Center for Tobacco Control Research and Education

In 1998, the Australian Government announced a major reform of Australia’s overall tax system. The previous system was characterized as out of date (it included a range of historically justified but now anachronistic taxes), unfair, discouraging of exports and investment, ineffective and complex. The proposed reforms included the introduction of a Goods and Services Tax (GST) and the abolition of a raft of state taxes and charges. The aim was to bring the service economy into the tax net, provide sustainable funding to the states and lower corporate and individual tax rates. Tobacco control advocates felt that it was essential to ensure that this did not adversely affect tobacco taxation levels.

Higher tobacco taxes significantly reduce cigarette smoking and other tobacco use. However, for a specific tax increase to have maximum effect on reducing consumption there are a number of criteria that must be considered. Firstly, it must be a real, sustained increase, that is, greater than the rate of inflation. Ad valorem taxes such as the GST will increase with actual prices. Secondly, the impact of the tobacco tax will depend on the magnitude of the price increase. Thirdly, it must be understood that smokers exhibit compensating behaviour, for example, substituting with higher tar and nicotine cigarettes. And finally, smuggling can reduce the effect on consumption of a tax increase (Chaloupka, 1998), as can other means of excise avoidance.