This came out in The Conversation, a while ago, but I didn’t get around to posting it here. I’m posting my original version, which includes a discussion of vapes
Few Australians can have failed to notice the proliferation of tobacconists and “convenience stores” in the last few years. And most of us are aware that these stores aren’t making much from the limited set of offerings on public display. Rather, their profitability comes from under-the-counter sales of untaxed tobacco and illegal vapes.
The growth of illegal tobacco sales has reached the point where the national accounts produced by the Australian Bureau of Statistics have been significantly distorted. The ABS has announced that it is taking steps to “measure the consumption of illicit nicotine related products to supplement existing measurement. ”
Before looking at how this decision will affect the national accounts, it’s worth asking how we got here. The short answer is that, over the past decade or so, tobacco excise has been steadily increased to the point where there are big profits to be made from dodging the tax.
But that’s not the whole story. Taxes on spirits have also been raised substantially, yet we haven’t seen a return of the “sly grog” shops that were common in Australia until the 1960s, when 6pm closing of pubs was abolished. And despite heavy taxes on gambling, illegal casinos seem to be a thing of the past.
What explains this difference? The sale of alcohol and gambling services is subject to licensing restrictions, managed by state authorities and enforced by police specifically allocated to these duties. By contrast, until very recently, nicotine products have been treated as normal grocery items. Enforcement has been left to health inspectors with many other duties and very limited powers. A store found to be selling illegal cigarettes might get a warning, or at worst, a 24-hour closure.
The Australian Taxation Office, along with the Australian Border Force, makes serious efforts to prevent illegal importation of tobacco products as well as seizing tobacco crops grown here. But it appears unable or unwilling to do much against retailers who sell cigarettes under the counter.
State police forces have been similarly unwilling to enforce the law in this respect. Their reluctance here contrasts with the reasonably effective licensing enforcement discussed above and with the positively draconian measures taken against suspected users of drugs like ecstasy, which are less dangerous than tobacco.
State governments have gradually tightened up the law, and have begun shutting down tobacconists found to be breaching it. But the imbalance between the incentive to dodge the tax and the risks of being caught remains. Until it is resolved, the federal government would do well to defer further increases in taxation.
Another measure that would help to resolve the problem is the abandonment of the anomalous policy under which vapes (legally available only from pharmacists, many of whom are unwilling to supply them) are more severely restricted than cigarettes and loose tobacco. The aim here was to prevent the arrival of a new form of nicotine, but that horse has well and truly bolted by now.
A question that remains open is whether the growth of illegal tobacco has led to an increase in smoking. Evidence here is mixed. AN AIHW survey in 2022-23 showed a continued decline in smoking with an increase in vaping. However, a more recent Roy Morgan survey suggests an increase of smoking among young people as a result of the vaping ban
Now, back to the ABS. The objective in producing national accounts statistics like Gross Domestic Product (GDP) is to measure economic activity, giving a guide as to whether the economy is operating at full capacity. As critics have often pointed out, this measure pays no attention to whether the production being measured is socially desirable, neutral or harmful. Similarly, the ABS has always been aware that not all economic activity is legally recorded.
The solution, in the past, has been to add an adjustment of 1.5% to official measures, to take account of unrecorded activity. There hasn’t been a perceived need for anything more detailed. But with untaxed and unrecorded products now accounting for around half of all tobacco consumption, this ad hoc adjustment is no longer sufficient. The ABS estimates that growth in final household consumption expenditure has been underestimated by more than 0.5 percentage points over the past year, which is a big deal given that the typical annual change is around 5 per cent.
Finally, it’s worth noting that this isn’t the only issue the ABS is looking at in response to an ever-changing economy. As more and more households meet their electricity needs through rooftop solar, the ABS has faced a conceptual issue. This might be thought of as household production, like growing your own vegetables or cooking your own meals, which isn’t counted in GDP. But the ABS has decided it’s between to regard solar rooftops as a home-based small business, whether the electricity is self-consumed or fed back into the grid.
As distinctions between home and work, and between licit and illicit production become increasingly blurred, statisticians will need to make more and more judgements like this.