Spring is budget time - a season of raised public health hopes for finance ministers to raise the price of tobacco and vaping products by imposing taxes.
So far this year 5 of Canada's 13 subnational governments have presented their annual budgets, and one (British Columbia) has included a tax increase of 7% of the total purchase price. Neither the Yukon nor Northwest Territories changed tobacco taxes. Prince Edward Island has indicated that it will be introducing a vaping tax and increasing tobacco taxes this year, but did not provide specifics. Alberta, by contrast, introduced one of the first tax reductions in many years by cutting taxes on smokeless products by one-third (from $0.4125/g to $0.275/g).
This post updates and recaps ways in which health officials can raise the price of tobacco products, and reasons for them to do so.
Higher tobacco taxes are good for public health...
When prices go up, sales go down. This basic rule of economics applies to tobacco as it does to other market goods. Raising tobacco taxes is an efficient and effective way to reduce the diseases caused by smoking.
Elasticity of demand is the measure used by economists to define the change in quantity of a good purchased in response to the change in its price. It is generally calculated as the percentage change in quantity purchased divided by the percentage change in price. This concept is frequently applied to tobacco products (usually cigarettes) by considering the elasticity of consumption (the change in the amount of tobacco smoked), the elasticity of participation (the change in the number of people who smoke or who smoke daily) and the elasticity of initiation (the change in the number of young people who start smoking)
A variety of estimates have been made for the Canadian response to tax and price changes, confirming that this is an effective and efficient way to reduce tobacco use in Canada, as elsewhere.
... but without price controls, their impact is blunted.
Taxes are a very blunt instrument to influence tobacco pricing, especially in comparison with the flexible pricing powers of manufacturers. Suppliers manipulate their wholesale pricing and use their contracts with retailers to manage retail prices in ways that undermine the impact of tobacco taxes.
Two useful articles discussing these problems were recently published in the journal Tobacco Control. One (Ribisl et al) describes how industry pricing can harm vulnerable populations, and suggests that governments buttress excise taxes with minimum price policies and restrictions on price promotions. The other (Scollo et al) proposes innovative ways to address the issue. Their proposals include a price cap at the wholesale level to reduce the ability of the companies to adjust prices and to curb their profits. They also propose a form of price management as conditions of license on retail suppliers. These measures are consistent with proposals for standardized pricing, which some Canadian health groups have called for for some time.
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| Ribisl et al, 2022 |
France has a system of price controls in place. Manufacturers cannot change their prices without the approval (homologation) of the government, which is done by regulation. The price list that is set by government is applied to all stores, and includes a set percentage mark-up for retailers.
Although coupons and most other price promotions directed at consumers have been legislated out of existence in most provinces, they have been replaced with pricing schemes that operate through agreements with retailers. Cooperative retailers who meet sales targets, for example, are eligible to buy cigarettes for lower wholesale prices or to receive rebates on past purchases. The companies use carrots (contracts) and sticks (incentives) with retailers to increase sales and profits by:
Reducing the impact of tax and price increases.
A 40 cent a package increase is much more noticeable to smokers than two 20 cent increases -- which is why the companies favour multiple small increases rather than a few large ones. In Canada there are no restrictions on when or how often tobacco companies can change wholesale prices.
Keeping cheaper brands on the market.
Not so long ago, all cigarette brands in Canada were sold at the same price. Now the companies use price-segmentation to divide their brands into higher priced premium brands, mid-range value brands and lower cost budget or super-value brands. This gives smokers a new option when faced with a tax increase - switching to a lower-priced brand. In Canada there are no minimum price laws or other legal restrictions on tobacco companies selling brands as lost-leaders or below the cost of production.
Keeping cheaper prices at some retailers
Until 2009 it was illegal for manufacturers to charge different prices to different retailers for the same product. But after the federal Competition Act was amended, tobacco companies were able to charge different prices to different retailers, a practice that was made easier because they replaced traditional wholesale distribution with their own 'direct distribution' contracts with retailers.
The result is that the same brands of cigarettes are sold at lower prices in some neighbourhoods than in others. An example from our price survey in Montreal in early November 2021 shows how large these differences can be: among 19 stores displaying prices for Pall Mall cigarettes, the price the same package of 20 was advertised from $8.49 to $11.19
Pressuring governments to keep taxes low
Tobacco companies want governments to keep taxes low because a) lower prices will not encourage smokers to quit (and may encourage more young people to start smoking) and b) when taxes are low the companies have more "pricing room" in which they can escalate their profit margins. One of the tactics they use to raise fears about contraband sales (as they did through their retail allies this January in Newfoundland.) This has worked particularly well for them in Ontario and Quebec, where taxes have remained low for decades. The Quebec government has not increased tobacco taxes since 2014; the Ontario government last raised tobacco taxes in March 2018.
.... and without price controls, tobacco company profits have grown while tax revenues have fallen
Tobacco manufacturers are getting an increased share of tobacco revenues. Industry prices are growing while tax revenues are falling. Industry prices have climbed significantly across Canada, including in the largest provinces of Quebec and Ontario where taxes have been kept low. Reports filed with Health Canada show that the average manufacturers' revenue per cigarette doubled over the 6 year period 2014 to 2020 (from $0.095 to $0.190 per cigarette).
Our annual survey of prices in downtown Montreal shows that even among the lowest-priced brands the companies raised prices by more than 10% per year. In the four year period 2017 to 2021 the median price charaged by suppliers (excluding tax) increased by more than 10% per year, the equivalent of a tax increase of more than $6 per carton. By discouraging taxes while raising prices, the companies were able to extract more profits from Quebec, while continuing to externalize the costs of treating tobacco-caused disease to government and consumers.
- Briefing note: Tobacco and Vaping Tax Measures
- Tax data: Tax Revenues from Tobacco Sales (1990 - 2021)
- Tax data: Tobacco tax revenues as a percentage of government revenues (1990-2021)
- Tax data: Provincial and federal tax revenues per cigarette smoker (2003-2020)
- Tax data: Taxes on cigarettes in Canadian jurisdictions
- Wholesale Revenues Per Smoker
- Wholesale Revenues and tax revenues
- Cigarette prices in downtown Montreal 2017-2021
