Revenue estimates
The Treasury's revenue estimates for three options to increase tobacco excise are set out below. All options are for revenue increases in addition to revenue increase from annual CPI indexation on 1 January which is included in baseline forecasts for the status quo.
| Revenue Gained ($ millions) |
2011/12 | 2012/13 | 2013/14 | 2014/15 | 2015/16 | 4-year Total | Compounding % excise increase above CPI to 2015/16 |
|---|---|---|---|---|---|---|---|
| 10% each 1 Jan for 4 years | - | 22 | 94 | 166 | 246 | 528 | 46% |
| 10% Budget night then 10% each 1 Jan for 4 years | 5 | 82 | 149 | 219 | 299 | 755 | 61% |
| 30% Budget night then 10% each 1 Jan next 4 years | 16 | 159 | 216 | 280 | 357 | 1,018 | 90% |
Key revenue assumptions:
- No stockpiling to avoid Budget night increases. For other increases, 70% of product is produced/imported in first half of fiscal year avoiding the 1 Jan increase.
- Price elasticity of demand constant at -0.5. A 10% increase in price leads to 5% decrease in consumption. With larger increases the uncertainty around this estimate is greater Demand is likely to respond less in the short run (affects current smokers only) than long run (as take-up rate by new smokers also falls).
- Extra GST not included (increased spending on cigarettes is substituted from other consumption subject to GST).
- "Pass through" of excise increases to retail prices is assumed to fall from 140% to 100% over the forecast period. This means the first increase is passed through and marked up (so price rises nearly the same percentageas excise rises), but later increases are passed through with less mark-up (so price rises the same $ amount as excise rises).
Lower pass through rate means a given excise increase yields more revenue but reduces smoking less, as it has lower impact on retail price. Reasons to expect this include increasing consumer price resistance and migration to budget brands (we saw this with the previous increases)
