Opinion: Here comes another federal subsidy to illegal tobacco
The high cost of cigarettes — 70% of which is taxes — drives illegal sales. Now the feds are adding a 'cost recovery' charge to legal smokes
This article was originally posted in The Financial Post
The federal government will soon implement a “cost recovery” program for the tobacco industry. This will involve levies to be paid by the major legal producers in proportion to their share of the market. This is despite the fact that the sector already generates about $8 billion in taxes annually, with taxes accounting for 70 per cent of the price of cigarettes.
The new levy will appeal to many voters’ sense of fairness — after all, Big Tobacco is responsible for the illness and death of tens of thousands of Canadians every year. Who could object? In fact, there are several reasons for not pursuing this proposal.
To begin with, our experiment with the first such levy — in the cannabis sector — has not gone well. Health Canada reports that the sector paid $60 million to Ottawa in cost-recovery fees in 2022-23, the last fiscal year for which data are available. That was down from $76 million the year before. The money comes from fees associated with security, licence application, import and export of product, as well as a 2.3 per cent charge on sales that accounts for 90 per cent of the $60 million. Free-fall in the price of the cannabis flower helps explain the recent decline in revenues. Profits in the sector are non-existent: every major producer reports negative earnings. Stock prices from the start of COVID-19 in 2020 are down about 97 per cent. Canopy Growth Corp. currently trades at about $6, down from $300 at end-2020. The sector already pays more than $1 billion a year in sales and excise taxes on its d columns.
But a government that needs revenue needs revenue, and imposing a tax that it denies is a tax is one way of generating it.
Sin goods are a splendid target for a regulatory tax. Cannabis is psychoactive and tobacco is both addictive and carcinogenic. But why stop here? Is the alcohol sector next in line for the regulatory chopping block? It, too, is responsible for tens of thousands of lost life-years in Canada every year. Gambling should not be far behind. And what about the obesity-producing sector? Starbucks sells bottled coffee with 10 teaspoons of sugar per unit. McDonald’s milkshakes contain double that. So, let’s have a McBucks or a “super-size me” levy to go with the Canadian Club levy, the micro-brewery levy, the gambling levy and the tobacco levy. For that matter, why not fund the Competition Bureau with a levy on supermarkets? Loblaw recently agreed to pay half a billion dollars to compensate consumers for its “price gouging.” More regulators, more regulation and more regulatory fees are clearly the order of the day. After all, federal public service employment under Prime Minister Justin Trudeau has been super-sized by 40 per cent. Somebody has to pay these people’s salaries and benefits.
The government claims the regulatory fee will not fall on the consumer. But it will increase costs. Econ 101, which too many government spokespersons clearly haven’t taken, says the degree to which it’s passed on depends on market power. On the other hand, at least a quarter of all cigarettes consumed in Canada are illegal. And, of course, the illegal sector will pay nothing under the new scheme — and is only likely to grow more as a result of what amounts to a new subsidy for it. (In good part because of high taxes, one-third of the cannabis sector is still illegal and doesn’t pay fees or taxes.)
The proposed levy is purely cost-based and therefore provides no incentive for efficient government: the more the regulator spends, the greater the levy on the regulated. The regulator can spend and employ without limit knowing that such costs will be covered by the evil forces of capitalism. To give an example: last year Health Canada sent a tobacco delegation of 15 employees to a World Health Organization (WHO) conference in Panama. The WHO is an extraordinarily retrograde organization in the field of tobacco and nicotine policy, in that it condemns lower-risk non-combustible products. I wrote at the time that this was equivalent to sending a group of evolutionary biologists to a conference run by creationists. With an open chequebook there is no limit on low-efficiency expenditures.
But expenditures on junkets may be less serious than inefficient policy. In managing tobacco consumption, governments should not be denying consumers information or acting as nicotine prohibitionists. They should be giving agency and information to smokers by encouraging switching to low-risk products. Efficient policy demands a power-to-the-user program, not another tranche of public servants.
Ian Irvine, professor of economics at Concordia University, has worked as a consultant to the federal government on tobacco and alcohol policy and in the private sector. Some of his recent research has been funded by the Foundation for a Tobacco Free World. No one paid him to write this article.
