Bad tobacco policies drive smokers to black market

Candice Malcolm — The Canadian Taxpayers Federation (CTF) released today a new joint-research paper with the U.S.-based Reason Foundation. The paper looks at Canada’s tobacco tax rate changes in relation to the growth of the contraband market, making the case to reject higher tobacco taxes in Canada as well as President Obama’s proposal for higher tobacco taxes in the United States.

CTF Releases Joint Paper with U.S.-Based Reason Foundation

“Canada, and especially Ontario and Quebec, have witnessed first-hand the effects of high taxes and the resulting explosion of the contraband tobacco trade,” said report co-author and CTF’s Ontario Director Candice Malcolm.

In 1994, Canada’s federal government cut excise tax rates on cigarettes in half, and many provinces, including Ontario, followed suit with their own cuts. Ontario’s tobacco tax decreased by 66 per cent and Quebec’s were slashed by nearly 71 per cent.

This was done in an effort to combat widespread cigarette smuggling from on-reserve as well as across the U.S. border, where tobacco was taxed at a fraction of the Canadian levies. Within six years, RCMP seizures of illegal cartons of tobacco dropped by 93.6 per cent.

“Not surprisingly, when tax rates were lowered the contraband market lost its competitive edge,” said Malcolm. “It was no longer worth breaking the law to smuggle and sell cheap cigarettes.”

Due to mounting pressure from interest groups and lobbyists, Canada’s federal government hiked tobacco taxes in 2001 and by 2002 they were back to pre-1994 levels. Within four years, RCMP contraband tobacco seizures were higher than ever.

“Well-meaning policies like using sin taxes to prevent youth smoking often backfire,” said Malcolm. “In this case, the policies entice large segments of the population to break the law – both buyers and sellers – and thereby allow young people to circumvent laws intended to protect them, but buying cigarettes illegally.”

“Children who are supposed to be seeing pictures of cancerous mouths on the sides of cigarette packages are instead only seeing cigarettes in clear baggies, and at the fraction of the price, thanks to the growth of the contraband tobacco trade,” said Malcolm.

“In Ontario, the federal and provincial government forgo well over a billion dollars annually due to untaxed contraband tobacco,” continued Malcolm. “We only need to look at our own history to see that we are repeating the mistakes of 20 years ago and find a potential solution with Jean Chretien’s 1994 tobacco tax policies.”

The CTF’s new joint paper with Reason Foundation, “The Effect of Cigarette Tax Rates on Illicit Trade: Lessons Learned in Canada” can be found here.