The case for plain packaging of tobacco

The Australian government has proposed to legislate to ensure tobacco in Australia must be sold in plain packages, rather than the branded packages in use at the moment. This is designed to reduce consumption of tobacco, and thereby reducing smoking’s cost to society.

As I have shown below, currently smokers are not paying anywhere near the costs of tobacco use in Australia, action designed to reduce consumption is sensible public policy, which is probably why the majority of Australians support this action.

A sample plain package

The Plain Tobacco Packaging (Removing Branding from Cigarette Packs) Bill 2009 has been supported by the Labor government, and now has the support of the Liberal-National Opposition. It will become law on January 1 next year. The economic reasons to reduce smoking are summarised in the Australia’s Future Tax System review, conducted in 2009 (popularly known as the Henry Review).

Tobacco levies on Australian society tangible and intangible costs that far outweigh income brought in by smokers. Government income in 2009-2010 from tobacco excise was $5.65 billion according to the budget outcome for that year. Excise does not include the GST take, so if sales in 2009 were about $10 billion, there is also another $0.9 billion in GST, giving total taxation income for Australians from tobacco of $6.6 billion (being generous, and round up).

The most recent readily available data I could find was from 2004-2005. This suggested costs in that year of $31 billion (Victorian Cancer Council, National Drug Strategy).

Tangible costs — those that can be measured — were $12 billion. This includes expenditure on health care and drug subsidies, and also staffing costs to replace workers sick from smoking-related illness and the costs for those who leave the workforce as they can no longer work. Note that these are the net costs (less any savings made by, for example, smokers who die earlier than they otherwise would and so don’t require increased health expenditure). The important consideration with intangible costs is that when they’re reduced, the saving is freed up for other uses.

Intangible costs are harder to measure, but in many ways are the more important ones. Intangible costs include the loss of enjoyment of life, loss of life itself, and the pain and suffering of both smokers and their families. They were $19 billion in 2004-2005. Saved intangible costs can’t be reused. This $19 billion estimate is very low, as it only includes two components:

1. The value of a year of life lost to each person not alive in 2004–05 due to past drug abuse;
2. Estimates of pain and suffering due to accidents.

It does not include:

1. Purchase of over-the-counter and off-the-shelf medicines
2. Domiciliary care and allied health professional services
3. Reduced on-the-job productivity
4. Litter
5. Pain and suffering experienced by smokers and others.

Adjusting the costs — change in price — tobacco, health and labour, 2005-2010.

Remember, this cost is in 2004-2005, but the revenue is from 2009-2010. A more realistic comparison would be to do a simple cost adjustment for CPI from the 2004-2005 costs for inflation. Where possible, I’ve used the rise in costs associated with the specific cost (so, wages increases for labour costs, and health costs increases rather than CPI). A comparison shows that generally the cost of tobacco, health and labour are similar except for the spike in tobacco costs in 2009 (likely due to an excise increase). CPI lags these other indexes, and so adjusting for cost increases using CPI is generous.

Using the data provided by the National Drug Strategy’s report on the costs of tobacco and adjusting for these changes in prices, we see that the total cost rose from $31,485.80 million in 2004-2005 to $35,814.14 million in 2009-2010.

I’ve included the growth in costs from June 2005 to June 2009, and so have probably underestimated the growth in cost. Data comes from the ABS (Consumer Price Index, Labour Price Index). Where there was no specific price index, I used the general index. I could have been more detailed, and adjusted health costs by the increase in the individual components, but that seemed unnecessary — the point I’m making is that the evidence clearly shows tobacco use costs far more than its taxation revenue.

On market failures — It would appear that tobacco use is a good example of market failure. The smoker has imperfect information, as smokers can’t assess the effects of smoking on them as individuals. In addition, externalities exist as smokers affect others.

First, tobacco is addictive. It’s not like any ordinary product where consumption is nothing more than a simple choice made by a rational actor. The consumer has imperfect information about the costs he or she incurs. Most obviously, no one knows how much their life will be cut short by smoking, or how much income they will lose due to ill health, or almost any other effect of smoking.

Secondly, costs are incurred by households and business and these costs are not compensated for by excise revenue (presumably compensation could occur if excise income was being spent on things that alleviate these externalities). These negative externalities need to be taken into account when considering the effect of tobacco consumption.

Reducing the cost to society — Taxes paid by tobacco producers and/or smokers do not meet the costs to society caused by smoking. Even if only the tangible costs are considered, tobacco excise would need to be doubled to begin to approximate the measured costs. As tobacco demand is relatively inelastic (see here and here), smokers aren’t all that sensitive to price (as price rises, demand falls but not a great deal). Price alone can’t be used to reduce smoking. Other mechanisms must be used. While detractors, including tobacco lobby groups such as the Institute for Public Affairs, either run ridiculous arguments about trademark appropriation or claim (without evidence) that it won’t work, given the massive drain on public finances and the social and individual costs concerned, plain packaging is a sensible approach.

The most obvious alternative to plain packaging for tobacco would be to impose significant cost increases; tripling the excise might be a start. If the tobacco industry finds plain packaging sufficiently onerous so as to take action in a futile attempt to protect branding cigarettes, perhaps the most suitable alternative would be an excise increase to ensure that the costs smokers levy on the rest of us are properly met by tobacco consumers.

Why plain packaging? A common assessment of targeted solutions is that they fall into the trap of:

1. Something needs to be done.
2. This is something we can do.
3. So let’s do it then.

Plain packaging does not fall into this category. It’s likely to lead to fewer people taking up smoking (From the link, “Plain packaging, along with astronomical price increases for packets of cigarettes, is likely to have a strong deterring influence for those who are new to smoking or considering taking up the habit.”).

Laughably, a report prepared by Phillip Morris claims that “plain packaging is expected to reduce prices and increase sales”. One would be left to wonder why they’re not introducing plain packaging themselves. When the assessment of why plain packaging won’t work is as trite as this, I think I’ll go with the Cancer Council’s assessment:

“Plain packaging for tobacco products has the potential to be one of the most important policy measures in Australian history for reducing cancer deaths from smoking.”

As its introduction is effectively free, there appears to be no valid reason to delay its introduction. I’ll leave the final word to the University of Sydney’s Simon Chapman and Becky Freeman with ANU’s Matthew Rimmer, referring to Morgan Stanley Research.

“Plain and generic packaging of tobacco products (all other things being equal), through its impact on image formation and retention, recall and recognition, knowledge, and consumer attitudes and perceived utilities, would likely depress the incidence of smoking uptake by non-smoking teens, and increase the incidence of smoking cessation by teens and adult smokers [37].”

*Alister Air’s blog can be read here.