Canada’s Feds Need to Cut Taxes on Tobacco to Fight Contraband Sales

Whether the argument is to raise revenue or reduce specific behaviors, policymakers have raised taxes on ostensibly harmful goods since the 1700s. It is an increasingly rare occurrence that any “sin tax” hike is actually reduced or repealed. One of these rare occurrences happen in Canada in 1994 when Canada’s federal and provincial governments cut excise taxes on cigarettes nearly in half. Unfortunately this tax-respite was short lived, when in 2002 the feds pushed up tobacco tax rates to nearly twice the post-cut rate.

Canada’s history of tobacco tax cuts and subsequent tax hikes have effected consumer’s behaviors, but largely in terms of where they purchase cigarettes — whether that is on the black market or through legitimate retailers. Shifts in Canada’s tobacco taxes effect whether or not Canadian’s choose to light up to a much lesser extent.

Currently at an all-time high, it appears that Canada’s draconian tobacco tax rates have pushed would-be legitimate cigarette sales into the much cheaper black market.

In an op-ed recently published in Canada’s Financial Post, Julian Morris and I cover results of a study aiming 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.

As Canada’s decades-long contraband tobacco problem has shown, the only time that there was a noticeable drop in illicit sales was during the eight-year period of low tobacco taxes. As mentioned in our op-ed, those concerned with Canada’s thriving contraband tobacco market should urge Canada’s federal government and her provinces to cut tobacco taxes.

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.