Did Canada's 1994 tobacco excise work?

0:00The tobacco ex-ice debate has intensified this week, with the coalition proposing to slush the tax by 80% and legalise vapes and nicotine pouches. A move which opposition leader Angus Taylor argues would increase federal revenue and curb the illicit market. Throughout this debate, many law and order and health experts have cited the Canadian example where authorities slashed the country's tobacco ex-ice by around 50% in 1994. So more than 30 years on, what can we learn from Canada? Frank Grimmard is professor of economics at McGill University in Montreal and was the author of a 1997 research paper called the Effect of Tobacco Tax Cuts on cigarette smoking in Canada. I spoke to him a short time ago. Frank Grimmard, after the tobacco ex-ice was cut in Canada in 1994, what immediately happened?

1:01Well many things, first the official price dropped. Then quickly people switched from buying contraband cigarettes to going more to legal way of doing it. So it helped remove the fair amount of illicit trade in cigarettes. However, that reduced reduction in price led to a take up in smoking by the youth people and also an increase in smoking by some of the people who were already smoking. So how significant was the increase in tobacco consumption? Not very much so. I mean, there have been a trend before that of declining in smoking rates and declining in take up rates. So I think in the 70s or 60s, certainly the smoking rate was 50%. And up to early 90s, it went down to 92, 24 to 26%.

2:03So that when the tax rate went down at a federal level and with some provinces as well, the decrease instead of going on going down stopped. And in fact, there was 1% or 2% increase among the young people. However, a few years after what happened is that the government started raising prices again. The reason was I should say raising taxes again with a better monitoring, a better control of the illicit trade. And now the price is up. In fact, it's, I think the excise rate in 1994 before was $10 per 200 carton. Now the price is about the tax is about $40. So there was an initial decline in the price in the tax rates, which led to a slight increase in the take up rate as well as the smoking. But after a few years, this went down again. So I think I had mentioned 26% in 1994.

3:04Now the incidence of smoking is about 11%. What affected cutting the tobacco tax have on the criminal enterprises that were behind the illicit trade? And was their violence associated with that at that time? Not so much violence, but a lot of that illicit trade was done through our indigenous nations or why? Because they were overlapping both the Canadian and the US provinces and some criminal gangs within these took advantage of that fact to actually ship cigarettes from the United States to Canada without knowing from the customs and so on and so forth. But that was illicit trade from some small minority gangs. At some of them claimed that they were affiliated with some of the indigenous nations. So there was a political action, a political reality that one needed to make sure that in order to eliminate this, that you wouldn't, there was a political economy problem that you

4:06wouldn't go to harsh on the connections among the non-natives and the natives. So that's why one of the policy was to reduce the exercise stock then. Of course, if one could have kept the exercise tax high, but find other ways to monitor supply and control, that might have been a better story, but we couldn't do it, but as we're speaking here in Canada. Looking back, do you think cutting the tobacco exercise in 1994 in Canada, did it work? Was it a positive step? I think it depends on the objective function you were thinking. What do you mean by did it work? I mean, did it stop the illicit trade? Yes, it helped reduce it, a fair amount, but so much. And then did it allow government to raise more revenues? Yes, it did. Did it allow a reduction in smoking? Not at the beginning, but because you re-took control of the prices of cigarettes at a legal

5:07point of view, and you started raising it with better controls, I think overall it worked. But that was a solution for Canada, given the political economy constraints, given the democratic constraints, given the monetary constraints and so on, you could say that it worked, depending on which of the objectives you were thinking. Either it was smoking incidents, reduction in smoking incidents, or raising revenues, and or making sure that the state kept this enforcement capacity and reduced contraband. Franca Grimaud, thank you very much for joining me. You're welcome.