 Maori, we have:
  • 773 who would not have smoked regardless,
  • 13 who quit because of the tax and enjoy health benefits, save some money, and may or may not be happier from having quit – we’ll assume happier,
  • 214 who keep smoking about 90% as much as they had been smoking. Each and every one pays about $1020 more in excise per year than they otherwise would have paid.
For every Maori smoker who quits, 16.46 Maori smokers will pay a bit over a thousand dollars more in excise per year – assuming they start with a half-pack-a-day habit. Some will pay more, some less. The 2014/2015 NZ Health Survey says that Maori daily smokers smoke on average 10.3 cigarettes per day, so that’s about right. On the other side, the same survey says that current prevalence of daily smoking is 35.5% among Maori. If Wilson’s figures underestimate baseline smoking in 2020, then the tax hike would have a few more current smokers quitting than here estimated, and a lot more current smokers paying that extra thousand bucks per year.

The NZ Health Survey notes that daily smoking rates are 25.4% overall in the most deprived neighbourhood quintile (as compared to 8.3% in the least deprived quintile). MoH estimates there are 178,000 daily smokers in the most deprived quintile. If each of them is pays an extra $1000 in tax, the government is pulling $178 million more dollars out of our poorest communities.
When the Otago Public Health people talk about the package of policies that they support, and that I'm evil for not supporting, they mean the continued excise hikes. That's what "implementation of cutting-edge methods to reduce the affordability" means. It's more tax hikes on the poorest people in New Zealand.

My package of reforms? Freeze the excise hikes. Reduced harm products are now legal in New Zealand. Allow them to be advertised - they should not have the same advertising restrictions as smoked tobacco. Make sure that nobody tries applying plain packaging to them. Weigh seriously the trade-offs with an R18 status - if you keep it R18, then monitor to see whether that's winding up making youth smoking rates higher than they need be. Heck, distribute leaflets about reduced-harm products in the dairies and shops that sell cigarettes and let the dairy owners know about distributors who can supply them with reduced-harm products.

Over the next few years, there'll be a lot of switching to reduced-harm products. Eventually, you'll be left with a small number of continuing smokers for whom reduced-harm products simply don't work. Punishing that group with high levels of excise - I don't know what the point of it is. Schedule a reversal of the excise hikes, recognising that excise is less needed where there are better substitutes for smoking available. You just don't need as high an excise rate to discourage use when acceptable substitutes are more readily available. That's just maths and how elasticity works. Goods with more substitutes are more elastic in demand. Any excise hike does more to curb consumption for relatively elastic goods than for relatively inelastic goods. So you don't need as high of excise to induce any given demand reduction if you've been able to make more substitutes available. It's bizarre that parts of the public health community have worked so hard to make sure that acceptable substitutes don't become available.

It really annoys me when people say stuff like "The taxes are regressive but the health benefits are progressive!" Why? The person paying the tax isn't getting much health benefit from the tax. Quitters get the biggest health benefit, but there aren't that many of them.* Current smokers cut smoking rates a bit, but they'll also draw harder on each cigarette to compensate. And it's a bit funny to laud excise for the health benefits of a 10% reduction in the number of cigarettes smoked while damning vaping because some vapers will have the occasional cigarette as well.

Bottom line: the continued hikes in excise should not be part of any reasonable harm reduction package. The harms that excise imposes on those who continue to smoke are substantial. The now-legal status of reduced-harm devices means that you don't need to beat people up with excise.

And if you like excise because it beats up on tobacco companies, think again. Cigarette supply is basically infinitely elastic at the world price. Demand is highly inelastic, in no small part because there have not been good available legal substitutes. Basic tax incidence means the burden of tobacco excise falls predominantly on the relatively inelastic side of the market. That's the demand side.

* And there's still the more difficult question of whether they then see themselves as better off. Many will, some won't.


  1. The point of it is to prevent people enjoying themselves. Specifically poor people. Health is merely a useful cover story. If it was about health they would be all for reduced harm products, but products that allow people to enjoy themselves with mild risk are anathema.

    I'm allowed to rock climb without a safety harness. That is insanely dangerous, but legal.

    But the wowsers are determined that smoking be forbidden, on the grounds of health risk?

    When all the much more dangerous middle class activities like skiing, parachuting, horse riding etc are banned, then I'll accept that smoking should be stopped too.

    Until then, it's merely to stop the poor enjoying themselves.

    1. I'd come to similar conclusion about a decade ago. Would modify it somewhat. The underlying premise is that poor people are too stupid to be trusted to make their own decisions, so layer on paternalistic controls more easily avoided by richer and smarter people. Tax soda but not expensive froofy coffee drinks. Tax McDonald's but not marbled steak. Ban porn, but anybody who can figure out a VPN can dodge it.