Auditor-General asked to investigate Costello decision to slash tax on heated tobacco products

Labour has asked the Auditor-General to investigate a government decision to slash tax on heated tobacco products, claiming there are signs of "industry influence".

Labour's health spokesperson Ayesha Verrall has asked Controller and Auditor General John Ryan for an urgent investigation under the Public Audit Act .

Associate Health Minister Casey Costello, who is also Customs Minister, halved the excise tax on heated tobacco products (HTPs) in July and her Cabinet colleagues agreed to set aside a contingency of $216 million to cover the foregone revenue.

Costello said she slashed the tax to encourage chronic smokers to switch to HTPs.

But the change was made without a public announcement, appearing on the Customs website without fanfare.

"The decision lacks a political or policy justification and carries health risks," Verrall alleges in her letter to the Auditor-General, which RNZ obtained.

"It is also likely to only benefit a single tobacco company."

Verrall's letter also included her view that "there are several indications of tobacco industry influence and potential corruption that must be investigated to maintain trust in government".

Costello said in a statement to RNZ that she had not been informed of Labour's letter to the Auditor-General, but she was not surprised the media knew before she did as it was "a purely political action".

She said the Auditor-General was an independent officer of Parliament and would make his own determination.

"I would welcome an inquiry as it would show these allegations to be completely untrue."

Costello has consistently said that she has no links to the tobacco industry and is fully committed to Smokefree 2025.

Tobacco giant Philip Morris currently has a monopoly on HTPs in New Zealand. Its IQOS device looks similar to vapes, but contains tobacco sticks, which are heated by the device rather than burned.

Verrall told the Auditor-General that the tobacco tax cut may breach the World Health Organisation Framework Convention on Tobacco Control, which requires New Zealand to protect policies from "commercial and other vested interests" of the tobacco industry.

Costello has said that HTPs "have a similar risk profile to vapes", but officials from Treasury and Ministry of Health have both given her contrary advice.

Officials from both agencies advised her that HTPs were much more harmful than vaping, and there was no evidence yet that they were significantly safer than cigarettes or that they worked as a quit smoking tool.

Costello told her Cabinet colleagues she had received other "independent advice" on the efficacy of HTPs as a smoking cessation tool.

Costello released the advice a week after RNZ asked for it.

Verrall's complaint to the Auditor-General suggested the five papers Costello released fell well short of the "synthesis of scientific reports" that usually constituted public health advice.

"The papers were an opinion piece and four scientific reports, that are not applicable to the New Zealand context, are out of date, or relate to products other than heated tobacco products."

Auditor-General asked to investigate links to New Zealand First

Verrall said in her letter that she believed links between Philip Morris and New Zealand First must also be investigated.

"There are serious questions of probity raised by what is known about the decision, and investigating the influence of the tobacco industry in these decisions is crucial for trust in government."

Verrall told the Auditor-General that two Philip Morris executives, Api Dawson and David Broome, were former New Zealand First staff members.

New Zealand First Minister Shane Jones has previously said Dawson was involved in "soundings" about the party's tobacco policy.

The plan to cut taxes on HTPs dates back to the signing of the government's coalition agreements. Verrall asked the Auditor-General to take his probe into the senior leadership levels of New Zealand First.

"The Minister's interaction with her fellow New Zealand First Cabinet members, party staff and officials are not subject to the Official Information Act, thus my ability to obtain further information under this Act is limited," Verrall wrote. "I believe only an investigation by the Auditor-General can resolve these issues of probity."

Verrall's letter also took aim at Costello's "obfuscatory and misleading" handling of documents on tobacco and vaping policy.

A document arguing for tobacco tax cuts and using language similar to pro-industry talking points, such as the claim that nicotine had the same level of harm as caffeine, was sent by Costello to health officials in December 2023 to help them develop policy.

Costello initially denied the document existed but later said she had received it as a hard copy on 6 December.

Costello has repeatedly said she does not know who wrote the document or who left it on her desk.

Chief Ombudsman Peter Boshier recently found Costello acted "contrary to the law" in withholding documents requested by RNZ and Otago University Professor of Public Health Janet Hoek, and forced her to apologise.

Boshier later took the rare step of asking the Chief Archivist to investigate Costello's management of documents under the Public Records Act.

Verrall letter questions health benefit of policy

The government has said the tobacco tax cut is a one-year trial to determine whether it helps people to quit smoking.

Verrall's complaint to the Auditor-General said a trial "requires a formal methodological approach", but that Costello had provided no description of the evaluation design, data collection or outcome measures.

The trial itself has been temporarily derailed by the fact that the IQOS cannot be sold at the moment, because it does not comply with new regulations forcing vaping devices to have a removable battery and child safety mechanisms.

In March, Costello asked Cabinet for a two-year delay to those regulations but her ministerial colleagues only granted a six-month deferral.

Arguing for the two-year delay, Costello told Cabinet that "it is likely that higher quality vaping devices used by former adult smokers will soon be unavailable domestically as high-end manufacturers that cater to international markets may not make New Zealand specific models".

She did not address a question from RNZ about whether she was referring to the IQOS product, which has now had to be pulled from sale.

"It is hard to believe that the Minister sought regulatory changes that would allow IQOS devices to continue to be sold by Philip Morris in March, but did so ignorant of the fact that they were non-compliant with regulations," Verrall said in her letter.

"It may be that the Minister did not disclose the non-compliance of IQOS devices because it would reveal the extent to which she was seeking cabinet to alter regulations largely for the benefit of one company."

Verrall's letter also cites a Philip Morris corporate affairs strategy from 2017 that was leaked to RNZ by a tobacco insider.

The document outlines the tobacco giant's strategy for getting tax cuts for HTPs, including plans to target New Zealand First and the Māori Party and "leverage on positions already advocated" by the Taxpayers' Union and the New Zealand Initiative.

Costello was chair of the Taxpayers Union, prior to entering Parliament on the New Zealand First list.

Verrall believed these links should also be investigated by the Auditor-General.

"It is of significant public interest that your office investigates the decision to remove excise duty on heated tobacco products itself, and whether the tobacco industry interfered in that decision directly, or via any links to New Zealand First or the Taxpayers' Union."

The Auditor-General's office confirmed it had received the complaint from Verrall and said it would now consider whether to investigate.

"We are considering the issues raised in the letter and whether or not we will carry out any inquiry work," the Auditor-General said in a statement.

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