Smokes, booze and property tax breaks prime targets for Budget

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Finance Minister Bill English may hike the excise on tobacco and alcohol and further tighten rules on property investment to help bridge the $640 million shortfall in his pledge to return to budget surplus in 2015.

Treasury forecasts for next Thursday's Budget were found to be predicting a $640 million deficit at June 15, thanks largely to a declining tax take, a drop in investment returns, and weak economic growth. Prime Minister John Key has already warned Cabinet will tighten the tax system and prune government spending in the budget next week. Subsidised prescription charges are also to rise from $3 to $5, and the rate of repayment for student loans will be quickened in two pre-Budget announcements that have already been made.

"I think we will see some sin taxes rise - alcohol and cigarettes - these sorts of things," said Cameron Bagrie, chief economist at ANZ National. "Generally speaking the government is keen on tax systems that drive economic incentives."

Long-time smoker and New Zealand First leader Winston Peters has also predicted a rise in tobacco taxes as a certainty, especially as the government's wobbly political partner, the Maori Party, wants cigarette smoking stamped out in New Zealand by 2025.

The budget may also target property investors, adding to the loopholes it closed last year, when it curbed depreciation that can be claimed on buildings. That change, which came into effect on April 1, is expected to generate about $685 million in government revenue in the 2011/12 year, rising to $690 million in 2013/14.

"It's an area that might get a look in this time - there still are losses in real estate and I don't know if they have hit that on the head," said David Patterson, a consultant at Chapman Tripp. "It's that type of activity that has not yet been addressed."

Patterson said tackling loopholes in property investment may result in less political fallout for the National Party than further hikes on tobacco, where the excise was increased by 20 per cent over the past year.

"These taxes are high and they have a disproportional impact on lower income people," he said. "It would be particularly harsh in these economic times. I would question whether that is a smart move."

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. It made $517 million from the excise on alcohol produced domestically and $177 million on imported alcohol.

A Ministry of Health discussion paper released last month modeled the impact on 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.

However, Prime Minister John Key moved quickly to stub out any thought of such a dramatic rise.

A Treasury ready-reckoner says every $10 increase in the excise charged on 1,000 cigarettes is expected to raise some $15 million extra annually, taking into account the expectation that some people will quit smoking as the price rises.