Lowering punitive tobacco taxes not in the cards

As expected, Dalton McGuinty's Liberals shot down MPP (Member of Provincial Parliament) Toby Barrett's attempt to lower tobacco taxes in Ontario. His private members bill was defeated on second reading in the provincial legislature. Barrett's proposal would have cut the punitive tobacco tax by 33% and asked the federal government to do the same.

Barrett's proposed legislation was intended to help reduce the rapidly escalating problem of contraband in the province which he claims is now 50% of tobacco sales in Ontario.

Said Revenue Minister John Wilkinson: "We are with those who believe that we need to get our smoking rates down (and) that taxation is an effective deterrent..I think it's important that people understand when they buy illegal cigarettes, they are stealing from their neighbours."

Wilkinson is wrong on both counts. When people buy illegal smokes, they're not stealing from anyone; they're protecting themselves from the legalized extortion demanded by senior levels of government. And, taxation is no longer an effective deterrent to smoking. In fact, the usurious levels of taxation have become counterproductive and may be doing much more harm than good.

In 1994, federal and provincial governments saw that contraband tobacco was becoming a problem. They lowered taxes. But, around 2000, anti-smoker crusaders lobbied government to impose dramatic new tax increases, once again driving consumers into the welcoming arms of the black market.

In 1994, it was estimated that only 11% of tobacco was illegal; today it's 50% and, according to Barrett, some experts claim it could go as high as 80% by the end of next year.

And, tobacco taxes are no longer having the desired effect.

According to a 2007 study by PSC (Physicians for a Smokefree Canada): “The number of smokers in Canada has remained virtually unchanged over the past 5 years.”

PSC claims that, in 2005, there was an estimated 4,889,511 smokers in Canada; by 2007, that number had climbed to 5,165,376. Smoking prevalence went from 18.7% to 19.2% over the same period. Contraband sales went from an estimated 4% in 2002 to a whopping 40% in 2007. And now, they're estimated at 50% of the market.

In addition, tax revenue dropped from 1.453 billion dollars in 2004, to 1.217 billion in 2007. That's a 226 million dollar loss in provincial tax revenue. A loss that not only continues, but continues to grow. Latest estimates from the provincial Auditor General's report estimates Ontario is now losing $500-million in taxes due to contraband tobacco.

But, the provincial government, and their colleagues in Ottawa, are prepared to spend tens of millions more on policing contraband sales rather than admit that their tax-gouging policies have been an abject failure. The politicians prefer to kiss the collective ass of the anti-smoker brigade and punish 20% of the adult population in a futile attempt to impose a backdoor form of tobacco prohibition.

It's not working.

And, the reason it's not working is that a contraband smokes can be manufactured for less than $8.00 per carton of 200 cigarettes. In Ontario, provincial tobacco tax alone is roughly three times that amount per carton. Ottawa adds twice that amount. The potential for profit in the black market is huge; literally billions of dollars. It is this direct and indirect taxation on tobacco that makes the sales of contraband even more attractive to the flourishing black market.

The demand exists whether the anti-smoker fanatics like it or not. Government is unwilling to allow the legal market to fill that demand; at least not at a price the consumer is willing to pay. Dealers in contraband stand ready and willing to furnish the supply side of the equation. And, rake in sizable profits for their efforts.

Most politicians refuse to admit that tobacco taxes exceeded their effective limit years ago; that they are now faced with the law of diminishing returns. Heads buried firmly in the sand, they'd rather find fault with consumers for refusing to pay punitive, discriminatory taxes. No other legal product in the country is taxed to such extremes.

Yet, the provincial government seems poised to exacerbate the problem, rather than resolve it. They are prepared, once again, to allow the anti-smoker brigade to dictate public policy. OCAT (Ontario Campaign for Action on Tobacco), one of the more strident anti-smoker groups, continues to insist that penalizing smokers financially is the most effective way to force them to give up the habit.

Ottawa and Queen's Park will ignore the lessons learned in the early nineties when contraband threatened to get out of control. They'll ignore the lessons from the early part of the twentieth century when attempts to prohibit alcohol led to an upward spiral of illegal activity and violence.

And, they'll ignore the fact that it was following advice from rabid anti-smoker groups which is, in large measure, responsible for the current problem with contraband.

Politicians followed that advice, hoping to enhance government coffers with an opportunistic tax grab. But, every tax increase added greater financial incentive to the criminal element. And, the law of unintended (but not unforeseen) consequences has done the rest.

Young people have greater access than ever to cheap cigarettes; from the trunk of a car, without the hassle of providing ID. Tobacco wholesalers and retailers are unable to compete with the far less expensive contraband. Tax revenue is declining despite the highest levels of tobacco taxation in Canadian history.

Politicians believe more stringent enforcement will resolve the issue. History, and common sense, suggest otherwise.

Unfortunately, Toby Barrett's effort to bring some common sense to the debate was doomed from the start.