So far this year, the government’s tobacco excise revenue is $164 million below forecast. If that pace continues, the annual shortfall will reach about $225 million.

That number should sound familiar. Two years ago, politicians and commentators were outraged by an excise change on heated tobacco projected to cost roughly that much over four years.

But the heated-tobacco change appears to have reduced annual revenue by only about $3 million. The rest of the shortfall is far more worrying and had drawn far less outrage.

Two years ago, Associate Health Minister Casey Costello reduced the excise rate on heated tobacco.

The government wanted excise to reflect harm and to encourage smokers to shift to less-harmful products like heated tobacco. Much of the harm of smoking comes from combustion, and heated tobacco is not burned. So the government set the excise on heated tobacco at half the rate of excise on combusted tobacco - as a rough and conservative guess on relative harm.

The government needed a number to put in Budget 2024 as a best guess about the likely effects of the change in excise.

The original $216 million estimate over four years never looked plausible.

It was inflated by including GST charged on top of excise. Unless people permanently stash saved money under their beds, they spend it on other things, and those other things attract GST. Government should never use GST-inclusive figures for this sort of costing. Without GST, it would be about $184 million.

More importantly, the number depended on unrealistic estimates of the number of smokers who might shift from cigarettes to heated tobacco. Encouraging that shift was always part of the point of the excise change. If every smoker completely shifted to heated tobacco, excise revenue would halve, but it would be a win for health outcomes as compared to a world in which they kept smoking. But the projections looked incredibly optimistic.

The government promised to evaluate the tax change in 2027. But we can take an initial look.

The Ministry’s 2024 workings expected about $38 million in lost tobacco excise revenue for the 2025/26 financial year. At current excise rates, that would be about 46,700 kilograms.

Statistics New Zealand recorded only 3,652 kilograms of heated tobacco imports for the 2025 calendar year – less than a tenth of what the Ministry expected.

Excise on that volume of tobacco, at current rates for heated tobacco, is about $3 million. If tax on heated tobacco had not been cut in half, the same volume of import would have drawn an additional $3 million in excise.

And late last year, Customs said that excise-equivalent duty on heated tobacco for the 2024/25 fiscal year was $2.3 million. At full excise, that quantity would have drawn an additional $2.3 million.

Associate Minister Costello, at the time, warned that the Ministry’s projections were highly unrealistic. I do not know whether opponents believed the unbelievable number, or whether it was just a useful partisan attack line.

Heated tobacco imports are increasing. At current growth rates it would take about 25 years to hit the numbers that worried people in 2024.

Associate Minister Costello was right, but it is unfortunate. Shifts from cigarettes to less harmful alternatives are a good reason to forgo excise revenue.

Treasury knew about heated tobacco when it set its forecasts. And excise changes to heated tobacco can amount to only about $3 million. Excise looks like it might be down by about $225 million.

So we are left with a substantial and unexpected reduction in tobacco excise revenue. People are buying a lot less legal tobacco. There are two possible explanations.

Perhaps the next wave of the New Zealand Health Survey will show a sharp decrease in smoking rates, with more smokers shifting to vaping or simply quitting. But overall smoking rates in the 2024/25 survey were very similar to those reported in the prior year. Reductions in smoking seemed to have levelled off – but maybe things changed this past year.

The other possible explanation is more worrying.

Late last year, Jonathan Killick reported on the growth in New Zealand’s illicit tobacco trade. Illicit cigarettes are about a third of the price of legal ones and are easily found. And one online illicit tobacco vendor I’d noted in a column a month before still seems to be delivering cartons of ten packs of cigarettes in Auckland for $150.

Enforcement does not seem all that serious, despite Australia providing a rather worrying example of where that path leads.

Two years ago, there was intense outrage over a projected excise loss tied to a harm-reduction policy.

Now there is a much larger actual excise loss, with no clear health upside if there is a serious illicit-market problem behind it. That has drawn much less attention.

To read the article on The Post website, click here.