Finance and Expenditure Select Committee

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20 January 2016

Secretariat

Finance and Expenditure Select Committee

Select Committee Services

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WELLINGTON 6160

Submitted online:

To the Finance and Expenditure Select Committee

SUBMISSION ON DRAFT BUDGET POLICY STATEMENT 2016

Introduction

Thank you for this opportunity to make a submission on the draft budget policy statement. The Smokefree Coalition is a national network of 51 organisations, committed to being a united voice for action toward the Smokefree 2025 Goal.

We remind this governmentit was the first government around the world to make a commitment to making a country smokefree by a set date (ie, 2025 for New Zealand). Reducing tobacco smoking will hugely improve health in New Zealand, and will have considerable economic benefits including increased productivity and reduced absenteeism,[1][2][3]and reduced health care expenditure over the lifecourse of current New Zealand population. This smokefree goal is an achievable one, but only if the most strategic measures are taken and then maintained. Substantial excise tax increases are the most effective measure in reducing tobacco’s demand and encouraging smoking cessation, and this is proven right here by New Zealand’s own tax policy for the last six years. So we are surprised and disappointed that this measure is not included in Government’s 2016 Budget Policy Statement. Tobacco excise tax increases must be sustained within government’s strategy for achieving a Smokefree New Zealand.

Our Recommendations

• We call for the extension of annual tobacco excise tax increases, to 2025
• We call for the annual tobacco excise tax increases to be doubled, from 10% to 20%
• We call for there to be an additional surprise tobacco excise tax increase of 40% immediately, or on May 31 World Smokefree Day, as part of the Government’s 2016 Budget statements
• We call for all tobacco excise tax revenue to be allocated until 2025 to
• mass media funding
• to promote cessation before targeted high smoking prevalence populations
• to denormalise tobacco and its New Zealand suppliers
• to educate the public of ways to protect children from exposure to tobacco
• to build local community support for regional smokefree environmental policy
• usher the subsidy of new evidence based cessation treatments
• research and evaluation of targeted cessation service methods
• nationwide targeted cessation services for
• Maori
• pregnant women and their whanau
• those in New Zealand suffering mental illness
• Pacific communities

This electoral term is a critical one prior to 2018, the year in which the Ministry of Health has set an interim goal of 10% for the nation’s smoking prevalence. Several lines of emerging evidence suggest that there is an urgent need to intensify tobacco control efforts if the Smokefree 2025 goal is to be achieved. Modelling studies suggest that the current strategy of regular 10% increases in tobacco taxation will be inadequate to ensure that the goal is reached, particularly for Māori. We write to express clearly the sense of urgency there is to act now, so that future generations of New Zealanders can be protected.

Background

The key point of reference is the 2010 Māori Affairs Select Committee report from its Inquiry into the tobacco industry in Aotearoa/New Zealand and the consequences of tobacco use for Māori.[4] This report recommended the Government adopt the aim of making New Zealand a smokefree nation by 2025. As one of the measures to achieve this, the Committee recommended the Government legislate for incremental tax increases over and above the annual adjustment for inflation. The Government in its 2011 response adopted the Smokefree 2025 goal of eliminating smoking, and undertook to focus on implementing the actions it identified as necessary, including tangible actions to improve outcomes for Māori. These included a commitment to continue legislating sizeable and regular tobacco excise taxincreases from 2013 onwards.[5]

When reporting on the Customs and Excise (Tobacco Products – Budget Measures) Amendment Bill in 2012, the Government Finance and Expenditure Select Committee recommended that the policy’s impact was continually monitored, with a view to renewal of the measure beyond 2016.[6] A number of researchers have collated evidence of its impact on quitting and tobacco consumption.Furthermore, careful modelling research has been conducted to calculate whether the tax policy will be enough to ensure the Government’s Smokefree 2025 goal is achieved.

A recent review9 estimated an average demand elasticity for tobacco to be -0.4 for high income countries (i.e., a price increase of 10% would reduce consumption by 4%). Young people tend to be more price sensitive compared with adults. At a recent Conference of the Parties signatory to the World Health Organization’s Framework Convention on Tobacco Control (which New Zealand was one of the first to ratify), guidelines for Article 6 on tax were updated, recommending that Parties “establish coherent long-term policies on their tobacco taxation structure”.[7]

Modelling studies of the impact of tobacco taxation

NZIER calculations commissioned by the Ministry of Health clearly showed in 2012 that annual 10% tax increases will not achieve this government goal.[8] The Treasury’s Regulatory Impact Statement[9] confirmed these calculations.[10]

Other researchers have continued to monitor the impact annually, (as per below in figures 2 and 3) on quit registration levels and on tobacco consumption. Researchers who study disease modelling have used updated prevalence data from the 2013 NZ census and 2011/12 New Zealand Health Survey to estimate the likely impact various tax regimes would have on prevalence (see figure 1). Like the previous modelling by NZIER and Treasury, it is suggested from these calculations that 10% annual increases are highly unlikely to result in the achievement of the Smokefree 2025 goal.[11]

Figure 1: Decline in smoking prevalence over time with no annual increase, compared with annual increases of 10% (best and worst case scenarios)16

Figure 2: Smoking prevalence in 2025, three scenarios[12]

Figure 2 shows the modelled impacts of inflation only, inflation + 10% and inflation + 20% annual tobacco tax increases on smoking prevalence in 2025 among Māori and non-Māori smokers. The impact of a 20% annual tobacco increase is greater, but the Smokefree 2025 goal will still not be achieved for non-Māori and is missed by a large margin for Māori (according to these estimates). Hence there will need to be additional tobacco control measures (e.g. one or more of: standardisedpackaging of tobacco products, enhanced mass media campaigns, control and reduction of retail outlets, and even denicotinisation of tobacco) if the Smokefree 2025 goal is to be achieved.[13]

Higher tax increases will also reduce the tobacco companies’ ability to mitigate the impact of tobacco tax increases by introducing ultra-low cost brands, differential price increases and other measures.

Evidence of declining impact of recent tobacco tax increases

Quitline data and tobacco sales data strongly suggest that the Act’s implementation of annual 10% excise tax increases is diminishing in its impact year to year.

New Zealand’s previous tax excise legislation (2010-12) resulted in increased quit attempts as evidenced by peaks in calls to Quitline in the month following the tax increase in April 2010, and January 2011 and 2012 (figure 3). However, there was evidence that this change in smoker behaviour was not sustained amongst more vulnerable smoking populations beyond 6 months.[14] Further analysis of Quitline registrations shows that there has been a steady decline in the January peak from 2011-14, with the 2014 January peak very similar to the January 2010 peak which occurred prior to the current series of above inflation tax increases.

Figure 3:Impact on Quitline calls from Recent Tax Increases[15]

Further evidence of reducing impact of recent tax increases comes from an analysis of retail tobacco sales data (figure 4).[16] This suggests that the January 2013 tobacco tax increase had little impact on consumption, compared with the 2010-2012 increases.

The declining impact of the 10% annual tax increases over time suggests there will be a suboptimal return on the existing tax policy for the increase in 2015 and the subsequent increase in 2016, and probably for future tax increases of the same size.

Figure 4:Impact of recent tax increases on retail tobacco sales

[RE1][director2][17]

Finally, evidence from current and recently quit smokers revealed that the impact of the tax increase in 2012 differed by ethnicity with non-Maori having an increased likelihood of reporting a smoking-related change (quit attempt, quitting or cutting down) in the previous week in the 2-3 month period following the 2012 tax increase than in the 3 months prior to the increase.[18]

Tobacco industry efforts to reduce the impact of tobacco tax increases

There is also evidence that tobacco companies adjust profit and production cost margins for their products to accommodate tax increases of up to and including 10%, so that price increases at the counter are significantly minimised.[19] For example, the median increase in price from before to after the tax change on January 2014 was only 3% for a value brand, compared to 8% for a premium brand tested among over 400 tobacco retailers.[20] Other approaches to blunt the impact of tobacco tax increases (so as to retain customers and profits) are to introduce low-cost brands, and to apply differential price increase between brands so that prices increase to a minimum on low cost brands (favoured by poorer smokers) but increase more on higher cost brands (favoured by higher income smokers who may be less likely to quit due to increasing cost). In New Zealand between[RE3] 2010 and 2013, there was a rapid growth in the sale quantity of ultra low-cost brands, up from 8.5% in 2009 to 41.2% in 2013. Such an increase was due to the introduction of a new variant, “Pall Mall Baseline” and an increase in the sale quantity of the other ultra low-cost brands, “JPS”. As a result of the ultra low-cost brands, cigarettes are still relatively 'affordable'. The increased price of purchasing an ultra low-cost brand in 2013 ($0.76-0.78) is similar to that of the then most popular brand in 2009 ($0.76), after adjusted to the value of 2013[RE4].[21]

Evidence of smokers using strategies to mitigate the impact of the tax increases and continue smoking

Surveys of people addicted to smoking have demonstrated a variety of ways in which they can modify their smoking behaviour to mitigate the impact of tobacco tax increases whilst continuing to smoke.

For example, a survey of Maori and Pacific smokers from a low income area of South Auckland found that smokers adopted a range of strategies to reduce the financial impact of the 2010 tax increases. These included cutting down on numbers smoked, switching to roll-your-own cigarettes or lower priced brands, and smoking more intensively and closer to the filter.[22]However, another study of smokers in the 2-3 months before and after the 2012 tax increases found that whilst there was an increase in smoking-related behaviour changes (cut down, tried to quit or quit) in the previous week in the period after the tax increase, there was no difference in product-related behaviour changes (e.g. changing to roll-your-own cigarettes, changing to a cheaper brand or tobacco type, or rolling smaller cigarettes) between the period before and after the tax increase.[23]

The potential importance of any switch to roll-your-own (RYO) cigarettes is demonstrated by evidence from analysing quarterly sales data for manufactured and loose tobacco revealing significant differences in price responsiveness between the two tobacco types. Those smoking manufactured cigarettes reacted far more strongly to price increases compared to RYO tobacco smokers.[24] This suggests that any switching to RYO tobacco that occurs following tax increases may act to blunt the impact of the current and subsequent tobacco tax increases.

Conclusion

Tobacco tax policy is a key public health measure and the single most effective intervention currently used by nation states to reduce smoking prevalence and consumption of tobacco.[25] The evidence for the effectiveness of tax and price policies is overwhelming.[26][27]Research has consistently found that tobacco tax increases that raise the cost of tobacco are strongly associated with declining smoking prevalence, reduced tobacco consumption, and reduced smoking uptake by youth. Tobacco tax increases are therefore a core component of the strategy to achieve the Smokefree 2025 goal.

We welcome the opportunity to present our submission in person.

Sincerely,

Dr Jan PearsonDr Prudence Stone

ChairExecutive Director

What might be the tax policy options for the NZ Government – if it is to use the tax instrument to help achieve the Smokefree Nation goal of 2025

Thetable below summarises the key options available to the NZ Government.

Option / Detail / Pros/Cons of the option
1) Do nothing / Let the systematic approach to annual tobacco tax increases finish with the last one being in January 2016. / Pros: Nil
Cons: Would greatly jeopardise progress towards the Government’s Smokefree Nation 2025 goal and also reduce government tax revenue.
2) Extend the current approach / Extend the current system of annual 10% increases in tobacco excise out for another five years (or even out to 2025). / Pros: Would be a cost-effective way of supporting progress towards the Smokefree 2025 goal, and help prevent erosion of the price signal by the shift to budget brands.
Cons: Approach is weaker than option 3. Modelling data and evidence of decreasing impact suggest it is unlikley to result in the achievement of the Smokefree 2025 goal.
3) Extend the current approach but at the 20% level / As above – but at the more effective level of 20% annual increases in tobacco excise. / Pros: Would be a more effective way of supporting progress towards the Government’s Smokefree Nation 2025 goal (than option 2) as the price signal would be less easily obscured.
Cons: For a minority of smokers who don’t cut down or quit there is potential for increased financial hardship. This is, however, outweighed by the substantial health and economic benefits for those who do cut down or quit, and can be mitigated by greater cessation promotion efforts at the time of each increase, targeted toward lower socio-economic populations (see option 4).
4) As per options 2-3 but with tax revenue specifically tagged for tobacco control / As per options 2-3 but with tobacco tax revenue being tagged for achieving the smokefree nation goal by 2025 and supporting smokers to quit. / Pros: Extra revenue for tobacco control would increase the probability of the Smokefree 2025 goal being achieved. Providing excellent smoking cessation support would mitigate ethical concerns about financial hardship for those ongoing smokers who do not cut down their consumption.
Cons: From one perspective, “tied taxes” limit government options. (But in this case the tied tax would end when the Smokefree Nation goal is achieved, and studies show strong support for such an approach, including among smokers)[28].
Note: this option (with option 3) is the most favoured approach by the signatories of this letter to key Ministers.
5) As per options 2-4 but with a minimum pricing system / As per options 2-4 but with a minimum price per pack of 20 cigarettes or per 100 grams of loose tobacco. / Pros: This extra measure would minimise the effect of budget brands and discounting in undermining the price signal (with particular benefit for low-income smokers who are the most price sensitive) and prevent the tobacco industry using differential price increases to undermine tobacco tax increases.
Cons: Some need for extra surveillance to ensure the new minimum price law is followed.

[1]Weng, S.F., Ali, S.,Leonardi-Bee, J. 2013. Smoking and absence from work: systematic review and meta-analysis of occupational studies. Addiction 108, 307-319.

[2] Menzin, J. et al. 2012. Lost productivity due to premature mortality in developed and emerging countries: an application to smoking cessation. BMC Med Res Methodol 12, 87.

[3]Centers for Disease, Control and Prevention. 2008. Smoking-attributable mortality, years of potential life lost, and productivity losses--United States, 2000-2004. MMWR Morb Mortal Wkly Rep 57, 1226-1228]

[4]NZ Parliament. Inquiry into the tobacco industry in Aotearoa and the consequences of tobacco use for Māori. Report of the Māori Affairs Select Committee. Wellington: New Zealand Parliament, 2010.

[5]NZ Parliament. Government Response to the Report of the Māori Affairs Committee on its Inquiry into the tobacco industry in Aotearoa and the consequences of tobacco use for Māori (Final Response). Wellington: New Zealand Parliament, 2011.

[6]Government Finance and Expenditure Select Committee report on the Customs and Excise (Tobacco Products – Budget Measures) Amendment Bill, July 2012.

[7]Framework Convention Alliance. ‘Meeting agrees advances to fight tobacco epidemic; governments must make them an immediate priority’ press statement 22/10/2014.

[8] ELT Subcommittee Policy Quality and Improvement Paper Brief, Ministry of Health, released in 2012 under the Official Information Act, page 7 ‘Even a continuation for several years of the current increases (i.e. 10% a year over the last three years) can only provide about a quarter of the decline in smoking rates needed to get to Smokefree by 2025.’

[9] Isaac, R., ‘Regulatory Impact Statement: Increase in Tobacco Excise and Equivalent Duties’, The Treasury, Wellington, May, 2012.

[10] Laugesen, M., ‘One Billion Fewer Cigarettes, 100,000 Fewer Smokers’, New Zealand Medical Journal, 6 June, 2012.

[11]Cobiac LJ, Ikeda T, Nghien N, Blakely T, Wilson N. ‘Modelling the implications of regular increases in tobacco taxation in the tobacco endgame’ in Tobacco Control 2014 (E-publication 21 August 2014)

[12] Blakely, T. Tobacco EndgamesMasterclass Presentation. Population Health Congress, Auckland New Zealand October 2014.

[13]Cobiac LJ, Ikeda T, Nghiem N, Blakely T, Wilson N. ‘Modelling the implications of regular increases in tobacco taxation in the tobacco endgame’ in Tobacco Control 2014 (E-publication 21 August 2014). See also van der Deen FS, Ikeda T, Cobia L, Wilson N and Blakely T. Projecting future smoking prevalence to 2025 and beyond in New Zealand using smoking prevalence data from the 2013 census. N Z Med J. 2014 Nov 28;127(1406):71-9.