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Pricing And Taxation

Raising the Price of Tobacco Saves Lives

When the price of tobacco increases, tobacco consumption decreases. The World Bank calculates that each 10% increase in the cost of smoking reduces consumption by 4%.

Raising the price of tobacco saves lives in two ways:

1. by motivating current smokers to quit, and
2. by discouraging youth from starting to smoke.

Youth are more price-sensitive than adults, so the health benefits of raising the price of tobacco are even greater among youth than among adults. The US Surgeon General estimates that price increases reduce youth consumption at least three times as much as they reduce adult consumption.

Even a modest tobacco price increase could save thousands of lives in Nova Scotia. Right now, approximately 160,000 Nova Scotians smoke, and half of them will die as a result of their smoking unless they succeed in quitting. According to the US Surgeon General’s estimate, a 10% increase in the cost of smoking (about ninety cents a pack) would reduce the number of Nova Scotians who smoke by almost 5,000, meaning almost 2,500 lives would be saved. Many others would cut back on the amount they smoke, increasing their chances of quitting later.

Recommendations to Raise the Price of Tobacco in Nova Scotia

1) Close the Roll-Your-Own Loophole in the Provincial Tobacco Tax

Nova Scotia currently taxes roll-your-own tobacco at less than half the rate of regular cigarettes. One hundred grams (100g) of roll-your-own tobacco makes the equivalent of one carton of cigarettes, but the provincial tax on 100g of roll-your-own is only $15.00 (compared to $33.04 for a carton of cigarettes).

Roll-your-own cigarettes are just as dangerous as other cigarettes. The lower tax rate makes it tempting for people to switch to roll-your-own when prices rise, rather than cut back or quit. To close this loophole and encourage quitting, 100g of roll-your-own tobacco should be taxed at the same rate as a carton of cigarettes.

2) Raise License Fees and Stop Subsidizing Tobacco Retailers

Another way to increase tobacco prices is to raise the license fee for tobacco retailers. Raising the license fee would force retailers to raise prices to recoup their costs, resulting in higher tobacco prices, less smoking and, ultimately, less addiction, disease and death.

Currently, the license fee for tobacco retailers in Nova Scotia is a nominal $100 every three years. This is not even enough for the province to recover the cost of administering the Tobacco Access Act (the provincial law that regulates tobacco sales, including prevention of sales to minors and prevention of in-store tobacco advertising and displays). At a minimum, retail license fees should recover the cost of administering this Act; failure to recover at least this much from the license fees amounts to a subsidy of tobacco retailers by the provincial government.

As a first step, Nova Scotia should raise the tobacco license fee to $1000 per year. While this would have only a marginal impact on cigarette prices at first (approximately 3 cents a pack for the average retailer), it would eliminate the current subsidy to tobacco retailers and pave the way for further increases to raise tobacco prices, reduce smoking and save lives.

3) Introduce Municipal Licenses for Tobacco Retailers

Municipalities have a role to play in raising the price of tobacco. Nova Scotia’s Municipal Government Act (MGA) gives municipalities the right to require tobacco retailers to obtain municipal licenses (these would be in addition to the provincial license.) In addition, the MGA gives municipalities the right to establish license fees “that may be in the nature of a reasonable tax for the activity authorized or for the purpose of raising revenue” (see subclause 172(2)(e)(i) of the MGA).

The Ontario cities of Markham and Ottawa currently require tobacco retailers to have municipal licenses. Both charge $300 per year for these licenses. In addition to raising tobacco prices, licensing gives municipal governments a tool to promote health by restricting tobacco sales in undesirable locations, such as near schools or in premises accessible to youth.

Smoke-Free Nova Scotia recommends that municipalities require tobacco retailers to obtain municipal licenses, and use their licensing systems to reduce smoking by increasing tobacco prices and restricting where tobacco can be sold.

Common Objections to Raising Tobacco Prices

The tobacco industry (tobacco manufacturers and retailers), opposes raising the price of tobacco because raising the price reduces their sales and profits. They routinely resort to misinformation to further their self-serving ends. Below are their two most common myths.

Tobacco Industry Myth #1 – Raising Tobacco Prices Puts an Undue Burden on the Poor

In reality, low-income Nova Scotians would benefit economically, not to mention in terms of their health, from higher tobacco prices. The World Bank and others have concluded that lower-income people who smoke are significantly more likely to quit smoking when prices rise than higher-income people, or at least cut back the amount that they smoke to offset the price increase. Quitting provides a substantial economic benefit by freeing up income previously spent on tobacco for other uses. Since those who quit as a result of tax increases are disproportionately lower-income, the economic benefits of a tax increase accrue primarily to the poor.

Low-income individuals who do not succeed in quitting as a result of a price increase are also more likely to compensate for any price increase by cutting back their tobacco consumption. If someone smokes half a pack of cigarettes a day and the price rises by 10%, cutting back by a single cigarette a day is enough to offset the price increase. Cutting back in this manner makes the price increase cost neutral to the individual, and improves their chances of quitting later.

Tobacco Industry Myth #2 – Raising Tobacco Prices Causes Contraband to Increase

Tobacco price increases are not linked to increases in contraband tobacco. If they were linked, jurisdictions with high taxes and prices would have more contraband tobacco than those with low taxes and prices. In reality, the opposite is true. Tobacco in Canada is cheapest in Ontario and Quebec, yet even the tobacco industry admits that these provinces have the highest rates of contraband tobacco use.

The amount of contraband available in any location depends on its proximity to a source of contraband. The main source of contraband tobacco in Canada is the US border crossing at Akwesasne-St. Regis. The Royal Canadian Mounted Police estimate that over 90% of the contraband in Canada enters the country there. Ontario and Quebec have the most contraband because Akwesasne-St. Regis is right on the border of those two provinces, very close to Montreal and Ottawa.

Contraband tobacco is a problem because it reduces the health benefits of price increases. The availability of contraband allows some people who smoke to respond to price increases by switching to contraband products, rather than cutting back or quitting. Thus, it is important for the government to deal swiftly and decisively with the organized crime groups that produce and distribute contraband. However, the fact that criminals sometimes try to make money by selling contraband tobacco is no reason to give up on the many lives that can be saved by increasing the legal price of tobacco. Even where contraband is widely available, most people who smoke still obtain their tobacco legally.

Links

Canadian Cancer Society, Non-Smokers’ Rights Association, Physicians for a Smoke-Free Canada, and Quebec Coalition for Tobacco Control - Surveying the Damage - Cut-Rate Tobacco Products and Public Health in the 1990s (1999)

Canadian Coalition for Action on Tobacco – A Win-Win: Enhancing Public Health and Public Revenue (2004)

Non-Smokers’ Rights Association – Tax Policy to Address Tobacco Market Failures (2004)

Non-Smokers’ Rights Association - Tobacco Tax Maps

For every dollar increase in price, the odds that an adolescent will move on to the next level of smoking decrease by 24% - The Impact of Retail Cigarette Marketing Practices on Youth Smoking Uptake

Non-Smokers’ Rights Association - A map comparing cigarette prices in Canada (2008)

US Surgeon General – Smoking and Health in the Americas (1992)

The World Bank - Curbing the Epidemic: Governments and the Economics of Tobacco Control (1999)