GOVERNMENT ACTION ON TOBACCO’S COSTS

David Sweanor, Senior Legal Counsel, Smoking and Health Action Foundation, July 1997.

There is considerable interest among Canadian governments in looking at ways to force tobacco companies to cover some of the costs associated with their products. British Columbia has already publicly announced its initial steps in this process and other provinces are not far behind.

The efforts to recover health costs and to alter anti-health practices of the tobacco companies are linked to similar efforts in the United States. The fact that the U.S. operations of the tobacco companies are willing to pay large sums of money and subject themselves to significant marketing restrictions gives reason to believe that their Canadian affiliates can also be held liable for past misbehaviour.

In examining this situation we believe it is important to look at the various possibilities that will allow public health priorities to be most effectively addressed. Issues which we feel should be addressed are as follows:

THERE ARE DIFFERENT WAYS TO EXTRACT MONEY FROM THE TOBACCO COMPANIES

While the concept of suing the tobacco industry has received a lot of attention, there are various ways of obtaining funds to compensate for the harm caused by tobacco products. These alternative methods can also be easier and quicker. they include:

i) Imposing an Additional Tobacco Tax

Provinces already tax tobacco. As a way of raising money to cover such things as health care expenses one possibility is simply to impose a higher tax on tobacco products.

This method has the advantage of being straightforward and easily implemented. Disadvantages include the fact that the tobacco companies were successful in forcing a massive reduction in Canadian tobacco tax rates by flooding neighbouring low-tax jurisdictions with cigarettes which smugglers brought back into Canada. There is also a problem with Indian Reservations within Canada being a conduit for contraband tobacco.

Higher prices in the United States, which would result from a litigation settlement, would give more room for higher Canadian taxes by removing cross-border differentials. In addition, many border state (including Washington, Michigan, Vermont, New Hampshire and Maine) have recently raised tobacco taxes. With better enforcement efforts, and the exclusion of domestic tobacco companies from supplying the smugglers, there is clearly room for much higher tobacco taxes in Canada.

At the same time, tobacco taxes have always been used as a way to simply raise general revenue. Governments may be reluctant to use the simple restoration of past tax rates as a trade-off for the costs tobacco companies impose. There also is the problem that the tobacco industry in Canada is an oligopoly which simply passes these taxes on to consumers. The tobacco companies not only do not lose out financially, but can use the increasing taxes to hide their own price increases. Therefore, to give the tobacco companies an incentive to change their behaviour some other system of reimbursement may be necessary.

ii) Transferring Economic Rent from the Industry to the Government

The tobacco manufacturing business in Canada is amazingly profitable. Cartons of cigarettes cost about $2.50 to manufacture, but are sold by the companies (net of taxes) for about $9.60. The lack of price competition in this highly concentrated industry (one company has two thirds of the Canadian market) has allowed the manufacturers’ prices to keep escalating even while taxes were being reduced. As a result the Canadian operations of the transnational tobacco companies have a huge profit margin. The fact that this industry has been able to transfer costs, such as health care expenses, to governments has allowed these huge profit margins to be reflected in profits which dwarf those of other industries.

Moving some of this ‘economic rent’ from tobacco companies to governments would help to cover the economic costs imposed by tobacco while simultaneously reducing the incentive and resources for tobacco companies opposing public health measures. This can be done in various ways.

One way to do this would be to simply impose controls on manufacturers’ prices while levying an additional charge on the companies. This would move profits from the companies to the government. For instance, a maximum price for manufacturers could be set three dollars a carton less than the current price and a levy of three dollars a carton could be simultaneously imposed as partial funding for health care expenses. This would have the added benefit of creating an incentive for the industry to reduce costs (eg. marketing, lobbying, etc.) as the only way to increase profits. Many of these industry expenses are generally anti-health, and a reduction in such expenditures would help end the consumer deception on tobacco.

Such a system could be implemented through a licensing system for the manufacturers or a straight-forward system of price controls. A similar result could also be attained through the implementation of a form of graduated ad valorem taxation that would make high manufacturers’ prices much less likely. For instance, an additional tax of 500% of anything above $6.00 per carton in a manufacturers’ price would spur price competition and leave room for additional government revenue without raising retail prices.