New report illustrates the effects of cigarette taxes in Canada

Andy Radia

It shouldn't surprise anyone that raising taxes on cigarettes leads to a bigger underground market for tobacco products. It's simple economics.

Well, a new joint-study by the Canadian Taxpayers Federation and U.S.-based Reason Foundation says just that: when taxes rise, contraband cigarette seizures go up.

What's interesting about this study, however, is the extent of the cause and effect relationship.

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.

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.

The study was conducted in response to U.S. President Barack Obama's recent proposal about raising cigarette taxes in that country as a means to fund public early education programs.

But, according to the CTF's Candice Malcolm, Obama should look at what's happening in Canada before he proceeds.

"In Ontario, the federal and provincial government forgo well over a billion dollars annually due to untaxed contraband tobacco," Malcolm said in a press release accompanying the study released on Thursday.

"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."

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The study also makes the controversial claim that raising cigarette taxes has little or no effect on consumption rates.

"There was little evidence that the mid-1990’s lower tax rates encouraged more smoking, finding that taxes in general had no impact on consumption one way or the other. Instead, they attribute demographic factors, such as age, to the decision to smoke or quit."

That assertion — that taxes may not affect tobacco use — is counter to a review paper, published last week, by a University of Toronto health professor.

Citing examples from several countries including Canada and France, Dr. Prabhat Jha urged policy makers in the developing world to actually double the price of cigarettes.

"There are no magic bullets in public health. But tobacco taxes are as close to a silver bullet as you can think of," Jha told CBC News.

"Higher taxes are the single best way to get people to quit smoking. Quitting seriously would avoid something like 200 million premature deaths this century."

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But Malcolm presents a pretty compelling example of how higher taxes could actually backfire in Canada and result in more young smokers.

"[High taxes] 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," she said.

"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."

Smoking prevalence by province: 2011 (Source: University of Waterloo 2013 tobacco report)

Quebec: 19.8 per cent

Sask: 19.2 per cent

PEI: 19.1 per cent

Newfoundland & Labrador: 19.0 per cent

New Brunswick: 18.8 per cent

Manitoba: 18.7 per cent

Nova Scotia: 18.1 per cent

Alberta: 17.7 per cent

Ontario: 16. 3 per cent

British Columbia: 14.2 per cent

(Photo courtesy of the Canadian Press)

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