Thursday, June 19, 2008

Tobacco taxes up in smoke (Part 1)

Does anyone really believe that sin taxes on cigarettes are a good idea? Do they have any affect on tobacco company profits? Do they really impact on smoking prevalence, or do they create many more problems than they solve.

The chart which accompanies this post was taken from data published on the Physicians for a Smoke-Free Canada web site. It’s actually a composite of two different data sets on that site. One shows tobacco company profits for the years 1991 to 2003; the other shows combined federal and provincial government tax revenue for the same period.

Tobacco company profits include figures for all three major manufacturers in Canada.

The first thing you notice when looking at the chart, is that tobacco company profits have been climbing steadily for the entire 13 year period. Not in leaps and bounds, but steadily. In other words, the tobacco industry remains unaffected by punitive tobacco taxes imposed on smokers.

Tax revenue, on the other hand, is erratic, fluctuating from year to year, often by billions of dollars. The low tax revenue ($3.668 billion) reported in the fiscal year ending 1996, followed a sharp decline from the high ($6.081 billion) recorded in 1992.

But, the drop in tax revenue was not the result of a real decrease in tobacco consumption. Tax revenue dropped because consumers had reached the limit they were willing to pay in sin taxes and had turned to the black market to avoid the high price of feeding their habit.

The government, realizing the error of their ways, was forced to lower the taxes on cigarettes in 1994. But it took several years to regain consumer confidence and for users of tobacco products to return to purchasing legally manufactured cigarettes and once again start paying the extortion demanded by their governments.

You’d think that the government would have learned a lesson from the billions of dollars in tax revenue lost during that period. But, no; they went right back to more of the same, once again imposing confiscatory levels of taxation on the cigarette smoking public. Between 2001 and 2006, taxes on a carton of smokes jumped by $26.30 per carton.

Politicians, jumping on the anti-smoking band wagon, simply ignored the lessons learned only a few short years before. They were convinced by the anti-smoking zealots that the most effective way to reduce smoking was to price them out of reach of all but the more well-off members of society.

According to the Ontario Tobacco Research Unit, "Taxation of tobacco is an effective policy for preventing and reducing cigarette consumption.” But, did the punitive levels of taxation really result in a decline in consumption? Or was it really forcing smokers into an underground economy?

Tax revenue reached an all time high in the fiscal year ending in 2004, with combined federal and provincial revenues of $7.605 billion, before tailing off slightly in 2005, then dropping by over half a billion dollars in 2006 to $7.086 billion. The final figures aren’t in yet for 2007, or 2008, but given the fuss being made by all levels of government, there will be substantial declines in revenue.

Canada’s Public Safety Minister, Stockwell Day, said recently, “I'm asking individuals to consider that they are contributing to a dangerous pipeline of criminal activity. This is not a victimless crime or a benign activity”. He was announcing new measures to fight the distribution and sale of illegal tobacco products.

The naiveté of the Minister’s appeal is appalling. What he is actually saying to the smoking public is: please stop buying cheap contraband smokes and quit. After all, that’s why we raised taxes in the first place; to force you to quit . . . for your own good.

Taxes on cigarettes had, once again, reached the limit that many consumers were willing to pay. The working poor, and people on fixed incomes, were presented with only two options; quit or resort to cheap contraband cigarettes. Most have chosen the latter. And many more will start taking advantage of the availability of cut rate contraband cigarettes, once more sending tax revenues into a steady downward spiral.

Unfortunately, declining tax revenue isn’t the only problem created by the anti-smoker brigade and the politicians who support them, in their march towards tobacco prohibition.
To be continued . . .

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