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Cigs up: Smokers to pay more

Falling commodity prices have prompted the government to look for more sources of income.

In a move to prop up its promise of delivering a surplus in 2012/13, the Labor government has proposed to lift the tobacco excise tax by 25%. This would raise $5 billion over four years, according to a report in The West Australian.

The proposal would lift the price of a pack of 30 cigarettes by $2.62, and may be timed to coincide with the introduction of mandatory plain-packaging for tobacco products from the 1st December.

International research has shown that there is a 4% fall in smoking rates for every 10% increase in price. A price increase is also likely to discourage children and people on low incomes from smoking, whilst subverting attempts by the tobacco companies to lower prices, to offset lower sales from plain packaging.

With declining commodity prices, government taxes in the form of the Minerals Resource Rent Tax (MRRT), are likely to be lower than previously predicted. Government forecasts of income had relied upon a forecast iron ore price of around US$130 a tonne. Iron ore prices last closed under US$90 a tonne.

Iron ore and coal miners such as BHP Billiton Limited (ASX: BHP), Whitehaven Coal Limited (ASX: WHC), Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG), are likely to report lower profits for at least the next couple of years, if commodity prices don’t recover in the short-term.

The government needs substantial revenues to meet the raft of expensive programs recently announced, including the $4.1 billion national dental scheme and the $6.5 billion education scheme. It has also promised to implement a National Disability Insurance Scheme at a cost of up to $8 billion annually, by 2020.

Greens leader Christine Milne has called on the government to cut industry subsidies including $7.2 billion in fossil fuel subsidies, while suggesting people who earn more than $1 million a year should pay more tax. A cut in the diesel fuel subsidy is likely to affect mining companies, which would be a double blow, coming on top of falling commodity prices.

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Motley Fool writer/analyst Mike King owns shares in BHP. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it’s still available. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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