A Win-Win - Coalition Quebecoise pour le Controle du Tabac

A Win-Win:
Recommendation for an inflation adjustment to
federal cigarette tax rates
Submission to
The Hon. James Flaherty, P.C., M.P, Minister of Finance, and
The Hon. Leona Aglukkaq, P.C., M.P., Minister of Health
Endorsed by:
Action on Smoking and Health (Alberta)
Canadian Cancer Society
Canadian Council for Tobacco Control
Canadian Dental Association
Canadian Dental Hygienists Association
Canadian Lung Association
Canadian Medical Association
Canadian Public Health Association
Coalition québécoise pour le contrôle du tabac
Heart and Stroke Foundation
Non-Smokers’ Rights Association
Ontario Campaign for Action on Tobacco
Physicians for a Smoke-free Canada
May 3, 2013
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A Win-Win:
Recommendation for an inflation adjustment to federal tobacco tax rates
Submission to
The Hon. James Flaherty, P.C., M.P, Minister of Finance, and
The Hon. Leona Aglukkaq, P.C., M.P., Minister of Health
May 3, 2013
Summary: A Win-Win
The health organizations endorsing this submission urge the federal government to make
an inflation adjustment to cigarette taxes of $3.89 per carton of 200 cigarettes. This
would result in incremental federal tobacco tax revenues of an estimated $520 million per
year, not including GST. It is recommended that this inflation adjustment be made
immediately.
Higher cigarette prices are a highly effective way to reduce smoking, especially among
youth. Thus implementing an inflation adjustment would be a win-win for public health
and for public revenue.
Tobacco use remains the leading preventable cause of disease and death in Canada,
killing more than 37,000 Canadians each year. Cigarettes are highly addictive and cause
cancer, heart disease and stroke, emphysema, and many other diseases.
The
overwhelming majority of new smokers are adolescents. A sustained, comprehensive
response to the tobacco epidemic is essential, and tobacco taxation is a key component of
that response.
Federal cigarette taxes are being eroded by inflation
There has not been a net change to federal cigarette tax rates since June 17, 2002, fully 11
years ago. Cumulative inflation has been 22.9% between June 2002 and March 2013.
This means that, after inflation, federal tobacco tax rates are in fact decreasing year after
year, with adverse effects for public health and for public revenue. The absence of an
inflation adjustment undermines efforts to reduce smoking. To respond to this situation,
the federal government should implement an inflation adjustment of $3.89 per carton,
which is 22.9% of the current federal tobacco tax rate of $17.00 per carton.
In the United Kingdom, the tobacco tax rate is adjusted upwards each year. The same
approach should occur in Canada, but this has not been the case given that there has not
been a federal tobacco tax increase over the last 11 years.
2
In Canada, federal income tax is based on a percentage of income, while the Goods and
Services Tax (GST) is based on 5% of the retail price. Thus the total income tax revenue
and the total GST tax revenue collected automatically increases with inflation. But that is
not the case with excise taxes, which do not automatically increase with inflation.1
Federal Government is giving up revenue to provinces
While the federal government has not increased cigarette taxes since June 17, 2002,
provinces and territories have implemented extensive increases. Here is the total tobacco
tax increase by province and territory in the 11 years since June 17, 2002:
$0.00
$14.60
$8.00
$17.10
$29.00
$12.64
$7.70
$18.50
$27.73
$29.71
$14.00
$15.60
$24.00
$18.80
Federal government
British Columbia
Alberta
Saskatchewan ($18.00 less $0.90 for a 1% PST decrease)
Manitoba
Ontario ($7.50 plus $5.14 for 8% portion of HST implemented on tobacco)
Quebec
New Brunswick
Nova Scotia ($26.00 plus 2% increase in provincial portion of HST)
P.E.I. ($22.10 plus $7.61 for 9% portion of HST implemented on tobacco)
Newfoundland and Labrador
Yukon
Northwest Territories
Nunavut
If every province and territory can increase tobacco taxes, as has been the case, then so
can the federal government. There is no reason why the federal government should be
ceding tobacco tax revenue to provinces.
Federal tobacco taxes are more beneficial than provincial tobacco taxes. Federal tobacco
taxes apply everywhere across Canada. Federal tobacco taxes apply at the point of
manufacture/importation, and thus are more efficient in terms of tax administration and in
terms of deterring diversion into contraband distribution channels.
If the federal government today had a tobacco tax rate that was $7.70 per carton higher –
the lowest amount of the cumulative tobacco tax increases since June 2002 among
1
Note that since June 17, 2002, there have been two small adjustments to federal
cigarette taxes totaling $1.15 per carton to offset reduction in GST from 7% to 6%, and
from 6% to 5%. But the purpose of these increases was to leave net taxes including GST
unchanged, not to increase cigarette taxes.
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provinces/territories – the result would be an estimated increase in federal tobacco tax
revenue of more than one billion dollars per year, specifically $1.015 billion per year.
Tobacco industry price discounting emphasizes need for federal action
In June 2002, at the time of the last federal tobacco tax increase, virtually all cigarette
brands had the same retail price. Today, each of the three major manufacturers engages
in massive price discounting as a marketing strategy. Discount brands such as Pall Mall
and Studio can sell at a price of at least $25 per carton less than premium brands such as
du Maurier and Benson and Hedges. The $25 per carton discount exceeds the provincial
tobacco tax increases over the last 11 years in all but two provinces.
The widespread availability of discounted cigarettes counters the benefits of higher
tobacco taxes, but also creates room for the federal government to adjust tobacco tax
rates upward to help fill the price gap. Widespread cigarette discounting certainly
emphasizes the need for an immediate inflation adjustment to federal tobacco tax rates.
Past federal tobacco tax changes have been outside the budget
All of the federal tobacco tax increases since 1994 have been made outside the federal
Budget. Here is a list of a series of small federal cigarette tax increases and their
effective date (none of which was a Budget date), with the last increase being June 17,
2002:
Feb. 18, 1995
Apr. 1, 1995
Nov. 28, 1996
Dec. 12, 1996
Feb. 14, 1998
Nov. 6, 1999
Apr. 6, 2001
Nov 2, 2001
June 17, 2002
This experience of implementing tobacco tax increases outside the federal Budget
provides historical context for the federal government to do so again in 2013.
Revenue projections
The estimated incremental revenue of $520 million is based on 31.372 billion cigarettes
sold in Canada in calendar 2012, and a nominal increase of $611 million in revenue if
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there were no decrease in sales.2 The final estimate of $520 million factors in a reduction
in aggregate sales based on a price elasticity of -0.04, that is a 10% increase in retail
prices will lead to a reduction in tobacco sales of 4%.
Additional recommendations
While this submission focuses on an inflation-adjustment for cigarette taxes, it is also
recommended that an equivalent tax increase for loose tobacco (manufactured tobacco)
be made concurrently, with the tax increase for 0.5g of loose tobacco equal to the tax
increase for one cigarette. Moreover, it is recommended that any tax increase for
cigarettes also apply to cigarettes sold in duty-free stores and to cigarettes subject to the
federal export tax, and that any remaining tax rate reduction for these categories be
eliminated.
Support for Budget 2013 tax increase on loose tobacco
The 2013 federal Budget included an increase on the excise tax rate for loose tobacco
(manufactured tobacco) in order to address a long-existing loophole. The organizations
endorsing this report strongly support this increase. We believe the federal government
deserves appreciation for implementing this measure.
Conclusion
The federal government should immediately implement an inflation adjustment to
cigarette taxes of $3.89 per carton. Such a measure would be a win-win for public health
and public revenue.
Further information
As a source for further information, please contact Rob Cunningham, Senior Policy
Analyst, Canadian Cancer Society, [email protected], 613-565-2522, ext. 4981.
2
$3.89 per carton equals $0.019465 per cigarette; $0.019465 per cigarette times 31.372 billion cigarettes
equals $611 million