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High tobacco taxes encourage black market in cigarettes and organized crime

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Release Date: July 7, 2010
VANCOUVER, BC—Increases in tobacco excise taxes intended to reduce smoking in Canada create a powerful incentive to sell and buy contraband cigarettes, according to a new report from the Fraser Institute, Canada’s leading public policy think-tank.

“Smuggling and trafficking of contraband cigarettes is an unintended consequence of federal and provincial tobacco tax policies,” said Diane Katz, Fraser Institute director of risk, environment, and energy policy.

“A re-evaluation of policy is warranted, given that the flourishing black market for tobacco is becoming an increasing source of violent crime and economic losses for Canada.”

The study, Contraband Tobacco in Canada, documents the various federal and provincial tobacco tax policies and anti-smoking initiatives that have been implemented in Canada since the 1980s, and describes the history of contraband tobacco trade in Canada and government efforts to suppress it.

The effects of increased tobacco taxes became evident after the federal government hiked tobacco excise taxes from $6.01 per carton in April 1985 to $19.14 in February 1991 in an effort to discourage smoking and boost tax revenue. Coinciding with these tax increases, Canada’s contraband tobacco market grew from one per cent of total market share to an estimated 31 per cent share.

Similarly, the contraband tobacco market receded substantially after 1994, when the government reduced tobacco excise taxes in order to weaken incentives to smuggle and distribute contraband cigarettes. But contraband tobacco sales again surged after 2001, when tobacco taxes were increased under pressure from anti-smoking advocates and public health officials.

And despite the 2001 increase in excise taxes, government revenue from tobacco has been dropping considerably. Between 2001 and 2008, the federal tobacco tax generated nearly $204 billion in revenue. However, it peaked in 2005 and has declined ever since, dropping to $21.1 billion in 2008 from $31.1 billion (in real 2002 Canadian dollars).

“The burgeoning black market for contraband tobacco counteracts the government’s goals of increasing tax revenue and discouraging smoking, as more smokers substitute contraband cigarettes for lawful tobacco products.” Katz said.

“If smokers are evading taxes by purchasing black market cigarettes, increasing taxes to discourage smoking is essentially ineffective.”

Other research referenced in the report indicates that anti-smoking efforts such as health awareness campaigns, smoking bans, and restrictions on tobacco advertising and sales are just as effective at discouraging smoking as increasing tobacco taxes. In fact, research shows that smoking among Canadians did not increase when tobacco excise taxes were lowered in 1994, and that the number of Canadians who smoke has continuously decreased.

Efforts to curtail trade in contraband tobacco have had mixed success, the report notes. Although seizures of contraband tobacco in Canada are at record levels, law enforcement agencies are hampered by long-standing territorial disputes between the federal and provincial governments and Indian bands. The report identifies aboriginal territories in south-central Ontario and Quebec as “Ground Zero” of the contraband trade. Canadian law enforcement is effectively powerless to enforce tax obligations on Indian reserves because of Native territorial autonomy and charter rights.

“The tensions between Canadian law enforcement and aboriginal communities facilitate the trafficking of contraband tobacco products,” Katz said.

“It is exceedingly difficult for law enforcement to obstruct illicit trade and smuggling activities if they lack access to the territory on which it takes place and do not possess the clear authority to take enforcement actions.”

The report also reveals the increasing involvement of criminal enterprises in tobacco smuggling. Law enforcement agencies have identified the Hell’s Angels and individuals linked to terrorist organization Hezbollah as prime movers of contraband products.

“With all of these factors at play, the contraband tobacco market will continue to grow, smugglers will continue to prosper, smokers will continue to consume contraband cigarettes, and the policy objectives of Canada’s tobacco tax regime will go unfulfilled,” Katz said.

A follow-up study with specific policy recommendations to curtail the contraband tobacco trade is forthcoming.


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