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NZ tobacco companies use tax hikes as cover

New Zealand’s tobacco companies used annual tax increases as cover for significant voluntary price increases. Pete McKenzie reports. 

New Zealand’s smokers are paying through the nose for cigarettes after a decade of annual price increases. The average smoker will spend over $100 on cigarettes each week, more than double what they would have spent in 2011.

But while most attribute that rapid increase solely to tax increases, analysis shows that New Zealand’s tobacco companies used annual tax increases as cover for significant voluntary price increases. These have radically increased tobacco companies’ profit margin while subsidising attempts to attract new smokers and keep current customers addicted for as long as possible.

In March 2010, the average pack of 25 cigarettes cost $13.46. Of that price, $7.86 was excise tax and $5.60 was revenue for tobacco companies. By March 2019, the average price had skyrocketed to $37.48. Of that price, the government took $23.12. But the most striking change was that tobacco companies had almost tripled their average revenue per pack to $14.36.

Many smokers are frustrated by increased cigarette taxes but understand their policy logic. However, when informed of tobacco companies’ voluntary price increases, outrage was the most common reaction. One smoker, speaking on condition of anonymity, said that “It just seems wrong ... [Tobacco companies] know people get addicted and then just make us pay more money for something they sold us that we’re addicted to. It’s great for their pockets, bad for ours.”

Tobacco companies’ decade-long strategy of voluntary price increases was largely hidden in plain sight. Regular tax increases have increased the price of the average pack of 25 cigarettes by an average of $1.70 each year. Tobacco companies simply matched those increases with their own average annual voluntary hike of $1.

When asked for comment on these voluntary price hikes, a British American Tobacco spokesperson chose to instead focus on tax increases. “The key reason that the price of cigarettes is so high in New Zealand is the amount of tax smokers pay. These taxes have increased 165 percent since 2010.” A spokesperson for Philip Morris International would not comment on the record.

According to Professor Richard Edwards, an Otago University academic and co-director of the ASPIRE 2025 project, excessive and hidden voluntary price hikes are a common tactic of tobacco companies around the world. “The industry tends to portray itself as fighting tax increases so as to help out smokers, when really it is clear they often use such increases to bring in price increases that they blame on the government.”

Despite the significant decline in cigarette smoking among New Zealanders, this strategy of squeezing customers through voluntary price increases has allowed tobacco companies to maintain and in some cases increase their revenue.

However, the main concern in public health circles is not tobacco companies’ increased revenue in and of itself, but rather the way in which that revenue is being used. Over the past decade, tobacco companies have introduced ‘ultra-budget’ cigarette brands with significantly lower-than-average prices. When adjusted for quantity, these ultra-budget brands like Philip Morris’ Choice and British American Tobacco’s Winfield’s Select are $4 cheaper than the average pack of cigarettes.

According to Ben Youdan, a former director of ASH (an advocacy group focused on smoking), tobacco companies have introduced these ultra-budget brands “so that people who might be quitting… have a slightly lower price to fall back on and continue using the products of these companies.”

In other words, New Zealand’s tobacco companies are squeezing richer smokers to increase revenue, while also subsidising ultra-budget brands to attract new smokers and keep poorer customers. Youdan’s concern over this strategy resonates among everyday smokers. Another smoker speaking on condition on anonymity vented that “Not that tobacco companies have ever been beacons of morality, but the tax increase on its own would disproportionately affect smokers with low incomes. So the voluntary price increase adds insult to injury.”

One solution to this issue would be to introduce minimum pricing, where tobacco companies are legally required to charge a minimum price for every tobacco product. It’s an approach which Professor Rob Branston, an expert on tobacco pricing at the University of Bath in the UK, opposes because of concerns around placing the same minimum price on very different products. He notes that a hand-rolled cigarette can have very different amounts of tobacco to a factory-made one - or even to a cigarette rolled by someone else.

According to Professor Branston, “Even if that weren’t an issue, minimum prices give power to the industry. It forces tobacco companies to charge slightly higher prices where the benefit of those higher prices will go to the industry in the form of higher profits.” Instead, Professor Branston advocates for a stricter solution. “If you want higher prices in the shop, you simply need to have higher taxes and you pass a law that says the industry cannot sell below the tax level. You’ll effectively have a minimum price in the shops, but it will be government-controlled. It wouldn’t stop the industry from pricing higher than that, but of course higher prices are a good thing not a bad thing.” Youdan pushes back on the endorsement of higher prices, noting that they’re already having a punishing impact on poorer New Zealanders, and instead endorses extra funding for addiction and support programs.

As the Ministry of Health nears the end of a decade-long policy of tobacco tax increases, with the final increase scheduled for January 2020, it finds itself confronting a tobacco industry which has profited off of the policy and is, by some measures, stronger than ever. It remains to be seen whether the recommendations of Professor Branston and others will be taken up as New Zealand shifts into a new era of tobacco control.

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