Smokers' "addictive nature" makes them easy game for a tax hike, according to the Treasury's regulatory impact statement on the pros and cons of raising the excise on tobacco that was announced in this week's budget.
The tobacco tax will rise 10 per cent a year for four years, adding $1.4 billion of new revenue that will help return the government accounts to a small surplus in 2015. By 2016, a packet of 20 cigarettes will cost $20 or $1 per cigarette, the Treasury says.
"Tobacco taxes are very efficient at raising revenue, as compared to other goods and services," the Treasury report said. "Consumers are not highly price sensitive due in part to the strongly addictive nature of nicotine,".
"For any given increase the majority of current smokers in any income group will not quit, and they will struggle to reduce consumption by the amount they would need to in order to spend no more on tobacco," says the impact statement, which is dated last month.
"The powerfully addictive nature of nicotine means that the extent of smokers' 'free choice' to smoke is debatable and many smokers report regret having started the habit."
The Crown collected $145 million in excise from locally produced tobacco and a further $746 million from taxes on imported tobacco, according to the government's financial statements for the nine months ended March 31.
Tobacco companies claim the tax hike will drive tobacco into an unregulated, untaxed black market.
The Treasury report said the hike will have little effect on retailers, who will need to make minor price adjustments. Retailers favouring "premium" brands could be disadvantaged, with the tax hike encouraging smokers to purchase cheaper brands. The increase will also reduce the incentive to "invest and innovate in tobacco importation, manufacture and distribution."
That supports a Ministry of Health discussion paper released last month modeling the impact of smokers' behavior if the price of a packet of 20 cigarettes rose to $100 over the next eight years from around $16 today, to help achieve the goal of a 'smokefree New Zealand' by 2025.