Provinces should fight contraband cigarettes with better policing, and reforming government allocation of cigarettes to Aboriginal reserves, rather than impose higher taxes.
February 28, 2017 – Provinces should fight contraband cigarettes with better policing, and reforming government allocation of cigarettes to Aboriginal reserves, rather than impose higher taxes, according to new report released by the C.D. Howe Institute. In “Smokes, Smugglers and Lost Tax Revenues: How Governments Should Respond,” author Anindya Sen analyzes trends in cigarette smuggling and the implications for government revenues and policy.
“Understanding the extent to which stronger enforcement affects the consumption of contraband tobacco is important, given the significant tobacco tax increases recently implemented by the federal, Ontario and Quebec governments,” states Sen. “Further, concerns have been raised about lost tax revenue and even the funneling of black-market revenue to organized crime and terrorist activities,” he adds.
In the study, the author employs rigorous econometric methods to estimate the amount of smuggled cigarette cartons, along with associated lost tax revenues, in Quebec and Ontario from 2006 to 2014.
While it is not possible to provide a precise causal link, the statistical estimates reveal more police officers to be robustly correlated with higher legal sales, as shown by the Quebec experience. The reduced incidence of illegal products in the presence of increased taxation is also quite consistent with increased success of enforcement measures. However, according to Sen, “it would be incorrect to assume that either federal or provincial governments can unilaterally keep increasing cigarette taxes. Tobacco taxes and cigarette prices are very high, and it is possible that further tax hikes would reverse the declining trend in contraband tobacco.”
The report provides three finding:
- While the amount of contraband has been quite significant in both Ontario and Quebec, it has been particularly significant for Ontario, with lost tax revenue of approximately $816 million to $900 million in 2014.
- The amount of contraband has declined over time for both provinces and coincided with an increase in excise cigarette taxes.
- The reduction in contraband has been especially dramatic in Quebec, with lost tax revenue equal to roughly $617 million to $679 million in 2008 and $85 million to $93 million in 2014. In other words, lost tax revenue in Quebec from contraband is roughly a tenth of corresponding levels in Ontario.
The decline in illegal sales in Quebec is all the more remarkable given the roughly 25-percent increase in federal and provincial excise taxes over the same time span. In contrast, the corresponding increase in federal and provincial cigarette taxes in Ontario was much lower, at 10 percent. From another perspective, in Ontario, estimated illegal supply as a proportion of all carton sales fell from about 35 to 38 percent in 2008 to roughly 20 to 23 percent in 2014. The corresponding drop for Quebec was even more pronounced, from a high of nearly 31 to 34 percent in 2008 to roughly 4 to 5 percent in 2014.
“The decline in illegal sales can be at least partially attributed to additional federal and provincial resources devoted to law enforcement,” states Sen. “Given the magnitude of the decrease in estimated lost tax revenues as a likely consequence of stronger policing, and the risks to higher tobacco taxes undermining fruitful enforcement efforts, it appears that Ontario in particular would be better off by focusing on strengthening enforcement and regulation instead,” he concludes.
Click here for the full report.
The C.D. Howe Institute is an independent not-for-profit research institute whose mission is to raise living standards by fostering economically sound public policies. Widely considered to be Canada's most influential think tank, the Institute is a trusted source of essential policy intelligence, distinguished by research that is nonpartisan, evidence-based and subject to definitive expert review.
For more information contact: Anindya Sen, Professor of Economics & Director of the Master of Public Service Program, University of Waterloo; or Alexandre Laurin, Director of Research, C.D. Howe Institute: 416-865-1904 or email: amcbrien@cdhowe.org