COSTING MINUTE
Date:  20/10/2009
Ref:  CQAU 2009-211
File:  

To:	Katherine Tuck, Australia's Future Tax System
Cc:	Jason McDonald, Australia's Future Tax System

TITLE	Changes to tobacco excise

Summary of Proposal
Intent of the proposal
The AFTS panel is examining a number of changes to the taxation of tobacco to increase the base and rate of tobacco excise. 
Current taxation treatment/problem
Currently in Australia, cigarettes and cigars that contain less than 0.8 grams of tobacco each are taxed on a ‘per stick’ basis, regardless of how much tobacco the stick contains.  From 1 August 2008 the excise was $0.2545 per stick or $6.36 on a pack of 25.   Excise rates are indexed twice a year in line with the CPI. Since wages generally rise more quickly than consumer prices, this means that excise will fall as a proportion of average wages over time. 
Other tobacco products — including cigars and cigarettes containing more than 0.8 grams of tobacco, rolling tobacco and smokeless tobacco — are subject to excise at a per kilo rate equivalent to the per stick tax on 0.8 gram sticks.  From 1 August 2008, this amounted to $318.14 per kilo. The main features of the existing excise system have been in place since 1999.

Proposed taxation treatment
The first proposal is for a one-off increase in tobacco excise of 10 per cent. That is the per stick excise rate would rise by 10 per cent from 1 July 2010. Excise equivalent customs duty would also rise by the same amount. This would be additional to indexation increases in Feb and Aug 2010. 
The second proposal is to change the indexation of tobacco excise from CPI indexation to wages indexation. Since by convention, all AFTS proposals are being costed with date of effect 1 July 2010, this should start from the regular 6 monthly indexation point in Aug 2010. Use the ABS’s wage price index. 
The third proposal is to abolish inbound duty free for tobacco, though retaining a de minimis threshold of 25 cigs or equivalent amount of other tobacco products. 

Elements and options
Elements
Element ID	Description	
A	Abolish the inbound duty free concession for tobacco, though retaining a de minimis threshold of 25 cigarettes or equivalent amount of other tobacco products.	
B	Change the indexation of tobacco excise from CPI indexation to wages indexation. Since by convention, all AFTS proposals are being costed with date of effect 1 July 2010, this should start from the regular 6 monthly indexation point in Aug 2010. Use the ABS’s wage price index.	
C	A one-off increase in tobacco excise of 10 per cent. That is the per stick rate would rise by 10 per cent from 1 July 2010. This would be additional to indexation increases in Feb and Aug 2010.	

Options examined
Option ID	Option	Assumed start date	Was a Departmental Impact Assessment sought? 	Was a Tax Regulation Impact (preliminary assessment) sought?	
1	A & B & C	01/07/2010	No	No	

FINANCIAL IMPLICATIONS 
IMPACT ON FISCAL BALANCE - Accrual-Budget ($m)
Option ID	Year of Maturity	2008-09	2009-10	2010-11	2011-12	2012-13	
1	2012-13	-	-	760	890	1020	
 	Revenue	-	-	760	890	1020	
-  Nil

IMPACT on UNDERLYING cash BALANCE ($m)
Option ID	Year of Maturity	2008-09	2009-10	2010-11	2011-12	2012-13	
1	2012-13	-	-	760	890	1020	
 	Revenue	-	-	760	890	1020	
-  Nil

The costing of each option has been undertaken independently from those of other options, meaning that the costs are not necessarily additive.
Reliability 
The reliability of this costing is moderate. The accuracy of option A is highly sensitive to assumptions regarding the Price elasticity of Demand. Option B is dependent upon forecasts of wages and the CPI.  
Costing Details
Methodology
Option A costs projected excise revenue based on RAU collections forecasts with and without the excise increase.

Option B applies RAU Average Weekly Earnings forecasts.

Option C  has been costed prior in CQAU 2009 150 and the output from that was used directly to cost this option. For insight into the methodology used to cost this option please refer to this costing. 

Data
Forecasts of AWE, CPI and tobacco excise collections.
Assumptions
The demand for tobacco is characterised by a non-linear demand curve with a constant PED given by -0.42.

Additional information
Departmental impacts
An assessment of the Departmental Impact has not been requested.
Tax Regulation Impact (preliminary assessment)
A preliminary assessment of the Tax Regulation Impact has not been requested.
 
All material provided in this minute must be cleared by the Tax Analysis Division incorporated into Executive Minutes, Cabinet Submissions, any other briefing material, or when used for external purposes.
Brown, Colin
Manager
Costing and Quantitative Analysis Unit
Tax Analysis Division

Primary TAD contact	Daniel Bunting	Phone No.	6263 2878	
Secondary TAD contact	Matthew Maloney	Phone No.	6263 2556	
ATO contact	N/A	ATO Minute No.	N/A