The gap that I see in this approach is everyone has a different definition of what is a nicety and what is a necessity.

To go with your tobacco example, I personally don't believe that tobacco should be considered a necessity. (Though I have no problem with Nicorette / nicotine gum being in that category, which could be used by someone unable to buy cigarettes to satisfy their craving.) Someone else may have a different definition of a necessity vs nicety altogether.

It's much simpler IMO to just give people ordinary currency, and let them decide how to spend it best.