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April 27, 2021 – Harm reduction should be a major consideration in deciding tax rates on the profusion of new nicotine products, says a new report from the C.D. Howe Institute.

In “The Taxation of Nicotine in Canada: A Harm-Reduction Approach to the Profusion of New Products,” author Ian Irvine examines alternative nicotine products, from e-cigarettes and heat-not-burn sticks, to oral pods, and proposes that tax rates for individual products reflect their potential health-related harm.

Despite a growing number of alternative nicotine delivery systems in the Canadian market, Canada has no comprehensive taxation systems for these products, notes Irvine. But the federal government intends to change that by 2022.

“With Ottawa announcing in its new budget to tax vaping products like e-cigarettes in coordination with the provinces, they should make the relative health risks of different products a key consideration. Compared to traditional cigarettes, these products have relatively low toxin levels,” says Irvine.

The author’s harm-reduction approach recognizes that if safer alternatives to cigarettes are available, policy should be developed with the goal of diverting users – particularly those in vulnerable communities where smoking prevalence remains high – away from higher-risk products towards lower-risk ones. Irvine argues alternative nicotine delivery systems perform two functions: they act as a quitting device for smokers, and a reduced risk means of consuming nicotine.

“Adults should be free to consume nicotine in a relatively low-toxicity form,” says Irvine. “We don’t ban beer or alcohol because of risk, and cannabis isn’t considered an exit from cocaine or heroin.” Although nicotine consumption should be tolerated, Irvine advocates for robust restrictions to prevent youth access.

Irvine examines each category of alternative products with respect to nicotine content and potential health-related harm, and creates a tax hierarchy based on his findings.

The author’s calculations suggest that, in addition to existing sales tax, an excise tax – or “sin tax” – of 5 percent to 10 percent of the rate applicable to regular cigarettes should be applied to products at the low-risk end of the spectrum, if health risk were the sole criterion. These products include snus and modern oral products, vapes and e-cigarettes, heat-not-burn products and chewing tobacco. If tax revenue alone were the objective, a higher rate would apply. 

At the top end of the spectrum, very low nicotine cigarettes should carry a tax rate below that on cigarettes, and the discount should be sufficient to indicate that very low nicotine cigarettes are slightly less risky than traditional cigarettes.

Relative tax rates should reflect our best understanding of the health risks associated with each nicotine- or tobacco-based product, concludes Irvine. A well-structured set of taxes should aim to encourage smokers to quit or switch to reduced-risk products, but not be too high to drive an illegal market.

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For more information contact: Ian Irvine, Professor of Economics, Concordia University, and Research Fellow at the C.D. Howe Institute; or Nancy Schlömer, Communications Officer, C.D. Howe Institute, email: nschlomer@cdhowe.org.

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.