Key Issues

Summary

In February 1994, the federal government significantly decreased tobacco taxes in an effort to eliminate smuggling. It gave provinces an incentive to do the same.

The tax cuts resulted in combined federal and provincial revenue losses of more than $1.2 billion in fiscal year 1994-1995. The federal government lost $656 million, more than twice the amount predicted.

This analysis shows that governments were much better off financially prior to the tax cuts, even with the significant level of smuggling in evidence in late 1993.

Alternative anti-smuggling measures were recommended and available to the government. Some were promised but never implemented. The implementation of such measures would allow governments to return to pre-1994 taxation levels while minimizing smuggling, resulting in revenue recovery and health promotion.

Background: Health Impact

The impact of the tax cuts on tobacco consumption was dramatic:

• an estimated single-year expansion of the total tobacco market in Canada by approximately ten per cent
• a marked increase in smoking rates among youth

Revenue Impact

The revenue impact of the tax cuts, although less publicized than the health impact, was equally dramatic:

• the federal government lost $656 million between fiscal year 1994 and 1995, a decrease of 25%, and more than twice the predicted loss of $300 million;
• Ontario’s revenue decreased by 58%, a loss of $450 million;
• the total loss to all provinces which decreased taxes was nearly $600 million; and
• the combined federal/provincial revenue loss was over $1.2 billion.

The provinces which maintained their tax levels fared much better:

• British Columbia, Alberta and Saskatchewan saw their tobacco revenues increase.
• Manitoba’s revenues dropped by 6%, partly due to interprovincial smuggling from Ontario and Québec.
• Newfoundland’s revenues decreased marginally.

Policy Alternatives

Promised Measures

Along with the tax decreases, the federal government promised a number of anti-smug gling measures as part of the National Action Plan to Combat Smuggling. The two most significant were a tax on exports of Canadian tobacco products and better tax-paid markings on domestic cigarettes.

New markings have not materialized, despite mounting evidence that visible, hard-to- counterfeit markings on tobacco products can help decrease smuggling. The current export tax contains loopholes which make it ineffective as an anti-smuggling measure.

Other Alternatives

The Canadian Cancer Society and other national health organizations recommended numerous policy options to the government. The implementation of these measures would have allowed governments to maintain tax levels while substantially reducing smuggling.

Conclusions

The decision to decrease taxes was unnecessary in the face of other viable options to curb smuggling. The decreases caused irreparable health and revenue damage. However, governments can limit the damage by restoring tobacco taxes to pre-rollback levels, while finding alternative solutions to smuggling.

In December of 1995, the federal Minister of Health announced progressive, comprehen sive proposals for tobacco control. If these proposals are to achieve the goal of reduced tobacco use in Canada, the most effective tobacco reduction tool — decreasing the affordability of tobacco through tax policy — must be used.

The government can achieve its health goals and raise additional revenue by taking the following steps.

1. Create a climate where tobacco smuggling is unprofitable:

• implement all promised aspects of the anti-smuggling initiative, including an effective export tax and more prominent tax-paid markings on cigarettes and tobacco packages; and
• implement further strategies to reduce smuggling outlined prior to the rollback by the Canadian Cancer Society and other health groups.

2. Increase tobacco taxes to pre-rollback levels, thereby encouraging smokers to quit or reduce consumption and discouraging youth from starting.