1 Submission to the Finance and Expenditure Committee on the Customs and Excise (Tobacco Products- Budget Measures) Amendment Bill 22 June

2 Authors of this submission Dr Murray Laugesen QSO WHO medallist, public health physician and Chair; and Trustees: Dr Marewa Glover PhD, Trish Fraser MPH, Dr Penelope Truman PhD, Prof Ross McCormick, PhD Revenue section revised, 20 July Thank you for granting an oral hearing ph Winchester St Lyttelton 8082

3 About us: End Smoking NZ trust 3 We are a policy think tank. Our main contribution is by way of policy research. We do not seek to prohibit tobacco smoking. Instead, we seek its de-normalisation. We seek phasing out of the sale of tobacco. We do not receive government funding. We are a registered charitable trust, founded Trustees are mainly addiction experts.

4 What we support 4  The government ’ s 2025 smokefree goal  Changing this bill to provide extra ways to reduce tobacco addiction, make quitting easier and hold manufacturers accountable:  Lowered excise for Denicotinised cigarettes to encourage smokers unready to quit to switch to Denics and quit sooner.  Legalisation of the sale of nicotine electronic cigarettes (ecigs) as in UK and USA.  Ending the tobacco concession at duty-free shops.  Profit caps on cigarettes firms to raise further revenue.  Mandated monthly reporting of total cigarette sales by manufacturers.

5 Summary of End Smoking NZ’s argument on the Excise Bill  Government’s plan to annually increase tobacco excise is welcome.  The Health proposals for increase in excise are the minimum needed to achieve the 2025 smokefree nation goal. Even 20% pa x 4 does not reach the 2025 goal.  The Health Proposal delivers more revenue and greater health gains by By 2016, revenue will be more from the Health Proposal ($300 m) than from the Budget proposal ($250 m). The Health proposal, however, means 100,000 fewer smoking by 2016, as against 26,000 fewer from the Budget proposal. Altogether, the Health tax Proposals will raise around $800 m. from smokers.  Increased excise need not increase smokers’ costs nor increase their cravings for cigarettes, provided Government permits two types of product to be sold on the domestic market: Denics and Ecigs:  Lower tax category needed to get Denics sold – not difficult. (More at Slide 24.  Legalisation of nicotine e-cigarettes as a non medical stop smoking aid – by releasing them from purview of the Medicines Act. (more at Slide 25)  These less addictive or safer alternatives to smoking are sold overseas and should be on sale here.  Market failure needs correction: The current addictive-cigarette monopoly has killed 200,000 New Zealanders since 1950 and must be abolished by allowing competition from less addictive products.  Over and above the proposals to increase tobacco excise, ~$600 million extra tobacco excise is obtainable in without further increase in prices. (price & profit cap, ending duty-free)  Market failure needs correction. High profits (EBIT 46% in 2011) from the sale of cigarettes which continue to kill 5000 New Zealanders annually, suggest prices should be capped and profits recovered as excise.  Outdated privileges In-bound tourists and returning residents should pay full excise and GST on cigarettes, like anyone else.

6 We support the Governments’ 2025 Smoke-free Nation Goal 6  The Government has agreed to this achievable goal following the recommendation of the Maori Affairs Select Committee and the Tobacco Inquiry in  The goal will be achieved when :  less than 5% of adults still smoke, or  cigarettes sold per adult are reduced 95% below 2012 levels  We support substantial increases in tobacco excise tax to achieve the goal as such measures are highly effective.

7 The Budget proposal (10% x 4 excise increases) would not achieve the Government’s 2025 smokefree nation goal until around We want the Bill changed to help achieve the goal by (20% x 4 also not effective) 7  10% increases as proposed in Budget 2012 will not enable the Government and people of NZ to attain a smokefree NZ (until about 2050).  These budget proposals lower the numbers smoking by one percent a year for the next four years.  Meantime, cigarette-smoking deaths continue at around 5000 per year.  Greater increases are needed now.

8 Increases in tobacco tax, ; two different proposals 8

9 The health tax proposal in summary 9 The health tax proposal (40% + 20% x 3) would, by 2016: Have a huge and immediate health impact, esp. for Maori Reduce the number of cigarette smokers by ~150,000 Remove one billion cigarettes annually from sale Lead to $200 million extra revenue annually for government Not cost smokers any more if they reduced the number of cigarettes they smoked from 12 to 9 cigarettes per day  Not cause cravings for cigarettes if Denics & Ecigs on sale.

10 The Health proposal can secure large health gains in  The health proposal asks for 40% in 2013, then 20% annually to  The health proposal is preferred for its immediate improvement to health.  70,000 smokers would quit early in 2013, and  0.7 billion fewer cigarettes would be sold in 2013, and 1.3 billion fewer by Price elasticity -0.7

11 The next few slides project and compare the future effects of the Budget versus the Health Proposal. By each measure, Health proposal produces much greater gains for public health.  Projected to 2025 Cig sales  Numbers smoking Cigarettes per adult  

12 The impact of tobacco tax increases and beyond to See Annex 2 for explanation of price elasticities Smokefree Nation Goal by 2025 = 5%

13 Impact on sale of cigarettes by 2016; Health proposal: one billion fewer cigarettes sold annually By 2016 the Health proposal would have reduced cigarette sales by one billion sticks per year and lowered cigarette sales 0.65 billion sticks below the sales expected from the Budget proposals. Price elasticity -0.5

14 Only much higher tobacco excise rates will markedly reduce the numbers still smoking:  The Budget proposal (10% increases annually) lower numbers smoking by 1% a year – an inadequate remedy.  The Health proposal can reduce numbers smoking by 18% over four years  Even at the Treasury tobacco price elasticity of -0.5, the Budget proposal would reduce numbers smoking by 26,000 (4%) over 4 years.  The Health proposal for excise increases would lower numbers smoking by 100,000 during  With a 40% increase in excise on 1 Jan 2013, 50,000 would quit in early  At the more realistic price elasticity of -0.7, the gains will be 40% higher than noted above.

15 Impact by 2016 of Budget & Health proposals on cigarettes smoked per adult  Cigarettes per adult is the most accurate public health statistic for measuring smoking.  The Budget proposal, the middle column, decreases smoking per adult by 15%.  The Health proposal on the right decreases cigarettes per adult by 38% Number of cigarettes sold per adult per year

16 REVENUE – the next few slides  In an extra $1400 million can be obtained from tobacco excise revenue, and not only from smokers.  $584 million extra excise is obtainable without raising the price of cigarettes.  $750m-$850m extra is available directly from smokers in excise payments, ~$200 million p.a.  Price-profit caps on excessive profits and conversion to excise can generate $83 million p.a. without raising prices.  Ending the duty-free tobacco concession for inbound passengers. $63 million p.a.

17 Besides $800 million from increases in Health proposal excises, Government could obtain another ~$584 million of extra excise without increasing the current price of duty-paid cigarettes

18 Revenue comparisons, Budget v. for Health Proposal based on supermarket cigarette sales data Differences between height of these columns show that extra revenue expected in 2016 calendar year would be: $250 million if the Budget proposal is followed, or $300 million if the Health Proposal is followed. Budget or Health excise proposals both provide ample revenue, and so revenue does not have to be the decider on the the level of excise.

19 The Health tax proposal would cost smokers $2 to $4 a day extra, and generate ~$200 million revenue p.a.  Government revenue from smokers is expected to increase by at least $650 million whatever option is chosen, but the health benefits vary, and are ineffectual for 10,10,10,10.  Price elasticity = (For the evidence, see Health NZ Supplementary submission)  40, 20, 20, 20 means 60,000 fewer person-years of smoking in than with 25, 25, 25, 25.  25, 25, 25, 25 gives $106 million more revenue over 4 years than 40, 20, 20, 20.  The Health tax proposal (at price elasticity –0.7) adds ~$1.25-$2.50 per day in extra excise, and 1.4 times this in increased cigarette expenses after allowing for some reduction in daily consumption. On the 10,10,10,10 proposal, smokers would pay $0.82 extra excise per day, and ~$1.20 per day more for cigarettes. (based on the average; 2016 costs will be more.)

20 Extra Revenue suggestion 1. Price-Profit cap on cigarette companies: $332m in 4 yrs  Currently cigarette firms are taxed at the standard company rate, and are not penalised financially.  Smoking kills, and cigarettes kill 5000 New Zealanders each year.  Cigarettes according to Annual Financial Statements of the companies on the Company Office website cost ~10 cents each to make; profit is ~6 cents.  Industry profit per cigarette averages 46% (PM 23%, Imperial 31%, BAT 53%).  After allowing for reduced company tax, and capping of profits at 12% to 20%, $83 million p.a. could be unlocked by increasing excise by a matching 3 cents a cigarette.  Cigarette prices would be unaffected. This proposed revenue stream is in addition to the excise increases on smokers proposed in the Bill and in the Health tax proposals, which will raise the cigarette price.

21 Extra Revenue suggestion 2: Recoup $72 million of duty free tobacco concessions.  The current tobacco concession of 200 cigarettes and 250 g of tobacco should be removed.  Returning New Zealanders and in-bound tourists may still wish to buy cigarettes at the airport on arrival, but there is no reason why they should not pay tobacco excise and GST as does every other smoker in NZ.  As the duty increases, in-bound non-smokers may exploit this loophole and on-sell.  Treasury states in its Regulatory Impact Statement (RIS) that duty-free accounts for 5% of duty-paid tobacco sales, which means government could be missing out on $63 million of annual excise revenue* and perhaps another $9 million in GST not paid on this value if arriving passengers paid full duty. * 5% of $1269 million tobacco excise revenue in 2011.

22 NEXT FEW SLIDES: COPING MECHANISMS for smokers wishing to avoid paying increased excise on addictive cigarettes.  REDUCE CIGARETTES SMOKED. Reducing cigarettes smoked per day, however, leaves smokers with cravings for the next cigarette, unless they QUIT.  QUITLINE AND NICOTINE MEDICATIONS – their availability and subsidy means smokers better able to cope than 12 years ago.  DENICS TO REDUCE CRAVINGS – Not available. Their sale requires this Excise Bill to strike a lower the excise rate for Denics to enable their domestic sale. Currently only addictive cigarettes are sold.  E-CIGS to provide nicotine. Not available. Requires Government (Minister of Health) to permit their domestic sale.

23 COPING MECHANISM Smoke fewer per day or quit altogether. Ministry of Health currently provides quit services. 23 Increasing excise 40% in 2013 affects smokers’ costs - but much less than might be expected, if they can reduce from 12 to 9 cigarettes per day (tax up 40%) Cost of 20 cigarettes per day$13$18 Cost of 12 cigs (current average)$11 Cost of 9 cigarettes per day$8 (Many smokers however, will neither cut down nor quit and instead will pay more tax. ) … but 50,000 smokers will quit altogether! $8

24 COPING MECHANISM 2. Switch partly to Denics - lowers addiction and makes quitting easier  Denics contain less than 2 mg nicotine (by bench top test).  Could be taxed at a lower excise rate, priced at $12 a pack.  Creating a lower excise category for Denics would deal to the main problem in reducing smoking – tobacco addiction. Introducing a lower excise rate for Denics would:  allow smokers to select their own mix of AddictiveCigs and Denics;  make Denics available to reduce cravings, reduce addiction, and reduce smoking and welfare costs to smokers’ families.  by being kinder to smokers, increase the political feasibility of increasing excise on AddictiveCigs to greatly reduce smoking. Source: Laugesen M. Modelling a two-tier tobacco excise policy to reduce smoking by focusing on the addictive component (nicotine) more than the tobacco weight. NZ Med J under review.

25 COPING MECHANISM 3: Buy a nicotine electronic cigarette – Government can assist by legalising the domestic sale of nicotine electronic cigarettes  Many smokers, desperate to quit smoking, purchase nicotine ecigs for private use from overseas by internet. Smokers ask why can’t they buy them here.  Nicotine ecigs mimic the smoking habit as well as providing nicotine.  Nicotine patch or gum replaces nicotine but not hand to mouth movements. 3% of smokers use Nicotine ecigs in UK. Ecigs vaporise nicotine but do not burn tobacco.  Ministry of Health says ecigs are “far safer” but can’t be sold as nicotine is a medicine (under Medicines Act) and ecig nicotine constitutes an unlicensed medicine.  Addiction of never smokers to nicotine-only products is a rarity.  Government’ goal is a smokefree nation by Many smokers will need legal access to safer alternative products.  Ecigs contain nicotine; all nicotine is made from tobacco, and thus nicotine is a tobacco product under the Smokefree Environments Act provided it is non-medicinal. Medicinal nicotine is on sale under the Medicines Act, but smokers want a recreational safer alternative to smoking. Solution: Release it from Medicines Act.  The sale of nicotine e-cigarettes within NZ would enable NZ-resident distributors (small businesses) to profit from the sales, Government would obtain the GST.

26 Annex 1: Method used for forecasting 26  The Bill’s Regulatory Impact statement (RIS) was examined and a price-excise ratio of 1.7 to 1.35 adopted for  Cigarette prices were derived from consumer price indices.  Tobacco manufacturers’ returns provided annual sales data back to  Volume sales estimated from government excise revenue is frequently distorted by increased excise paid prior to excise increases.  Price elasticity (e) in some of the graphs drawn was assumed to be -0.5 as assumed by Treasury, but later graphs are based on (e)= -0.7 as we found, which increases the expected reductions in smoking by 0.7/0.5 = 40%. Source: Laugesen M. One billion fewer cigarettes, fewer smokers. NZ Med J. 8 June 2012

27 Annex 1: Method used for forecasting (cont’d) 27  Half of reduced cigarette sales was attributed to fewer smoking and half to smokers smoking fewer per day.  Various tax increases were modelled out to Minimum effective options were chosen to reach the smokefree NZ goal by 2025 or soon thereafter.  Estimates were based on standard cigarettes (factory-made under 0.8 g, or hand-rolled estimated to contain 0.7 g tobacco).  Modelling was carried out with an Excel spreadsheet and checked by a professor of biostatistics.

28 Annex 2: Elasticities 28  Comments on calculating sales trend in response to price changes (price elasticity)  Without real excise increases, sales generally remain flat.  Weekly or monthly sales data give the most accurate and timely trends in smoking.  Price elasticities vary, being higher when based on simple comparison of price and sales changes from tobacco returns data (-1.0 approx. since 2002*) and lower and more reliable when multiple regression is used on weekly or monthly sales data ( -0.7 approx. since 2009.) * Laugesen M. One billion fewer cigarettes, fewer smokers. NZ Med J. 8 June 2012

29 Annex 2 continued Price elasticities used in this submission  Consumption/Price elasticities:  -0.5 (Treasury estimate)  -0.7 Health Proposal estimate, based on supermarket sales – For example:  End Smoking’s weekly survey of supermarket sales using data from AC Neilsen. For further information on this topic, please see Health NZ’s supplementary submission 15 July Laugesen M. and Frampton C. “Cigarette sales in NZ supermarkets in response to excise and price increases in ” 29