The Shotgun Blog
Tuesday, September 01, 2009
Smoke up, Johnny! Signed, the government.
Glenn Beck defines Progressives in his latest book as "individuals who seek to redefine, reshape, and rebuild America into a country where individual liberties and personal property mean nothing if they conflict with the plans and goals of the state", and Progressivism as "the idea that your money and property are only yours if the State doesn't determine that there is a higher or better use for it". I found these descriptions to be pretty accurate, and it immediately got me thinking of a certain recent progressive policy passed by the NDP shortly after they got into office in Nova Scotia. There are a few industries which are often gouged by the government in terms of taxes: gasoline, liquor, and cigarettes.
This time, it was cigarettes that took the hit; prices went up $1.25 a pack, meaning a pack of Player's Rich for example (a popular brand) costs smokers almost $15 a pack. Does this seem a little high to anybody else? Below the border in Indiana or Texas for example, the same pack is just slightly over $6.50 (Canadian dollars), and in New Hampshire it's about a dollar less on average. New York City is one of the closest price wise to Canada, with packs topping at $10 to $11, Canadian dollars. The price hike in Nova Scotia was enacted by the government in the form of sales tax, and the increased tax on smokes will generate $21 million in extra revenues for the province. The problem is that illegal tobacco sales, which is becoming more and more popular with every price increase, will eat up that revenue before it even gets to the countless programs it's supposed to help fund. My biggest problem however is the fact that like it not, the government is basically saying "smoke up, Johnny! We need that money for keeping the failed ER's open, and we all know you'll need those eventually."
It appears the NDP do not understand the black market in the least. Aside from it being illegal, the illegal tobacco industry has absolutely no regulations or rules. So when the government jacks up the taxes forced onto legal retailers, more people are going to be choosing illegal tobacco over legal tobacco. It may be of less quality, but it's a hell of a lot cheaper. The thing is, smokers are addicted to nicotine, not the fancy brands, and nicotine addiction can get quite ridiculous if you have a lot more cigarettes to smoke. Not everyone who switches does this, but for those that really enjoy smoking, it makes sense. The point is, not only does tax hikes on addictive products create more activity in the black market, but is also cancels out those that cut back or quit because of the price increase.
Is it just me, or does the official government report on the cost of tobacco in Nova Scotia seem cynical? Below is a snippet of the report I found:
1. "Because current measures of progress based on economic growth statistics make no distinction between economic activities that create benefit and those that cause harm, spending generated by smoking, crime, pollution, car accidents and other liabilities are conventionally counted as signs of economic growth, prosperity, and well being."
The main two reasons for tax hikes on things like cigarettes are government revenue, and trying to appear as "progressive" and "with the times" by declaring that the government has control over what we put in our body. If not total control, taxation is the second best bet. Interestingly enough, the tax increase policy passed by the NDP was originally in the Progressive Conservative Party's proposed budget (which promptly got shot down, no less). It's never a good sign when parties vote down a budget they publicly hate yet continue with half of the policies proposed anyway.
Are they just lazy? More importantly, is the demise of the provincial PC government due in part to the progressive tilt of the one provincial conservative party in Nova Scotia? Sure, the word "Progressive" is in the name, but quite obviously the past supporters of the PC Party don't care for actually acting on that word and creating policies based off it. The PC Party of Nova Scotia must go back to the common sense days of the Canadian conservative movement that was actually popular during the 90's, and as Glenn Beck would advise if he were Canadian. More importantly, the latest PC Party of Ontario nomination brought the back-to-basics, common sense idea to the table with great success; an interesting election with Tim Hudak as the winner. This was the first time I was fired up about a provincial election, and it wasn't even my province!
[Cross-posted at The Right Coast]
There are two separate issues here. First, is increasing the tobacco tax an effective way to raise revenue? Second, is the rate of taxation on tobacco legitimate? You write mostly about the first issue, but mention both. Let's take each separately:
(1) Is increasing the tobacco tax an effective way to raise revenue? Well, 2006 statistics (the most recent that seem available) say that taxes on tobacco raised $164m in Nova Scotia, while $18m was lost due to black market sales. That's 11% of the total collected. So it means that reducing the tax on tobacco by any more than 10% of the 2006 taxation rate would mean a net loss in tax money collected even if doing so eliminated the black market entirely ($200k less, to be precise). Now, yes, reducing the tax rate might also increase consumption, but most smokers will tell you that price is not the most significant factor influencing how much they smoke. Now the proposed tax increase is projected to raise $21m more. That means that even if the new tax unexpectedly has the effect of doubling black market sales, there still will be a net gain of $3m ($21m-$18m). I don't know if a less than 10% price increase on tobacco is will change black market business that much, so it seems likely the increase really will increase revenues.
So strictly from a revenue generating view point, it seems like this move will is quite likely to be successful.
(2) Is the rate of taxation on tobacco legitimate? This is a much more difficult question, but consider this: In a health care system where people pay entirely for their own health care, either by just paying medical bills or though having medical insurance, it seems reasonable that smokers will pay more. A smart insurance company will want to know if you smoke and will charge you higher premiums if you do. Since they will have to pay the medical bills that result from your future ill health, they want you to pay for it a bit at a time now. That seems quite reasonable, right? But with a public health care system and a tobacco tax, the effect is the same. The government is asking smokers to pay more to support the health care system than non-smokers, just as higher premiums in a private system would. In turn, when smokers get sick in the future their medical needs will be paid for, just as they would in a private system. So the idea that smokers should pay a greater amount into the health care system is one that is just as true when private insurance companies are the payers as it is when governments are the payers. Just how much more smokers should pay is left as an open question, but the fact that they should pay more seems a no-brainer. If insurance companies insist on it, why not governments?
So strictly as a question of legitimacy, it is legitimate for smokers to pay extra higher taxes than non-smokers.
Posted by: Fact Check | 2009-09-01 2:44:09 PM
...while $18m was lost due to black market sales.
Posted by: Fact Check | 2009-09-01 2:44:09 PM
That was 2006. This is 2009. I personally know several guys that run tractor trailers once or twice a week filled with tax free cigarettes from an Indian reserve near Montreal to the Maritimes. And I'd bet there are a lot more people doing the same thing. They tell me a carton costs $15 if you buy them by the case. A case has 25 cartons. You can get a carton which are packaged in a baggie for $10. Ontario and east is flooded with tax free cigarettes.
Posted by: The Stig | 2009-09-01 4:06:17 PM
"I don't know if a less than 10% price increase on tobacco is will change black market business that much, so it seems likely the increase really will increase revenues."
Well that's the essential question isn't it? Where are we on the curve (laffer-type)? If we're too far, then every additional tax increase will lead to a decrease in revenues. I honestly suspect we're too far (because of the already very high prices compared to other regions), but that is rather difficult to prove. I've also had several discussions with executives of a large convenience store chain who personally believe that as well (of course anecdotal, which admittedly proves nothing).
Posted by: Charles | 2009-09-01 4:49:33 PM
Fact Check, one point that is difficult to reconcile but important, is that smokers die earlier than non smokers. So smokers' strain on the healcare system may not be greater overall than the average person's.
Posted by: TM | 2009-09-01 5:19:17 PM
Dane, you say that it appears that the NDP does not understand the black market and I must disagree. The NDP does not understand the market, not just the black market. This is why when the NDP takes power in a province inheriting either a surplus or a balanced budget, by the time they get booted out the province is in deep red along with all kinds of scandals.
Posted by: Alain | 2009-09-01 5:43:58 PM
"This time, it was cigarettes that took the hit; prices went up $1.25 a pack, meaning a pack of Player's Rich for example (a popular brand) costs smokers almost $15 a pack. Does this seem a little high to anybody else?"
The price of a (legal) pack of cigarettes in Québec is a bit less than 10$.
Posted by: Marc | 2009-09-01 6:00:04 PM
"...smokers die earlier than non smokers. So smokers' strain on the healcare system may not be greater overall than the average person's."
Smokers do tend to die younger, but they also tend to be sicker during their lifetimes. The people who have the strongest vested interest in learning whether smokers are more likely to be higher-than-average-cost patients or lower-than-average-cost patients are medical insurance companies, and they rate smokers as higher cost. Without any good evidence to the contrary, I'm prepared to trust their judgement.
"Well that's the essential question isn't it? Where are we on the curve (laffer-type)?"
True, but without good evidence that the curve has taken a sharp turn, it is, at the very least, hard to criticize the NS government for believing that raising taxes might well be quite profitable. Especially since I have allowed that the size of the black market could double and they would still make money by raising taxes. That seems a pretty good margin of error, and at least enough to justify optimism about profitability.
Posted by: Fact Check | 2009-09-01 6:17:34 PM
"Smokers do tend to die younger, but they also tend to be sicker during their lifetimes. The people who have the strongest vested interest in learning whether smokers are more likely to be higher-than-average-cost patients or lower-than-average-cost patients are medical insurance companies, and they rate smokers as higher cost. Without any good evidence to the contrary, I'm prepared to trust their judgement."
Perhaps you are right. But I have never seen any evidence to support what you say. I would love to see it if you have it. Even if it does exist though, I would say it is probably a wash give or take a bit. So long as it is a public system, why discriminate against smokers? What about fat people? What about cultures who are more susceptable to certain diseases? What about people are seen eating at McDonalds? What about people who speed? Drink? etc?
Posted by: TM | 2009-09-01 6:37:33 PM
"I have never seen any evidence to support what you say. I would love to see it if you have it."
My only evidence is the fact that insurance companies charge more to smokers. I would have to think that they have looked for and found good evidence, since their business depends on knowing who is a high risk client and who isn't.
"So long as it is a public system, why discriminate against smokers?"
I would not call it "discrimination" to hold people responsible for freely made choices that have the effect of increasing costs overall to a public system. At least, not "discrimination" in the pejorative sense of the word.
"What about fat people? What about cultures who are more susceptable to certain diseases? What about people are seen eating at McDonalds? What about people who speed? Drink? etc?"
Well, some behaviour that increases health care costs are harder to tax than others, but you named a couple that can and are taxed. Alcohol faces similar high taxes as tobacco. Speeders have to pay speeding tickets that others do not, which is a way they pay more into the pot than non-speeders.
Cultural (or individual genetic) suseptability to disease is not something that will ever be taxed, since it seems to punish people for things outside their own choosing. One does not (and would not) choose to be susceptable th diseases. So to punish people for bad luck seems unfair.
Unhealthy food choices (like McDonald's) would seem logical to tax more for the same reasons tobacco and alcohol are taxed more, but politics is the art of the possible, not necessarily the logical. That there is an inconsistancy here might just be no more than that. But it is also much harder to differentiate the effects of different foods in a way that one could clearly set up a tax structure that would tax people's food choices in a way that reflected their resulting health risk.
Having said that, I believe most provinces don't tax basic groceries but do tax junk foods, even when bought in the same store. While the justification offered has more to do with not adding costs of necessities to poor families, it does have the effect of making people who choose to eat junk food pay a bit more into the pot.
Posted by: Fact Check | 2009-09-01 7:16:10 PM
"The study, released on Thursday, says the trade has cost federal and provincial governments $1.6 billion per year in lost revenues. The majority of the illegal cigarettes are concentrated in Quebec and Ontario. Ontario accounts for 53.8 per cent of the volume and Quebec for 41.1 per cent.
The incidence of illegal brands has also risen significantly in the Atlantic provinces, where it has gone from 1.1 per cent in 2006 to 6.8 per cent this year.
"This is one of the most robust studies on the illegal cigarette issue and it clearly shows that this problem is not going away," said John Barnett, president of the manufacturers' council and Rothmans, Benson and Hedges Inc.
"Last year the study confirmed the scope of the problem. This year the study clearly demonstrates that the problem is growing and spreading."
Illegal cigarettes were defined for the survey as cigarettes and tobacco sold by individuals who are not paying the appropriate taxes or duty.
Those smoking illegal cigarettes in Ontario has risen to 31.6 per cent this year from 23.5 per cent in 2006. Thirty-seven per cent of smokers in Quebec pull contraband smokes."
Does anyone really think it has improved ?
Every time government raises the price they lose more money. Stupid is as stupid does. Those that want to smoke will smoke(drink,eat bad food,take chances and defy the activists that know what is best for us). A recent study showed that one of the biggest killers in society today is stress. Also found that smoking and comfort food relieves stress. Live clean, eat healthy, die anyway. Often read that old people are a burden on society as very few die peacefully in bed. Cigarettes,booze and bad food should be free and encouraged for anyone over 65. See how simple this is ?.
Posted by: peterj | 2009-09-01 10:50:58 PM
I wasn't actually disputing anything you said, I apologize if it sounded that way. I actually think it's impossible to come to a conclusion.
I'm just especially suspicious of the estimate for the black market. It's almost impossible to estimate a black market. Consider the evidence. The price is $15 a pack. The price is $6.50 (I'll be generous and assume this is a tax free price - which it isn't) in Texas. Assuming PPP holds (perhaps a generous assumption), that means that 43% of the revenue goes to private, and 57% goes to the gov't. It also means that the total legal market in NS is 163M / 57% = 286M. Is the black market really only 18M / 0.57 - 18M = 14M? No way to prove it ... just suspicious.
Posted by: Charles | 2009-09-02 5:02:52 AM
"Does anyone really think it has improved?"
Well, you just provided evidence that suggests that, as Charles pointed out, it seems hard to know what the extent of the black market is. Besides, the question is not "has it improved, but has it gotten worse and, if so, how much have taxation rate changes affected that change.
The data I found put the black market at 10% of the total market in 2006. But the data you found put it at only one tenth that size. So while your article seems alarming in claiming that the black market rose from 1.1% to 6.8% in a year, the higher number is still lower than the 10% I used in my previous calculations.
In an opinion piece published this month written by Benjamin Kemball, the president and CEO of Imperial Tobacco Canada, he gives numbers that put the black market for all provinces combined not counting Ontario and Quebec at 16%. Now, first, one cannot tell whether NS is above or below that 16% rate and, second, the tobacco industry is more likely to overstate the problem rather than understate it (remember, these are the guys who insisted for years that smoking did not cause cancer). But at the very least, it is telling when Kemball's criticisms of how governments have not dealt with this problem focus entirely on failures to shut down illegal operations and not at all on lowering tax rates as a solution.
So there still seems little reason to think that raising taxes will fail to raise revenue for the NS government. Which means that the economic effectiveness argument still stands up.
Posted by: Fact Check | 2009-09-02 7:46:48 AM
"So there still seems little reason to think that raising taxes will fail to raise revenue for the NS government. Which means that the economic effectiveness argument still stands up."
I would not disagree, but it is also a guarantee of diminishing returns. Whenever people feel they are getting shafted on a product they will look for alternatives. Once they have switched to that cheaper product they will not go back to the legitimate one until the price comes back to reason. I would argue that the best way to increase government revenues is to drop the price by one third. It still makes the product expensive enough to discourage the casual user but should slow down the expansion of illegal smokes throughout the country.
Posted by: peterj | 2009-09-02 9:48:51 AM
Just to be clear: According to Health Canada and the Canadian Cancer Society 80% of illegal tobacco in Canada comes through Cornwall, Ont.
Posted by: Floyd Merriweather | 2009-09-02 11:14:42 AM
"Just to be clear: According to Health Canada and the Canadian Cancer Society 80% of illegal tobacco in Canada comes through Cornwall, Ont. "
If they shut that down it would come through somewhere else. Also...there is no such thing as illegal tobacco. It is only illegal when someone cuts into the government turf and/or dodges the taxes.
Posted by: peterj | 2009-09-02 12:05:19 PM
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