Friday, January 2, 2009

Punitive taxes on smokers no solution

High tobacco taxes are touted as the most effective means of reducing demand for tobacco products. In theory, increasing cost will force smokers to quit. And, also according to theory, higher taxes have the added advantage of putting the cost of cigarettes beyond the reach of teenage budgets, meaning fewer teens will be inclined to start smoking.

But theory is one thing; the reality, of course, is something completely different.

Ask the anti-smoker zealots why they aren’t pushing for all out prohibition and they’ll tell you it’s simply not an option. They’ll point to the lessons learned from the American prohibition of alcohol from 1920 to 1933. They’ll admit that the resulting lawlessness and violence is unacceptable. They know that the public would be no more inclined to support tobacco prohibition today than they were the prohibition of alcohol in the twenties and thirties.

And, yet they continue to push for piecemeal prohibition which is creating the exact same problems. Physicians for a Smoke-free Canada, the Non-Smokers Rights Association and a host of other charter members of the anti-smoker brigade, insist that prohibitive levels of taxation are the most valuable weapon in their arsenal to force smokers to quit.

They point out to recalcitrant politicians that Canada has an obligation, as a party to the FCTC (Framework Convention on Tobacco Control), to implement tax policies that promote “national health objectives.” Unfortunately, the WHO (World Health Organization), responsible for the treaty, doesn’t have to suffer the consequences stemming from the usurious levels of taxation imposed on tobacco users; Canadians do

The fact, which politicians of all stripes seem determined to ignore, is that high cigarette taxes have already created a thriving black market and a massive loss of tax revenue as smokers grow weary of paying the extortion demanded by their government.

It’s not that the problem of contraband was unexpected. Both politicians and the public should have been aware of the detrimental consequences of excessive taxation. The government was warned by law enforcement years ago that increasing tobacco taxes beyond a reasonable level would lead to a black market that would be both costly and very difficult to bring under control. Those warnings were ignored.

Physicians for a Smoke-Free Canada estimate that contraband represented 40% of tobacco sales in Ontario in 2007. The most recent estimates suggest that contraband is almost 50% of the Ontario market. Governments are losing billions in tax revenue and the problem of contraband is beginning to spread across the country.

And, is it any wonder?

In 2004, the cost of manufacturing a carton of cigarettes (value brand) in Ontario was $12.53. That includes distribution, and profits at both the wholesale and retail level. Tax from various levels of government was $42.93. That’s 78% of the total cost of a carton of cigarettes. And, the average cost doesn’t include PST or the 2006 increase in provincial tobacco tax.

And, it was government, pressured by the anti-smoker lobby, which raised taxes to such punitive levels. It was government which created the huge profits to be harvested from the trade in contraband tobacco. And, it is government who must ultimately bear responsibility for the adverse consequences of this misguided tax policy.

Anti-smokers point to Canada’s First Nations as if they were responsible, demanding authorities increase enforcement efforts to get contraband off the streets.

But, by concentrating only on First Nations, they demonstrate that they have no real grasp of the problem and its costs. For example, Canada has become a lucrative market for counterfeit tobacco products; manufactured offshore, imported illegally and sold on the country’s growing black market. According to the RCMP, these counterfeit products originate primarily in China and South America.

Imperial Tobacco, Canada’s leading tobacco manufacturer, reports an alarming increase in theft of legal cigarettes, which then make their way onto the black market. Imperial Tobacco’s web site points out that in 2004, there were 17 times as many thefts as there were in 2003. Millions of dollars worth of cigarettes, millions of dollars in profits created for criminal elements as a direct result of punitive taxation.

Anti-smoker fanatics believe the problem can be remedied by forcing Canada’s First Nations to become tax collectors for the federal and provincial governments. It won’t work. The demand for cheap tobacco is too great. And, if Canada’s First Nations don’t fill it, then someone else will.

In Canada, it will be a criminal enterprise the likes of which has not been seen since the twenties and thirties. Count on it.

Additional reading: Patrick Fleenor - Wall Street Journal

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