Agency Disclosure Statement

This Regulatory Impact Statement has been prepared by The Treasury.

It analyses options to raise revenue for Budget 2012 and reduce smoking rates through further increases in taxation of tobacco, levied as excise (on domestically produced tobacco) and excise equivalent duties (on imported tobacco).

This analysis has been prepared with policy advice following a direction from the Minister of Finance to assess tobacco excise increases that could be progressed in Budget 2012. It does not assess and compare tobacco excise increases with other revenue, savings and expenditure options Ministers have considered in preparing the 2012 Budget. The focus is on the potential impacts of tobacco excise changes, and the role of excise in the wider context of tobacco control policy.

Analysis to inform a decision on tobacco excise increases for Budget 2012 has included:

• the impact of recent excise increases on Crown revenue and on consumption patterns;
• likely revenues from options to increase tobacco excise;
• initial information on likely distributional impacts.

The analysis has not included a range of other issues due to time and resource constraints. Key gaps in the information here include:

• overall economic and fiscal impacts of smoking (eg: health and other welfare effects on smokers, their families and others; impacts on labour productivity; the fiscal costs of publicly funded health and disability services linked to smoking; or fiscal offsets such as reduced superannuation and aged care expenditures due to the lower life expectancy of smokers).
• impact on the economic welfare of smokers and their families;
• impact on the tobacco industry: including importers, manufacturers, distributors and retailers.

Increasing tobacco excise requires Parliament to amend to the Excise and Equivalent Duties Table, pursuant to the Customs and Excise Act. Amendments are also recommended to extend existing time-limited provisions in various Acts to exclude tobacco price increases from CPI-based indices used to adjust NZ Superannuation, main benefits and various other transfer payments.

Increases to tobacco excise will impose minor additional costs on businesses in the tobacco supply chain to review and adjust prices and ensure compliance with the new excise rates. Little if any change should be required to existing systems and processes for compliance. Retailers may face additional costs to address security risks as the price of cigarettes is increased. Excise increases will encourage consumers to favour lower-priced brands, disadvantaging distributors focussed disproportionately on higher-margin 'premier' brands.

Tobacco excise increases may reduce incentives to invest and innovate in tobacco importation, manufacture and distribution. However, unlike most products and services, the Government has adopted explicit goals to reduce tobacco consumption to improve the health of New Zealanders. Reducing investment in the distribution and sale of tobacco within New Zealand will naturally result from progress towards this goal.

Ruth Isaac, Manager, Health & Housing, The Treasury
20 April 2012