To Reduce Smoking Tax The Act Of Smoking, Not The Price Of Cigarettes
Seventeen years ago I was asked to debate the issue of smoking in Quebec and specifically was asked why the imposition of taxes did not and could never be a solution. The large tax imposed at the time neither reduced smoking, increased government revenues or diminished smoking among the young. As is happening today, it led to a great deal of smuggling and the inevitable undesirable side-effects of such actions.
Here is a brief review what happened in Quebec 17 years ago. The condition continues to take place in Canada and elsewhere today.
A carton of cigarettes then sold officially for $47.53 in Montreal, the price of which included taxes and retail mark-up. Cigarettes smuggled from the U.S. sold for only $20 to $25.
The degree of smuggling varied across Canada and depended on the provincial taxes on cigarettes, as it does now. Two-third of cigarettes sold in Montreal in 1993 were estimated to be smuggled, one-third in Ontario, a third in British Columbia, and a fifth in the Prairies. So, on average, one third of cigarettes sold in Canada in 1993 were estimated to be smuggled.
If anyone advanced the idea that an item, any item, could be sold permanently for one price in one place, and for double that price a short distance from there, they would be immediately told that such an arrangement could not persist. These kinds of arbitrage opportunities are quickly identified. The Indian reservations in Canada close to the U.S. border were in an ideal situation to arbitrage the tax-driven price differentials, and they quickly got into the business.
Even in 1993 governments and the media learned that appeals to Canadian patriotism or to a loss of government revenues - and thus services - did not induce Canadian smokers to obey the law. Canadians were not persuaded to stop buying the smuggled cigarettes with repeated warnings about the detrimental effects of smoking either...
- Article by Professor Reuven Brenner
Read full article: Forbes, February 25, 2011