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Tobacco tax increase must not be voted down

South China Morning Post — 27 April 2011

On the day Chief Secretary Henry Tang Ying-yen resumed the debate to complete the budget’s controversial journey through the legislature, he pledged the administration will not become a mere “caretaker government” while it completes its term due to end next year. If the promise is to be kept, officials must first dig themselves out of the hole created by this year’s budget, which seems to get ever deeper. Taxing people, only to give them back the cash, is not the soundest public finance policy, although this has become the standard political response to demands from the public whenever there is a big surplus. But the latest twist in the budget saga could see the government taxing smokers, only to then give some of those proceeds back to the tobacco industry. This bizarre outcome could occur if legislators vote down the tobacco tax increases made in the budget, as many have suggested they will do. The government was right to impose the higher taxes as part of measures to deter smoking. It should seek to persuade legislators not to veto the increase and avoid another embarrassment.

The problem has arisen as a result of the sorry budget saga. The government has generally shown a lack of commitment towards sustainable long-term policies in its budgets, but at least in the past, it appeared to have faith in the analysis and the calculations of its professional economists and stuck to its principles on delivering what it thought would be a balanced budget. But in March, Financial Secretary John Tsang Chun-wah decided to react to a public outcry and effectively contradict himself – and all the principles he had previously championed about fighting inflation – by announcing direct cash handouts of HK$6,000 to permanent residents. As the weeks went by, it became clear that this populist announcement was a politically motivated, panic-induced response. Until now, the details of the proposal remain sketchy and it is unclear exactly who, how or when people will get hold of their cash. And even though the new arrangement could potentially require extra spending of HK$40 billion, of which none will result in investment returns, the government has not explained how these new arrangements affect their original calculations.

Now, lawmakers who criticised the pan-democrats for opposing the budget are themselves threatening to derail one of its most sensible measures. The government presumably identified the tobacco industry as one which should be taxed more because it agrees with the experts that tax increases are the best way to help quit smoking. The increased taxes will provide more funds for anti-smoking campaigns and improved health services. At the same time, the profit incentive in a harmful industry will be decreased. All in all, it is a sensible tax policy. But lawmakers from the pro-establishment camp which controls the legislature wants to overturn or at least cut that increase which was implemented with immediate effect upon the delivery of the budget in February. If that happens, the government will have to pay back the tobacco industry an estimated HK$300 million, even though it was the consumer who had to pay. Meanwhile, there would be less money for anti-smoking campaigns and to improve health services.

Lawmakers should think hard before vetoing these measures. The tax increases are needed in the interests of public health. Should the unthinkable happen and the increases be voted down, the tobacco industry must act responsibly and donate any tax rebate it receives to public health services.

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