Lessons from the 'Carbon Tax' for Tobacco Control.

Last week the Supreme Court of Canada upheld the federal Greenhouse Gas Pollution Pricing Act. Once again the courts have given the federal government the green light to impose regulatory charges as part of their actions to fullfill their responsibilities to Canadian citizens.

This post reviews the potential use of regulatory charges to address another problem caused by combustion -- cigarettes. (A downloadable briefing note provides additional information.)

Regulatory charges are not taxes

Although it is commonly referred to as a "carbon tax", the charge on fossil fuels that is applied by the federal government in some provinces is, legally speaking, a "regulatory charge."

A regulatory charge is different than a tax. Taxes can only be imposed and set by legislatures, but can be spent by governments without any specific conditions. Governments can adjust the rate of regulatory charges without getting legislative authority, but they are limited in how they can spend the money.

Federal 'regulatory charges' are used to meet important public goals

Canada's federal government uses regulatory charges to help it achieve a wide range of objectives. These charges are used to address global warming (as already noted), to support cultural industries, to pay for its cannabis-related activities, to help clean up the environment after spillage from ships and for other goals. In most cases, the regulatory charge is determined by, collected by and used by the government department that is responsible for the issue being managed, the regulatory scheme.

Tobacco taxes help reduce smoking by making smoking more expensive, but they don't fund tobacco control

Although federal and provincial governments have not yet applied regulatory charges to tobacco manufacturers, they do collect large revenues from tobacco taxes. In 2019-2020, smokers paid $7.6 billion in specific excise taxes on tobacco products (the amount would be higher if GST/PST/HST were considered). This is roughly equivalent to the health-care costs associated with tobacco use (estimated by the Canadian Centre for Substance Abuse at $6.1 billion for 2017.)

Taxes collected from smokers roughly offset treatment costs, but there is currently no formal or informal link made by these governments between the revenues from tobacco use and the expenditure on activities to reduce smoking or to treat the diseases caused by it. Income taxes paid by tobacco companies are similarly not linked to any specific public purpose.

In the last fiscal year (2019-2020) for example, the federal government received $3 billion in revenues from tobacco taxes. During the same period, it spent $61 million on tobacco control activities, of which about three-quarters was allocated to Health Canada. For every dollar smokers provided in tobacco taxes, the federal government invested 2 cents in programs to help smokers quit, prevent young people from vaping or smoking, monitor the tobacco industry or control contraband.

Regulatory charges can help provide transparency, accountability and sustainable funding

A regulatory charge on tobacco suppliers would assign the costs of tobacco control on the industry, making these companies accountable costs to the public that are directly related to their business operations. Regulatory charges also impose greater accountability on governments, as the amount collected must be linked to the 'regulatory scheme'.

Regulatory charges on tobacco companies have been tried and tested. 

Many governments around the world have established mechanisms to tax the problem of tobacco to pay for health programs. 

In recent years, the United States and France have imposed large regulatory charges on the industry, in keeping with their own legal systems for revenue collection. The US Food and Drug Administration collects US$712 million in user fees from tobacco companies, and France imposes a social contribution of 5.6% on the gross revenues of tobacco wholesale distributors, which provides about 130 million euros per year. 

Other countries have created dedicated funds for tobacco control or other health objecives using tobacco-sourced revenues, including additional high income countries (Korea, Switzerland) and developing countries (Thailand, Vietnam).

A regulatory charge can improve on past attempts to apply the polluter-pay principle to tobacco in Canada.

Although there are currently few dedicated revenues for tobacco in Canada, there have been several attempts to make tobacco companies foot the bill. 

The Tobacco Manufacturers' Surtax: For more than two decades, the federal government imposed a surtax on tobacco profit. In 1994, as part of a decision to reduce excise taxes to address smuggling, the federal government required the companies to pay 40% more in income taxes than other corporations. When he announced this measure, Prime Minister Chrétien linked the additional revenue ($200 million) to increased funding for tobacco control. "The money generated by this surtax will fund the largest anti-smoking campaign this country has ever seen."

The surtax was later made permanent and increased to 50%. Four years ago the tax was quietly rescinded after the companies had developed ways to avoid payment.

B.C.'s Tobacco Fee Act: In 1998, the British Columbia passed the a law to license tobacco manufacturers and make them pay for the province's tobacco control budget. The law also included measures to prevent the companies from passing the cost on to consumers (the goal was to make the companies and shareholders bear the burden, not to increase taxes on smokers). The companies objected, threatening to challenge it in court. The legislation was never proclaimed or put into force, and in 2002 it was repealed.

The Tobacco Industry Responsibility Act: In 1999, Senator Colin Kenny introduced legislation to impose a $0.50 per carton levy on cigarettes to fund a $120 Canadian Anti-Smoking Youth Foundation. The bill was approved by the Senage, but was never debated in the House of Commons because it was ruled out of order by the Speaker, who said it exceeded the authority of the Senate with respect to financial issues.

Regulatory fees on tobacco companies are a priority for health charities.

Earlier this year, the House of Commons Finance Committee included in its recommendations a call for an annual cost recovery fee on the tobacco industry. This reflected the advice that had been given the committee from the Canadian Cancer Society, the Canadian Lung Association, Heart and Stroke and others.

Regulatory fees can be set by all levels of government.

License fees for tobacco retailers are an example of regulatory charges that are currently in place in many Canadian municipalities. Revenue from these fees can be used to help pay for tobacco control activities (like cessation counselling or prevention messaging), although Lloydminster is the only Canadian city to have taken this approach to date. (A review of related municipal powers, focused on Ontario, is available here.)

Municipalities in Canada do not yet impose charges on suppliers to pay for the costs of cleaning up tobacco litter, although this is done in at least one U.S. city. 

An idea whose time has come?

The next federal budget will be presented on April 19. Hopes are pinned for a tobacco tax increase AND a new regulatory charge on tobacco suppliers.