Australia to Raise Cigarette Tax

SYDNEY—Australia’s government on Thursday promised new taxes on tobacco to discourage smoking and shore up declining revenues in a slowing economy as well as new levies for banks for guaranteeing deposits.
By placing new levies on big banks and tobacco, Prime Minister Kevin Rudd is gambling the political strategy will win over voters ahead of an election due over coming months. The cigarette taxes are aimed at curbing smoking and to fill a hole in the national budget, ministers said, while the bank levy will be placed in a fund that could be tapped in the event of a bank failure, according to a government briefing note.
But new taxes have backfired on Mr. Rudd before. In 2010, an attempt to place a so-called super profits tax on big miners was met with a wall of opposition from industry and voters, culminating in the removal of Mr. Rudd as Prime Minister by his own party.
The cigarette tax unveiled by Treasurer Chris Bowen Thursday will raise more than 5.0 billion Australian dollars (US$4.8 billion) and comes around eight months after Australia introduced the world’s toughest plain packaging laws, effectively forcing tobacco companies to remove virtually all branding from cigarette packets.
Proposals for higher cigarette tax also come ahead of the federal election in Australia, due by the end of November, which is likely to be fought on issues like the health of the economy as a decadelong boom in resources investment slows. The Labor Party, headed by Mr. Rudd, is currently tied with the opposition Liberal-National coalition in opinion polls.
Mr. Bowen said the 12.5% tax rise each year would be staggered over four years, raising a total of A$5.3 billion. The government has estimated a budget deficit of A$18 billion this fiscal year and Mr. Bowen added the move would help return the government’s budget to surplus in the 2016-2017 fiscal year, while also contributing to efforts to deter smoking. Taxes on cigarettes in Australia are already relatively high, with a pack of 20 cigarettes costing about A$16.
“We know that increasing excise is the single most effective way for government to reduce premature death and disease due to smoking,” Treasurer Bowen and Health Minister Tanya Plibersek said in a joint statement. “We expect it to be particularly effective in dropping the number of young people who smoke.”
Labor’s legislation on plain packaging, which came into force in December, banned logos, branding, colors and promotional text on packets. Brand names appear in a standardized font on olive-brown-colored packets and health warnings with graphic images of the harmful effects of smoking cover 75% of the front of any packaging and 90% of the back.
As for the bank levy, the government’s plans involve lenders paying 0.05 percentage point on deposits up to A$250,000—the maximum amount guaranteed by the government—starting in 2016, according to briefing documents. It aims to raise A$733 million over four years to be used in the event of a crisis.
The idea of a levy to safeguard against unexpected financial shocks was among key recommendations made by the International Monetary Fund in November after it assessed Australia’s banks. The suggestion has been endorsed by the Reserve Bank of Australia, according to the briefing notes.
Australia’s banks are among the world’s strongest, having glided through the global financial crisis largely unscathed and with profits continuing to hit new highs.
“It is time the big four banks paid a fair contribution for the public support they receive,” said lawmaker Adman Bandt of the influential left-leaning Greens party, which is key to propping up the ruling Labor party’s minority government.
But the bank levy is unlikely to be passed before this year’s federal elections and may play against Mr. Rudd’s chances. The risk is that banks may pass the cost of the levy onto customers. “With the upcoming election, this doesn’t appear a particularly strong vote-winning idea,” Macquarie said in a note to clients.
—-David Rogers in Sydney contributed to this article
Write to Enda Curran at enda.curran@wsj.com and Ross Kelly at ross.kelly@wsj.com

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