According to a recent study, one in five cigarettes smoked in Ontario is contraband. That is bad news not just for legitimate retailers, which are losing business, but for public health. Many purchasers are minors, for whom tobacco is now a readily available forbidden fruit thanks to the purveyors of contraband. Paradoxically, the best way to stop this scourge is by reducing taxes on legal tobacco products.
Cigarette smuggling has been a problem in Canada at least since the early 1990s, particularly in Quebec and Ontario. Until recently, taxes in U.S. states bordering Canada were far lower than those in Canada, so cigarette smugglers could easily profit by purchasing less expensive cigarettes in the U.S. and re-selling them over the border. But as U.S. states have raised taxes to levels similar to those in Canada, smugglers have switched to smuggling contraband tobacco products.
Contraband cigarettes are typically manufactured in illegal facilities on native reserves in Canada and the U.S and are then distributed via about 350 “smoke shacks” in Ontario and Quebec. The smoke shacks sell baggies of 200 contraband cigarettes for $10 - $15, which is about $60 - $70 cheaper than purchasing the equivalent volume by legal means.
In order to better understand the scale of contraband tobacco sales, the Ontario Convenience Stores Association (OCSA) commissioned a study of discarded cigarette butts. The findings are alarming. Rates of illegal tobacco usage are as high at 46.6 percent in parts of Ontario and the average across the province is 21 percent. That’s clearly bad news for convenience stores and other legitimate retailers.
It is also bad news for public health. Since the sale of contraband tobacco products is illegal, the vendors of such tobacco pay no heed to restrictions on the age of purchasers. So, unsurprisingly, contraband has become a popular source of tobacco consumption for minors. OCSA’s study showed that illegal cigarettes were found on the majority of secondary and high school campuses, with contraband representing upwards of 20 percent of cigarette butts found on most campuses in Ontario.
In an attempt to dismantle or at least suppress Canada’s contraband tobacco trade, in 2013 the Government of Ontario introduced amendments to the Tobacco Tax Act that increased the penalties for those convicted of illegal tobacco offenses, including steeper fines and forfeiture of illegal seized tobaccos items. And most recently Premier Wynne introduced legislation extending the smoking ban within Ontario, intending to keep kids and teens from using tobacco.
Despite the layers of government policies intended to stop contraband tobacco sales and use, only once has the trade noticeably declined. The cause? Not massive police enforcement. Not hefty penalties for vendors or consumers. Nope, the most significant reduction in smuggling in the past 20 years resulted from a dramatic cut in federal and provincial cigarette and tobacco tax rates.
In 1994, Canada’s federal government cut excise taxes on tobacco products in half and several provinces followed suit. Quebec cut its cigarette excise tax by 71 percent (from CAD $29.61 to $8.61 per carton of 200 cigarettes) and Ontario cut its excise tax by 67 percent (from CAD $28.85 to $9.65 per carton).
That same year legitimate cigarette sales shot up more than 50 percent – the first increase in sales over ten years. And between 1994 and 2001, illegal carton seizures dropped by 93.6 percent. But by then a new group of politicians were in power and the rationale for the tax cut – and the perverse effects of high taxes – forgotten. And so, in 2001, Health Canada (seeking to implement the Federal Tobacco Control Strategy) and various “public health” lobbying groups pushed for tobacco tax increases on the grounds that this would discourage smoking in Canada. By July 2002, the federal government duly raised the excise tax rate to CAD $15.85 per carton of cigarettes, nearly twice the post-cut rate and about 50 percent more than the pre-cut rate.
So what impact did these tax rate gyrations have on smoking? According to Health Canada, 35 percent of Canadians smoked in 1985. That fell to just over 30 percent by the early 1990s and has continued to fall almost every year since then regardless of the tobacco tax rate. In fact, as the figure below shows, the rate of decline in smoking in the eight years following the 1994 tax cut was greater than the decline in the eight years after taxes were raised in 2002.
The figure also shows that during the period of low tobacco taxes, seizures of illicit cigarettes fell precipitously and legitimate sales rose. The explanation for this is simple: as the taxes fell, tobacco consumers switched to legitimate vendors, the profits on illicit sales fell and illicit supply fell. The trends reversed following the nation’s tax increases, as the supply of contraband tobacco rose and legitimate sales fell. Legal cigarette sales dropped by 10 percent in 2002 and continued to fall at a slower rate. But illegal carton seizures climbed upward, reaching their peak in 2009 when the Royal Canadian Mounted Police (RCMP) reported nearly one million cartons of illegal cigarettes were seized – more than double the previous peak in 1994.
Rather than spending more on anti-contraband measures, Canada’s federal government and her provinces should consider instead cutting taxes on tobacco products. Tax cuts would reduce the shelf price of tobacco products, leading more consumers to purchase those products through legitimate means. This would reduce the profit margins of illicit tobacco vendors, potentially driving them out of the market, as happened in the 1990s. By removing a major source of illicit sales, such a tax cut might even reduce underage smoking. That would be a win for retailers and a win for public health. Meanwhile, the RCMP would be able to focus its resources on more important problems. The only real losers would be criminals.