Smoking the Budget

If the government needs a basic lesson in market economics, and I think it does, it just has to look at what’s happening to the tobacco industry.

Smoking the Budget
Photo by Uitbundig / Unsplash

Now I’m no shill for big tobacco but driving the price of a pack of cigarettes up to $50 doesn’t make much economic sense.

Realistically, who can afford to pay that much to feed the daily nicotine addiction? Sure, it might drive some people to quit but it also drives an awful lot more to alternative nicotine delivery systems.

Those alternatives are often illegally obtained and hence the government misses out on the tax revenue that made  legal tobacco unaffordable.

Tobacco retailers are reporting that business is so bad that the federal budget could take a $5 billion hit.

Some might think that’s fantastic. Fewer smokes sold mean fewer people smoking and fewer of the associated health consequences.  

That’s the theory any way but it doesn’t actually work like that.

Instead, many consumers are now buying illicit tobacco – known as chop-chop. It’s cheaper and readily available.

Tobacco retailers say the illegal tobacco trade costs the government up to $3.5 billion in lost excise every year.

The Australian Tax office says that the problem isn’t quite that bad.  While it collects over $14 billion in excise annually, it estimates the 1234 tonnes of illegal illegal tobacco sold, costs the budget nearly $2 billion.

The reason there is a market for illicit tobacco is because of price. If cigarettes weren't so expensive, thanks to exorbitant taxes, the illicit market would likely dry up.

But cigarette taxes are hugely lucrative for government. A 2016 report on tobacco harm minimisation found:

"From a purely financial perspective, the Australian Government in 2015/16 raised more revenue in tobacco excise ($9.8 billion) than it lost through smoking attributable costs and loss of other revenue ($2.2 billion)."

Tobacco retailers say there’s also a strong move toward vaping or electronic cigarettes. This too is illegal which makes little sense for several reasons.

Firstly, vaping is everywhere already and almost impossible to stop now. Far better to regulate it and gain some government revenue from the supply.

Studies show vaping is also less harmful than cigarettes. That doesn’t mean it’s safe, just that scientists think it does less damage to your health.

A US study of lung injuries and deaths associated with vaping , confirmed 2,807 cases of e-cigarette or vaping use-associated lung injury (EVALI) and 68 deaths attributed to that condition.

However, they went on to say that:

“These cases appear to predominantly affect people who modify their vaping devices or use black market modified e-liquids. This is especially true for vaping products containing THC.”

THC is the psychoactive constituent of cannabis.

A lot of former smokers also say that the move to vaping has been a step on the way to quitting the habit altogether.

It's just a pity they have to break the law to do it.

Retailers claim that vaping is already a $2 billion national market in Australia and 90% of that is currently sold via dodgy operators, online or through social media.

So, what’s the answer to potentially reducing smoking rates while also allowing the government to gaining  revenue and minimising the harm from tobacco use?

All rational roads lead to vaping as being the better choice. Regulate it, tax it and use it to continue the campaign to get people off tobacco.

It’s not the perfect solution but then again nothing is in this world is. That doesn't mean we should let the perfect be the enemy of the good.

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