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GOVERNMENT plans to ban smoking in pubs serving food, restaurants and workplaces will cost Gordon Brown £1.8bn a year in lost tax revenue.
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The cost, equivalent to more than ½p in the pound on the basic rate of income tax, dwarfs the £250m annual savings the British Medical Association claims the National Health Service could make by treating fewer smoking-related illnesses.
The Chancellor is likely to make up the shortfall through higher taxes elsewhere.
A report by Mike Warburton, senior tax partner at accountant Grant Thornton, claims receipts from tobacco duty, VAT and corporation tax will be hardest hit.
Tobacco duty nets the Treasury £8.1bn a year. Assuming smoking falls by 15% as a result of the ban - in line with BMA estimates - tobacco duty receipts will decline by £1.2bn.
VAT from cigarette sales - currently around £2.2bn - would fall by £300m.
Corporation tax would be hit by reduced profits for tobacco and pub companies, for which Warburton has pencilled in a further loss of £300m.
He said: 'To a degree, it's an educated guess how tax revenue will be affected by the smoking ban, but what is intriguing is that Gordon Brown will clearly lose more in revenue than he gains from health benefits.
'It is a harsh medical fact that lung cancer brings death quite quickly after diagnosis, so the cost to the NHS is not extended in the way it is for other medical conditions.
'In hard economic terms, the Treasury gains far more from tax and duty (seven times as much on my figures) than it pays in NHS treatment, which may be why successive Governments have to date seemed so reluctant to tackle this issue in any serious way.'
John Whiting, tax partner at accountants PricewaterhouseCoopers, said some of the loss may be offset by factors such as more non-smokers eating in restaurants - boosting VAT receipts - but he agreed significant tax revenue was at stake.
'The Chancellor needs to bear in mind this could blow a hole in his budget,' Whiting said. 'It's not money he can easily afford to lose - we all know he's short of a bob or two - but it's not going to break the bank.'
Economists have warned Brown is heading towards overshooting his budget forecast by at least £10bn this year and is on course to break his own fiscal rules.
A Treasury spokesman said its calculations would not be made public. 'This is all just speculation about the behavioural effects of the ban. It is not possible to calculate the effect on tax receipts,' he said.
The Irish Revenue Commission has said its take from cigarette taxes dropped 16% during the first half of this year. This included a 45% decline in January, when most people traditionally give up smoking, but also a 25% year-on-year fall in March when Ireland's smoking ban was introduced.
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