Tax on Sin

Tax Watch: Edition 1, 2014

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While tax changes this year did not herald hikes in “sin taxes”, it does not follow that we have a benign environment for sinners. 

In New Zealand, sin taxes relate to excise duty on alcohol and tobacco, together with gaming duty.

Other countries, however, are more creative.  A new global trend in sin taxes is “snack taxes” on food regarded by regulators as unhealthy.  Norway, for example, has imposed a tax on soft drinks while Finland taxes sweets and ice cream.  

So far the “world’s oldest profession” has remained a duty-free zone.  Attempts in Canada and the US state of Nevada to impose excise tax on prostitution have proved impotent.

Increasing sin taxes is primarily aimed at reducing demand, consumption, and consequential social harm.  A side effect is to boost government coffers although there is a significant cost to government arising from excessive indulgence in smoking, drinking and gambling.

The McLeod Tax Committee, in its 2001 report, concluded that many New Zealanders of modest means were likely to pay as much or more indirect tax via alcohol and tobacco excise and gaming duties as they pay in GST on all other spending.  For most, who indulge responsibly, that represents a punitive tax impost.  Somewhat perversely, it is even worse for people severely affected by drinking or gambling problems.  Excise taxes on gambling and alcohol have an even more disproportionately severe impact on them due to the high tax wedge.

Smoking

Smokers have been severely punished for their vice in recent years with several tax increases and there are more to come.  In recent times, annual tobacco excise duties increased by 10% on 1 January 2013, a further 10% on 1 January 2014, and they will increase by a further 10% in 2015 and 2016.

The total excise tax from tobacco in the Budget forecast for 2013 was $1.3 billion.

Drinking

By comparison with smokers, drinkers should count themselves lucky.  Excise duty on alcohol is subject to an annual consumer price index adjustment on 1 July of each year.  Excise duty on alcohol in the Budget estimates for 2013 was $914 million.  Studies have indicated the direct cost to the government of the harm caused by alcohol may range from $500 million to $1.2 billion and the total cost to society will be even higher.

The Law Commission recommended to the government in 2010 that excise tax on alcohol be raised by 50% to achieve an average 10% increase in retail prices.  It also recommended reducing excise tax on low alcohol products of up to 2.5% alcohol content by volume to encourage the production and availability of more low alcohol products.  However, these changes were rejected by the government and did not form part of the alcohol law reform initiatives passed into law at the end of last year.

Gambling

Gaming duty has not been subject to significant regulatory tax vigour in recent years although the problem gambling levy was increased in 2010.  The tax take from gambling in the Budget forecast for 2013 was $225 million.

The rate of gaming duty depends on the form of gambling.  Non- casino gaming machines take the prize for the highest rate at 20%.  The McLeod Tax Committee calculated that gaming duties took, on average, 15 cents in each dollar of gambling expenditure.

GST is imposed on top of that, as is the case with excise duty on tobacco and alcohol.  The estimated tax rate on gambling increased to 40% or more when taking into account implicit regulatory taxes such as the compulsory charitable contributions out of non-casino gaming machine returns.

What now?

The government’s attack on smoking, in particular, is likely to be ongoing.  Treasury estimated in a 2012 report that 50% to 60% of the total GST-inclusive price of tobacco products is tax. 

Treasury considered excise revenues from tobacco may have already exceeded the direct costs to the health system of smoking.  Moreover, the shorter life span of smokers also results in longer term savings from superannuation and health care for the aged.

Unfortunately the old adage that “there are two certainties in life: death and taxes” is doubly true for smokers.

David Haywood
Partner, Tax

Tel: +64 9 300 7049