Monday, 27 March 2017

Shell games with tobacco taxes

Tobacco manufacturers' profits surtax eliminated
Last Wednesday (March 22), Canada's finance Minister, the Hon. Bill Morneau, presented his second budget. Buried within it, on page 207, was an announcement that the federal government was backing out of one of the world's few special taxes on tobacco companies. He replaced the tobacco manufacturers' profits surtax with a small increase in tobacco excise tax  This tobacco tax shell game shifted the last bit of tobacco tax burden from the shoulders of corporate shareholders to the shoulders of smokers. Now, smokers bear all of the tobacco tax burden and the tobacco companies bear none.

We started with noble intentions
The government's intentions to link this tax with health programming were clear when was launched in 1994 (on the same day that the federal government announced that it would slash excise taxes in an attempt to combat contraband). In announcing the tax on February 8, 1994, Prime Minister Jean Chr├ętien told Parliament:
We are imposing a three-year health promotion surtax on tobacco manufacturing profits. This surtax will increase the federal tax rate on manufacturing and processing tobacco products from 21 per cent to 30 per cent. Companies will pay 40 percent more federal tax on manufacturing profits than they have in the past and the federal government will receive up to $200 million in extra revenue over the three years. The money generated by this surtax will fund the largest anti-smoking campaign this country has ever seen.
Chipping away at noble intentions
Over the years, those clear and noble intentions of 1994 were gradually chipped away. The revenue was collected for the first decade, but the spending on tobacco control soon plummeted. From $60 million a year in 1994 to $10 million  a year two years later. (Surveying the Damage, page. 49).

The Department of Finance continued to collect the money.  In 2001, the tax was made permanent, references to 'health promotion' were dropped, and the surtax rate was increased from 40% to 50%, but none of that money was earmarked for tobacco control. This information can be found buried in Footnote 26 to Table 2 of the 2005 document Tax expenditures and evaluations, produced by the Department of Finance.

Then the tobacco companies set about finding ways to avoid paying the tax.  In 2006, Imperial Tobacco moved its manufacturing operations to Mexico, thereby becoming an "importer" and avoiding the tax altogether..  Tobacco companies also use intercorporate transactions with newly-created shell companies  and intercorporate transactions with sister companies in other countries to avoid paying corporate income taxes. In 2007 and again in 2012, the government reduced the base rate of corporate tax.  This had the effect of also lowering the tax yield from the surtax. The net effect of all these tax-avoidance and tax-lowering schemes has been to whittle the tax yield from the surtax down to very little.

All of of this has been monitored by the Canadian Coalition for Action on Tobacco (CCAT), of which Physicians for  a Smoke-Free Canada is a member.  Our 2016 Brief to House of Commons Committee on Finance called for the surtax to be restored to effectiveness by making it apply to importers as well as manufacturers and by defeating various corporate tax avoidance strategies.

Clearly, our recommendation was ignored.  However, the central problem remains.  The tobacco industry avoids all financial responsibility for contributing to mitigation of  the epidemic that they have caused while government and community programs to control tobacco remain woefully underfunded.

Make Big Tobacco pay
What the Department of Finance was unwilling to do by one means can be done by another.  Experience has shown that manfacturers' profits can be manipulated and taxes on them can be also be manipulated, one way or another.  In addition, government can lower the rate of corporate profit tax, thereby lowering the yield a profits surtax.  So let's forget all that and start charging the tobacco companies a flat fee to pay for fixing the problem they created.

In 1994, Prime Minister Jean Chr├ętien set the cost of tobacco control at $200 million for three years.  To make up for lost time and the effects of inflation, let us set the fee at $200 million, but payable every year,  The fee could be apportioned among manufacturers and importers, according to their market share and adjusted periodically to account for inflation.  The money would go directly to tobacco control programming and could not be spent for any other purpose.

It is time to make Big Tobacco pay. And to apply that payment to health.