This week Health Canada formally articulated how it intends to collect and spend the tobacco cost-recovery fee which was
mandated by the Prime Ministers office some 31 months ago. The details are provided in the
Consultation document: Proposed tobacco cost recovery framework, with public comments being invited until October 10th.
This document confirms that Health Canada's budget for tobacco control will not increase as a result of tobacco companies being charged for a sub-set of its tobacco control activities.
What will significantly increase is the administrative burden on the tobacco control directorate. Some staff will be redirected from health-oriented activities to financial administration.
This post identifies eight concerns about the proposed framework. A subsequent post will suggest ways to overcome some of these challenges.
Health Canada's proposal in brief:
As described in the consultation document, the federal government proposes that:
1. The budget for Canada's Tobacco Strategy will be continued at the levels set in 2018, with $66.2 million allocated to cover the activities of the six federal departments involved. There has been no inflationary increase and none is forecast, meaning the budget is worth 17% less than when set in 2018 and continues to devalue.
2. Three of the departments involved (Health Canada, Public Health Agency and Indigenous Services) will monitor how much they spend in a given fiscal year on eligible expenses. Eligible expenses are for activities (a) connected to conventional tobacco products and (b) related to the purpose of the Tobacco and Vaping Products Act.
4. Health Canada will require tobacco manufacturers to provide a statement at the end of each April saying how much revenue they received from sales in Canada in the previous fiscal period (April 1 to March 31).
5. On October 1st of each year, Health Canada will issue an invoice to each manufacturer (unless their market share is under 0.001%). The amount of each company's invoice will be the total eligible expenses times that company's share of tobacco revenues. The companies will be given one month to submit payment.
6. The costs of administering this program will be taken from the existing tobacco control budget.
Concern #1: The cost-recovery fee will recover only a fraction of the federal costs related to tobacco industry products
The cost-recovery fee will apply only to activities which are related to the use of traditional tobacco products and which are carried out by Health Canada, the Public Health Agency and Indigenous Services Canada. The current tobacco-control budget for those three agencies is $55.3 million - but much less than that will be recoverable.
Even though the youth vaping and pouch-use crisis is arguably the most pressing issue facing the health department and even though tobacco companies contribute largely to this problem, none of the federal costs for nicotine use outside of conventional tobacco will be charged to the companies.
The activities of half of the federal departments involved will not be included in the program. These represent 15% of the budget for Canada's Tobacco Strategy. Similarly, federal costs by other departments which do not participate in the strategy will not be recovered. Examples of such activities include developing strategies to address plastic filter waste, managing smoking in federally-regulated workplaces, or addressing the tobacco-related health costs of prisoners, the military, etc.
Concern #2: The objectives of the Tobacco and Vaping Product Act are so narrow that the department will face challenges in assessing fees for many activities.
There are further restrictions in applying the fee to federal activities related to traditional tobacco products. As stipulated in the law that permits the fee, the department can only use the fee to recoup "costs incurred by His Majesty in right of Canada in relation to the carrying out of the purpose of this [Tobacco and Vaping Products] Act, including regulations."
The purpose of the Tobacco and Vaping Products Act (TVPA) is narrow and arguably antiquated. This section of the law was drafted in the mid 1980s as part of the Canada's first efforts to impose regulatory controls on the industry and at a time when the priorities and challenges were very different than today.
The law is silent about encouraging cessation, preventing addiction, protecting people from second-hand smoke, or reducing environmental and economic harm caused by this industry.
The TVPA has 4 specific objectives with respect to tobacco:
- "To protect young persons and others from inducements to use tobacco products and the consequent dependence on them"
- To protect the health of young persons by restricting access to tobacco products
- To prevent the public from being deceived or misled with respect to the health hazards of using tobacco products
- To enhance public awareness of the health hazards of using tobacco products."
Health Canada recognizes this limitation in the Consultation document, and provides a list of the costs which it considers can and cannot be recovered.
However, many of the activities which the department says will be eligible are unlikely to be recovered without a fight from the companies. These are the activities which go beyond the explicit purpose of the Act and regulations - such as "resources to help people quit smoking" and providing "access to less harmful sources of nicotine."
Given this industry's litigious past, such disputes are likely to land in court. The department's chariness about defending its policies in court will put pressure on staff to use a much narrower scope when recovering the costs than it is proposing in this consultation paper.
Concern #3: This framework creates an incentive for the department to de-fund non-eligible activities
Cost-cutting exercises are common place in Ottawa, especially following changes in governments. The proposed tobacco cost recovery framework provides a mechanism for ongoing reimbursement, but does not insure public health from decisions to 'de-prioritize' tobacco control. (The approaches used in other countries are better for this purpose, as discussed below).
The limitations on which activities can be covered, combined with pressure to avoid disputes over eligible costs will create an incentive for departmental planners to focus expenditures on activities tightly aligned with the TVPA.
The following hypothetical scenario describes this potential vulnerability: Health Canada focuses half its tobacco control activities on activities eligible for reimbursement, and recoups $23 million annually from tobacco companies. A government decision to cut programming costs by 15% across the board prompts the deputy minister to instruct that 80% of the work be on reimbursable activities in order that $13 million in departmental funding can be saved. Programs directed at researching and regulating vaping products are disproportionately cut.
Concern #4: The framework imposes a significant administrative burden
The design of this cost recovery fee requires the department to calculate how much it spends on eligible activities before requesting reimbursement from manufacturers.
Because only a subset of current activities are eligible, cost-accounting will be required to establish the eligible tobacco-share of all costs. This will impose a significant new burden on staff, and establishing criteria for eligibility will be a major management undertaking.
All of this will have to be done at an auditable standard. As the Consultation Document makes clear, the regulatory fee comes with requirements for transparency in recording costs. "There are also a number of legislative and government policy requirements to ensure proper accountability and transparency when fees and charges are introduced through ministerial regulations."
Concern #5: The transparency required by this framework may not be achievable for Indigenous Services, which will reduce the amount that can be recovered
Fifteen percent of the funds for Canada's Tobacco Strategy are transferred by Indigenous Services Canada to First Nations agencies. To date, that department has elected to not make the details of how --- or indeed if -- the money provided for tobacco control is spent as intended.
When asked by parliamentarians for details on components of tobacco control funding, for example, Indigenous Services Canada has dodged giving any specific information and has instead said only that it was used "according to the priorities" of the recipient communities. (An example of such a response can be seen here and is pictured below).
There is little incentive for Indigenous Services Canada to force the issue with recipient agencies. Transparency is required to recover the costs, but cost recovery is not required for the department to receive its share of the CTS allocation. How Health Canada will address this issue is not spelled out in the Consultation Document.
Concern #6: This framework does not borrow from good examples in other countries.
Health Canada has taken a different approach than that in the United States, France or other countries which have implemented regulatory fees on tobacco companies. These countries do not bill the industry for past expenses, but instead impose an up-front contribution based on sales revenue. This has had the effect of increasing their resources and expanding their range of activities.
United States: Since 2009, U.S. law has imposed a user fee on tobacco product manufacturers which is provided to the Food and Drug Authority for use at its discretion. Current revenues are USD $712 million (equivalent to CAD $985 million). No fee is imposed on the manufacturers of e-cigarettes.
Unlike Canada, France chose to use a cost recovery system to expand the resources available. Instead of restricting activities to those by national government, it divides resources among regions and has appointed stakeholders to the oversight board which allocates funds.
Concern # 7: More efficient ways to recover costs are available
Unless the constraints identified above are addressed, the approach proposed by Health Canada is unlikely to generate more than $25 million in revenues. This estimate is calculated as the departmental tobacco control budget less 45% for expenses on vaping-related activities or other ineligible expenses.
While it is not possible at this point to quantify the cost of administering the cost recovery fee, it is likely to be non-trivial. Estimating the cost base, allocating the charge across different manufacturers, providing transparency about the process and defending the system in courts will take time and money. This time and money will be provided from the existing budget for federal tobacco control, which will impact other activities of the branch.
Concern # 8: The recovery fee does not reflect the industry's capacity to pay
The smallest of the three companies (JTI-Macdonald, whose revenues are about 17% of the industry total) reports that it spends $150 million a year on promotional activities. (
Monitor's Report, page 12). Based on its recent revenue share, its contribution to a $30 million annual regulatory fee would only be $5 million.
