One Year Later: Studies Show Plain Packaging Costing Taxpayers, Boosting Illegal Market

Federal, state, and local governments are obsessed with tobacco taxes as a way to raise revenue and try to deter smoking.  There have also been attempts by international bodies such as the United Nations and European Union to impose massive tobacco taxes (see the Taxpayer Protection Alliance’s [TPA] work on international tax issues here and here). TPA has always been skeptical of such techniques to curb smoking or raise revenue.   A new report out of Australia now shows that plain packaging may be the next least effective way to curb smoking.

United States

The promised revenue from increased tobacco taxes is nothing more than Fool’s Gold.  The Minnesota State News pointed out that “Since 2003 there have been 57 cigarette tax increases across the nation and 68% of them have failed to meet projected revenues. In 2006, New Jersey raised cigarette taxes with the hope of pulling in $30 million in extra revenue each year.  Not only did the tax hike fail to bring in extra revenue, but the state actually collected $20 million less in cigarette sales.” According to the Troy Record, “The sale of black-market, untaxed cigarettes has resulted in the loss of hundreds of millions of dollars in revenue to the state, robbing state health care programs designed to help children.”  And, also noted in that same article, “According to the Tax Foundation, a Washington D.C., business-oriented tax research organization, approximately 60.9 percentage of cigarettes sold in New York were smuggled in from other states.”

Australia

It has been a full year since Australia instituted ‘plain packaging’ for tobacco products as the Tobacco Plain Packaging Act of 2011 went into affect.  Australia became  the first nation in the world to enact such a policy. The law “prevents tobacco advertising and promotion of tobacco products and tobacco product packaging by making it an offence to sell, supply, purchase, package or manufacture tobacco products or packaging for retail sale that are not compliant with plain packaging requirements.” Tobacco products were to be sold in logo-free drab dark brown packaging, as a way to discourage potential customers from purchasing the products. As the first anniversary arrives, so do some recent findings regarding the impact, or lack thereof, that plain packaging is having on tobacco consumption.

Last week, a study released by London Economics detailed their findings of the effects of plain packaging on cigarette smoking since the law had been implemented in December of last year. The key findings of this study show that plain packaging has done little to nothing to deter individuals from purchasing cigarettes. This of course comes at a time when Australian officials had hoped that both plain packaging and tax increases on tobacco products would lead to a decrease in consumption. The study found no such evidence to support that aim:

In greater detail, three months following the introduction of plain packaging, daily smoking prevalence had declined by 0.9 percentage points (to 19.5%), while weekly smoking prevalence and less-than-weekly smoking incidence had declined by 0.1 percentage point (to 2.0%) and 0.4 percentage points (to 1.9%) respectively. In total, the proportion of adult respondents indicating that they smoked any form of tobacco declined from 24.8% to 23.4%. As previously stated, from a statistical perspective, these changes are not significantly different from zero.

Eight months following the introduction of plain packaging, the apparent decline experienced in the first three months started to reverse. Specifically, between the first and second wave following the introduction of plain packaging, the proportion of respondents indicating that they were daily smokers increased by 0.5 percentage points (to 20.0%), while the proportion responding that they were weekly smokers or less-than-weekly smokers increased by 0.1 percentage points (to 2.1%) and 0.3 percentage points (to 2.2%) respectively. In other words, the proportion of respondents indicating that they smoked tobacco products increased by 0.9 percentage points (from 23.4% to 24.3% between three and eight months following the introduction of plain packaging). Again, both wave-on-wave, and comparing the pre plain packaging wave with the most recent wave, these changes in smoking prevalence are not statistically significant.

The findings in the London Economics study are just one component of plain packaging and though the Tobacco Tax Act of 2011 didn’t do much to decrease cigarette consumption, what it did do was increase the sale of cigarettes on the black market. Illicit Tobacco in Australia is a half-year report done by the accounting firm KPMG LLP. The key findings in this study show the cost to taxpayers and increase in illicit trade as a result of plain packaging being on the books for only six months:

• Australia’s illegal tobacco market has risen to around 13% since the introduction of plain packaging just under a year ago, costing taxpayers nearly $1 billion in revenue.

• Consumption of tobacco has not decreased since plain packaging took effect in December 2012, the first time since 2009 that consumption did not decline year over year with more and more turning to the illicit trade and to branded illegal products.

• The level of illegal consumption of tobacco reached record levels, growing from 11.8% to 13.3% over a one-year period from June 2012 to June 2013, the key driver being the increase in black market cigarettes.

The studies have made headlines in the international community and even as many opponents of plain packaging have been eager to discuss the findings, many advocates for plain packaging are forging ahead with their plans to implement the policy in their respective countries. Officials in Scotland and England have made clear they intend to introduce plain packaging for cigarettes in the coming year. Michael Matheson, Scotland’s public health minister noted the Australian model, “I am very encouraged by the early findings coming out of Australia following [the] implementation of plain packaging there. We will, of course, continue to take account of any new evidence emerging from Australia as we move toward a consultation on the next steps in Scotland in the New Year.” In England, Public Health Minister Jane Ellison discussed the possibility plain packaging, saying if “we are satisfied that there are sufficient grounds to proceed, including public health benefit.”

The recent studies released on plain packaging show very much in just a short amount of time. Tobacco on the black market has seen an enormous increase; there’s virtually no drop-off in cigarette use; the price of tobacco products is rising and will continue to rise and harm consumers. And the biggest slam is for Australian taxpayers who have lost nearly $1 billion dollars in revenue as a result of this ill-fated policy. Politicians around the world should learn the lessons from Australia and TPA certainly hopes that commonsense and free markets will prevail in Australia, and everywhere else.