SMOKE & MIRRORS
Annual cigarette spend-up gives Govt books a boost
An annual race to beat the January 1 tobacco excise hike has helped keep the Government’s books in surplus.
On Tuesday Treasury released the accounts for the New Zealand Government for the six months to December 31, which showed the Crown ran a small surplus of $437 million.
This was ahead of Treasury forecasts for an $82m deficit.
The documents pointed to stronger than expected revenue, with revenue from excise on tobacco products higher than anticipated.
Indeed, the figures showed a spike in excise on tobacco at the end of last year.
Treasury received $724m in excise taxes in December, more than a third of the just under $2 billion forecast for the 12 months to June 30.
Tobacco excise paid in December accounted for almost 43 per cent of the tobacco excise paid in the first six months of the year.
But based on patterns of previous years, the figures do not point to an increase in smoking, but widespread gaming of excise rules to avoid the impact of annual tax rises. Just as smokers can ease the burden by stocking up before the end of the year, so too can retailers and even tobacco companies. While the tax on cigarettes increases on January 1, the excise is not charged at the point of purchase, but when the product arrives in New Zealand.
This means that if a tobacco company imports extra products into New Zealand in December, but the product is not sold until the following year, the excise tax was paid until the following year.
Likewise a dairy which purchases tobacco products in December may pass on the excise increase on January 1, but the higher sales price will be kept by the retailer.
This phenomenon has played out for years, with a boom in the tobacco excise take in December, before a plunge in January.
Treasury’s forecasts assume it will be the case each year, although for years Treasury has underestimated how lumpy the country’s tax take from tobacco will be.
In December 2018, Treasury booked $637m in tobacco excise, which once again was around a third of the total it forecast for the year. The following month, in January 2019, tobacco excise dropped to $90m.
In December 2017, Treasury booked $628m in tobacco excise, which was around $150m more than Treasury expected would be paid. A month later in January 2018, the tobacco excise take dropped to $72m.
Taxpayers’ Union spokesman Louis Houlbrooke said the nature of addiction meant there was likely to be more of the behaviour with every tax increase.
“It’s [another item on the list] of unintended consequences of the tunnel-visioned push for annual tax hikes,” Houlbrooke said.
“It’s hard to blame people facing cripplingly-high tax rates when they . . . find legal ways to minimise their financial pain.”
Despite falling smoking rates, annual excise tax rises have steadily increased the amount the Government receives from smokers.
In the year to June 30, 2019, the Government received $1.98b in tobacco excise, $173m more than the prior year. So far tobacco excise is more than $150m ahead of Treasury’s forecasts in the first six months of the fiscal year, however Treasury said “most of the variances are timing in nature and unlikely to persist to year-end”.
It’s [another item on the list] of unintended consequences of the tunnel-visioned push for annual tax hikes.
Louis Houlbrooke, Taxpayers’ Union