Tobacco health tax smokescreen

By EUGENE BINGHAM political reporter

How's this for a coincidence? The Government's "health" measure of raising the price of cigarettes last month was the precise increase that would rake in the most revenue.

Documents released to the Act party show officials sweated over their calculators trying to maximise the gain for the Government's coffers.

The problem was that an increase in excise on a packet of cigarettes would affect the consumer price index, a key factor in adjusting welfare benefits.

Treasury boffins were set the task of figuring out how much the Government could raise the tax before the tax gains were offset by increased welfare benefits.

"Empirical studies suggest that a 10 per cent increase in the price of tobacco will, in general, reduce demand for tobacco by around 5 per cent in the long term," said a Treasury paper obtained by Act's Rodney Hide.

"These figures incorporate both the estimated reduction in smoking and the increase in welfare benefits that result from higher excise."

In the end, the Government settled on a $1 rise, based on Treasury advice that this would maximise the net revenue gain.

Mr Hide said he wished the Government had come clean and said its decision to increase the tax was a revenue measure and not a health measure, as it had claimed.

"If it was a health measure why would you settle on the tax that would maximise your revenue?"

The Treasury's calculations show the $1 increase would earn the Government $120 million in the first full year, and increase the CPI by 0.44 per cent, lifting payments to beneficiaries by $41 million.