Document(s) 19 of 37

Higher tobacco taxes play critical role

When the price of something goes up, people buy less of it. That’s basic logic and basic economics. That’s also the principle behind the most important factor in Canada’s tobacco-control strategy: higher tobacco taxes.

Research shows that as the real (after-inflation) price of cigarettes rises, tobacco consumption decreases. Although the magnitude of the decrease varies and may differ by country and circumstance, one oft-cited American study found that a 10% increase in real price led to a 4% decrease in consumption.^[360] Other studies have found decreases of 3%–9%.^[608] Among teenagers, who have less money and are more price sensitive, the decrease has been measured at about 14%.^[361] Were it not for nicotine’s addictiveness, decreases would be larger.

Higher prices can work in a number of ways. Smokers may feel that the price is too high and decide to quit or smoke less. Higher prices might combine with other factors and finally push a smoker into quitting. Even if a smoker only decides to cut down, this produces health benefits. Fewer cigarettes a day may reduce the risk that a smoker will contract a tobacco-caused disease. As previously noted, people who smoke fewer cigarettes a day are more likely to attempt to quit and to quit successfully than people who smoke more cigarettes per day. For teenagers, higher prices may push cigarettes beyond the level of affordability or may delay the age when smoking begins, thus decreasing the long-term risk to health. Decreasing the amount smoked may reduce the risk that addiction will set in.

Tobacco-tax increases serve a dual purpose: they improve public health, and they increase government revenue. Tobacco taxes also partially allocate health-care costs to smokers, who as a class receive billions of dollars in extra health-care benefits.

Tobacco taxes in Canada have a history that predates Confederation. For just as long, there have been attempts to get the government to reduce those taxes. In 1869, the question of abolishing tobacco taxes was raised in the House of Commons and dismissed by the Minister of Finance.^[181] In 1878, a resolution to eliminate tobacco taxes was debated and defeated. The mover of the resolution had argued that heavy excise taxes were suppressing the growth of domestically cultivated tobacco.^[256] In response, Wilfrid Laurier, then Minister of Inland Revenue, questioned whether Canadian conditions were suitable for the growth of tobacco anyhow.^[352] The Minister of Justice defended the tax in part, saying “this weed was injurious to the health of those who indulged in it,”^[347] but for this he was promptly criticized by some Quebec MPs. Other MPs opposed the measure, saying that if the tobacco tax was abolished, other taxes would have to be raised to replace lost revenue.

For more than 100 years, motivated to protect its profits, the tobacco industry has led the fight against high tobacco taxes. For example, in 1876, in a brief entitled “Serious Loss of Revenue to the Country,” the Tobacco Association of Canada complained that higher taxes had led to a large illicit tobacco trade. The Association called for strict enforcement of tax laws or, alternatively, abolition of the tobacco tax.^[589]

At the turn of the century, representatives of the tobacco industry traveled to Ottawa each year to lobby the Finance Minister. However, the lobbying did not always work. After tobacco taxes were increased in the 1897 federal budget, an outraged industry formed the Dominion Cigar Manufacturers Association to improve lobbying effectiveness. In the early years of the tobacco lobby, trade associations seemed to have a short life, and this one seemed to disappear after a few years. Other short-lived associations included the Tobacco Trade Association of Canada, created in 1917, and the Dominion Cigar and Tobacco Association, created in 1919.

For most if not all of the last century, cigarette taxes have constituted a significant proportion of the retail price, usually more than 50%. Also throughout Canadian history, cigarettes have been smuggled from the United States into Canadian border cities, although the level of smuggling has varied. The tobacco lobby, in its representations to the government, has often cited the threat of more smuggling being brought about by higher tobacco taxes.

In 1951, during the Korean War, the federal government increased the taxes on a pack of 20 cigarettes by 3 cents. Although the Minister of Finance would later say that the increase was not intended to discourage smoking, the increase seems to have had this effect. The increase was followed by substantial protests from the tobacco industry. To bolster their position, manufacturers increased their prices by 2 cents a pack (nearly as much as the tax increase), a move that further decreased smoking and consequently government revenue. These increases raised the retail price to 42 cents a pack, 46 cents in Quebec (where there was also a provincial tobacco tax). The differential between prices in Canada and the United States (where prices were already much lower) widened. Cigarette smuggling increased substantially, especially in Ontario and Quebec near the US border. Week-end Picture Magazine reported that a carton of 200 black-market American cigarettes could be purchased for $3.00 to $3.50 when the legal price of a carton was about $4.20 in most parts of Canada and $4.60 in Quebec.^[330] A strike at Imperial Tobacco resulted in a shortage of some popular brands, perhaps making contraband appear more attractive. Despite calls in Parliament for the Finance Minister not to be intimidated by the industry, tobacco taxes were reduced in 1952 by 3 cents a pack (thereby eliminating the 1951 increase) and in 1953, the last year of the Korean War, by another 4 cents. Though the Finance Minister felt that the extent of smuggling had been exaggerated, the contraband situation was the prime factor in his decision to roll back tobacco taxes.^[1,2] After the rollback, manufacturers rescinded their own 2-cent increase. The industry’s tactics had been enormously successful: taxes in 1953 were lower than they had been before the 1951 increase.

In the 1980s, tobacco companies used an array of arguments to oppose higher tobacco taxes. They argued that increases are inflationary, that increases jeopardize tobacco-related jobs in manufacturing and farming, and that tobacco products are being unfairly singled out for high tax rates.^{[172,434,436,513]}

Tobacco companies also argued that high taxes are regressive and have a greater negative impact on the poor.^[434,513] This argument, however, is countered by the fact that it is the health effects of smoking that are regressive. People from lower socioeconomic groups are more likely to smoke and thus die from tobacco-caused disease. Higher tobacco taxes benefit the health of the poor far more than they benefit the health of any other group because smokers with low incomes may be most likely to quit following an increase. Also, those low-income smokers who quit or cut back significantly will have more disposable income than before the increase.

In the 1950s, 1960s, and 1970s, the real disposable income of Canadians grew substantially, but the price of tobacco did not keep pace. In terms of disposable income, even with the price increases of the 1980s and 1990s, cigarettes were still cheaper in 1993 than they had been in 1949.^[448] Tobacco prices did not even keep up with inflation. This was a major factor in the increase of per capita cigarette consumption to such high levels during this period.

It took some time before higher taxes were seen as a desirable part of Canada’s tobacco-control strategy. The 1969 report of the Isabelle Committee contained no recommendation to increase taxes. By the late 1970s, officials at Health and Welfare Canada recognized the potential health benefits of a taxation strategy and regularly — and unsuccessfully — urged the Department of Finance to increase tobacco taxes. During the 1970s and early 1980s, there was little call outside government for higher taxes. Though some tobacco-control supporters thought increases were desirable,^[580] others were opposed to increases because they perceived that governments would become more dependent on tobacco revenue and less likely to regulate the industry.

The 1981 federal budget introduced the ad valorem tobacco tax (ad valorem means a percentage of the value of the goods being taxed). Taxes went up any time the price of tobacco went up, whether because of inflation, manufacturer increases, or provincial taxes. A tax spiral started. When the price increased, taxes went up, meaning that the price was yet higher, so taxes would go up again. Because many provinces also had ad valorem tax structures, federal tax increases pushed up provincial taxes, which in turn pushed up federal taxes. The spiral was slow at first, but by 1982 and especially 1983 the real price of tobacco had noticeably increased. Consumption started to fall, and manufacturers were lobbying for changes.

At the 1983 World Conference on Smoking and Health, held in Winnipeg, Canada’s Health Minister, Monique Bégin, urged that cigarette taxes be increased by 30% to reduce smoking.^[249] The Conference agreed with this view, also urging that taxes be increased. However, Bégin had made her comments without first consulting Marc Lalonde, who was Finance Minister, and she was forced to retreat. Officials explained that her views did not represent government policy but instead were part of a “personal lobby.”^[79]

When the Progressive Conservatives were elected federally in 1984, the new government was much more concerned with deficit reduction than the previous Liberal government had been. With a need to find more revenue, the government turned to higher tobacco taxes as one possible avenue. Although the government responded to industry representations and eliminated the ad valorem system in 1985, the tobacco tax on cigarettes was increased by $2.00 a carton in 1985, a further $4.00 a carton in 1989, and a further $6.00 a carton in 1991. Michael Wilson was Finance Minister for each of these increases. Arguably, Wilson can be credited with doing more to reduce smoking than any other Canadian ever. Budget papers accompanying the 1989 increase stated that “these measures, besides increasing revenues, complement the government’s comprehensive strategy of reducing tobacco smoking in Canada.”^{[137, p. 56]} In his 1991 budget speech, Wilson stated the following:

Studies show that tobacco taxes are particularly important in discouraging younger Canadians from smoking. . . . As a result [of the tax increase], it is estimated there will be about 100,000 fewer teenage smokers.^{[632, p. 22]}

Provincial governments, also financially strapped, increased their own tobacco taxes considerably in the 1980s and early 1990s, contributing to much higher retail prices.

The results were dramatic. As Figure 3 (Chapter 2) indicates, tobacco consumption declined during this period at rates unprecedented in Canadian history. Prevalence surveys found the impact particularly strong among teenagers aged 15–19. Between 1979 and 1991, among Canadians aged 15–19, the proportion who reported they were occasional or daily smokers declined from 47% to 22%, and the proportion who reported they were daily smokers declined from 42% to 16%.^[445,447] A 1993 Department of Finance study of the impact of higher taxes concluded that “federal tax increases since 1985 have resulted in a net decline in overall tobacco consumption in Canada”^{[138, p. vi]} and that “younger Canadians are, indeed, more sensitive to price changes than adults.”^{[138, p. iv]}

Higher tobacco taxes resulted in tremendous increases in government revenue. Total federal and provincial revenue received from tobacco increased from $2 billion in 1981 to $7.2 billion in 1992, before declining in 1993 (a result of increased smuggling).^[85,89] Although cigarette sales were falling, throughout the decade governments were collecting much more money.

Inside government, lobbying by federal Health ministers and Health Department officials helped convince Finance Minister Wilson and the Department to increase taxes. Outside government, the lead individual contributing to the tobacco-tax strategy was NSRA lawyer Sweanor, who provided expertise and pushed tobacco-control advocates so that taxation became a priority of the antitobacco lobby. In time, an effective lobby, led by NSRA, helped persuade federal and provincial governments to increase tobacco taxes. Well-researched prebudget submissions and compelling logic helped make the case to government.

Among other points, the submissions referred to public support for tobacco-tax increases. A 1987 Gallup poll done for CCS found that 44.1% of Canadians supported a tax increase of 40 cents a pack; 43.6% were opposed. However, when tax increases were pursued as part of a comprehensive strategy for tobacco control, support increased to 77.5%; only 17.3% were opposed. Even among smokers there was 2 to 1 support.^[189] A 1989 Environics poll done for CCS, NSRA, and the Heart and Stroke Foundation found that 80% of all respondents and 68% of smokers either “strongly” or “somewhat” supported a tax increase of 50 cents a pack “if this were shown to greatly reduce smoking among young people.”^{[64, pp. 17–22]} The message is that if governments must raise taxes, they will receive more support by choosing tobacco as their revenue source. Increases during the 1980s received little opposition other than from manufacturers and their allies, thus making it easier for governments to further raise taxes.

It is unusual to have public support for higher taxes of any kind. Nigel Lawson, a former British Chancellor of the Exchequer, said,

Such is the success of the anti-smoking lobby that the tobacco duty is the one tax where an increase commands more friends than enemies in the House of Commons. . . . The tobacco duty is the one tax a Chancellor can increase and receive at least as much praise as execration for so doing.^{[643, p. 23]}

The tobacco industry’s response

Not surprisingly, the tobacco industry was furious with the massive increases in tobacco tax. Year after year, their annual reports blamed increases in tobacco taxes for decreases in industry sales volumes. In its 1984 annual report, Imasco Ltd stated that a reduction in

tobacco taxes would “allow the industry to return to a pattern of modest but stable growth.”^{[274, p. 6]} In its 1986 annual report, the company said, “Excessive cigarette taxation continued to be the industry’s major problem in fiscal 1986. Substantial increases in taxes at both the federal and provincial levels resulted in a further slowing of unit sales.”^{[275, p. 2]} Similarly, Rothmans complained in its annual reports and at annual meetings about “discriminatory” and “punitive” tax policies.^{[514, p. 6]}

In 1989, the presidents of the three major companies wrote to tobacco-related businesses to urge them to send a letter to Ontario Treasurer Robert Nixon asking him to prevent further provincial tax increases. The presidents emphasized that “As the price of tobacco products is pushed ever higher by taxes, sales go down [emphasis as in original].”[172, p. 1]

In its 1990 prebudget submission to the federal Minister of Finance, CTMC decried the decrease in industry sales between 1981 and 1989, stating that “although lifestyles are changing and the debate on tobacco use and health explains part of this decrease, there is no doubt that taxation of tobacco products is principally responsible.”^{[434, p. 2]}

A 1990 Informetrica study commissioned by CTMC examined the impact of higher taxes. For the period 1973–88, Informetrica found that a 10% increase in the price of tobacco resulted in a 6%–8% long-term decrease in smoking, depending on the measurement of consumption used.^[309] The industry used this in an attempt to show that higher taxes reduced smoking and in turn meant fewer jobs.

In the face of decreasing cigarette sales, companies developed and promoted lower priced tobacco products as alternatives to cigarettes. For example, the industry promoted the lower retail price of roll-your-own tobacco, a product taxed at a substantially lower rate than cigarettes. As cigarette taxes increased and taxes on roll-your-own tobacco failed to keep pace, sales of roll-your-own tobacco increased as a proportion of total tobacco sales. This shift in purchasing patterns reduced the health and revenue benefits of high tobacco taxes.

In 1988, RBH introduced a Custom Cut product consisting of tobacco sticks, paper tubes with filters, and a device to insert the tobacco stick into the tube. Because tobacco sticks were taxed at a rate lower than the cigarette rate, they provided a lower priced option for consumers. Imperial responded by introducing its own Insta-kit. RBH took Imperial to Federal Court for patent infringement and won an injunction preventing Imperial from marketing its product until 2005.

In 1991, RBH introduced its Maverick brand of cheroots. Cheroots resemble cigarettes except that they are wrapped in process tobacco leaf instead of paper. Because cheroots were not considered cigarettes, taxes and thus prices were lower. This new product, however, failed in the marketplace.

When the 1991 federal tax increase came, the industry accelerated its antitax campaign. Within months of the budget speech, the industry generated a tax protest. Imperial and RJR – Macdonald printed protest cards on the inside sliding portion of the package. The card, which could be mailed to the Prime Minister free of charge, read “I am of voting age. I want you to stop the unfair taxation of tobacco products in Canada. What are you going to do about it? I expect a reply.”^[186] Advertisements also urged smokers to fill out and send in these cards.

Up to and including 1991, the industry had emphasized the argument that tobacco-tax increases were bad for the economy and led to job losses in the tobacco industry. By 1992, however, the tobacco industry realized that governments were not listening to these arguments, so it reversed its strategy. Despite previous assertions to the contrary,^[437,451] the industry now argued that the tax increases had had no impact on smoking by Canadians.^[278] Said CTMC President Rob Parker, “It is not the case that increasing price leads to a decrease in consumption.”^{[84, p. 25]} Because the objective of a reduction in smoking was a key pillar of the support for tax increases, the industry decided it needed to knock down the pillar.

The rise of smuggling

As Canadian taxes increased, the differential between Canadian and US cigarette prices widened and thus increased the incentive to smuggle cigarettes in from the United States. The contraband issue became critical to the industry’s antitax campaign. Tobacco companies publicized the growing problem of smuggling as part of their effort to pressure governments to lower taxes. For several years the industry hired a forensic accounting firm to calculate the size of the contraband market.^{[341,342,362,364]} The resulting reports were released with great fanfare (at least once in conjunction with a cross-Canada media roadshow).

One of the reports, “1992 Contraband Tobacco Estimate,”^[363] released to the media in April 1993, included errors that overestimated the size of the contraband market by 20%, or 1.6 billion cigarettes.^[576] NSRA detected the errors, but no revised report^[364] was released by the industry for 5 months, despite persistent dogging by NSRA (and without the media coverage accompanying the original report).

Although it is not suggested that the tobacco companies did anything illegal, the effect of certain industry actions, including the massive exporting of cigarettes, was to foster the contraband situation.

The major factor contributing to the rise of smuggling was a dramatic increase in manufacturer exports of Canadian cigarettes to the United States. Most of the exports went just over the border to upstate New York and returned to Canada as contraband, a fact openly acknowledged by the industry. As illustrated in Figure 12, total cigarette exports to the United States exploded from 1.2 billion cigarettes in 1989 to 18.6 billion in 1993, despite the absence of any added American demand for Canadian brands. Smuggling had a high profit potential, and tobacco companies happily supplied the cigarettes that became contraband. Said lobbyist Neville, “If there’s smuggling, we’re unapologetic that it should be Canadian cigarettes.”^{[270, p. A6]} The industry told the government it needed to defend its market share.^[270] More than 90% of the contraband consisted of products originally manufactured in Canada.^[279]

Figure 12. Exports of cigarettes and roll-your-own equivalents to the United States, 1980–94.^[559]

Not only was the industry not paying Canadian taxes on the exported product, often it was not even paying the lower US taxes. The industry shipped billions of cigarettes to US duty-free warehouses — despite the absence of corresponding large-scale increased demand from legitimate duty-free stores — before the cigarettes made it back into Canada. Payment of US federal and New York state taxes, amounting to about US $9.00 (CA $11.85) a carton, was avoided, thereby enhancing the price advantage of illegal products and further boosting the smuggling.^[423]

Much of the contraband — estimated to be up to 80%^[438] — entered Canada through the Akwesasne Indian reserve straddling the Ontario, Quebec, and New York borders (Figure 13). Once on the reserve, and despite strong opposition to the contraband trade by a large segment of the reserve population, massive volumes of illegal cigarettes then found their way to other parts of Canada. Enforcement on the Canadian side of the reserve was affected by the tense relationship between police and Mohawk Warriors, especially after the armed standoff during the Oka crisis just a few years earlier. Though contraband was openly stored and sold on the Quebec portion of the reserve, police avoided going on this portion to enforce the law.^[160,596,94] Smugglers were well armed and well financed, and they threatened to resist a raid with force. Police officers feared for their personal safety. Furthermore, the reserve was in three different political jurisdictions, which complicated enforcement.

Some other Indian reserves, especially the Kahnawake reserve just outside Montreal and the Six Nations reserve near Brantford, Ontario, were important selling and distribution points for contraband. On Kahnawake, a carton could be easily had from any

Figure 13. Map of Akwesasne reserve. Source: Bernard Bennell, Globe and Mail, Toronto.

one of dozens of outlets for as little as $17 to $21, compared with the fully taxed price of $47.[62]

Another smuggling route was from the French islands of St Pierre and Miquelon to nearby Newfoundland. Canadian tobacco exports to the islands during the early 1990s far exceeded what was necessary for the few thousand residents of the fishing outport.^[62]

In 1991, there was a surge of Canadian cross-border shopping in the United States. This was attributed to several factors: Canada’s new Goods and Services Tax, the relatively high value of the Canadian dollar, and the lower American prices for many products, especially tobacco, alcohol, and gasoline. Because a large majority of the Canadian population lives within 150 kilometres of the US border, cross-border shopping was having a severe impact on Canadian businesses in border communities.

The cross-border shopping issue and a major increase in cigarette smuggling prompted the federal government to take action. On 12 February 1992, effective at midnight, the federal government imposed an export tax of $8.00 per carton of cigarettes. The objective was to push up the price of contraband returning to Canada and to narrow the Canadian –US price differential. On the day of the announcement, Imperial Tobacco rented every truck it could and had 50 vehicles headed to the United States to get as much tax-free tobacco as possible across the border before the midnight deadline.^[270]

Exports plummeted from 760 million cigarettes in February to 233 million in March, as illustrated in Figure 14. The industry did not like it and began a major campaign to have the tax repealed. Soon 16 lobbyists were on board to get the industry’s message across to the government.^[270] Tobacco companies argued that if they were unable to

Figure 14. Monthly cigarette exports to the United States, January to June 1992.^[562]

export, then smugglers would simply obtain their contraband from US sources. The industry played hardball and threatened to get around the tax by shifting some production to the United States.^{[270,277,437]}

As offensive as the industry’s threats were, they worked. The industry orchestrated a large, well-publicized protest on Parliament Hill that involved hundreds, if not thousands, of bused-in demonstrators. The prime message was jobs. Unless the export tax was repealed, the industry argued, Canadian jobs would be lost. At the same time, RJR – Macdonald broke off negotiations with tobacco farmers for the next year’s crop. Although this announcement was more symbolic than anything, it garnered a lot of publicity about possible economic harm to farmers. Naturally, this resulted in tobacco farmers being up in arms.

The overall campaign succeeded in placing tremendous pressure on the government and its Minister of Finance, Don Mazankowski. Mazankowski had been Agriculture Minister in his previous portfolio and was sensitive to farmer concerns. On 8 April, less than 2 months after the export tax was imposed, the government yielded to the pressure and repealed the tax. When the announcement came, leading tobacco-control advocates were out of the country at the Eighth World Conference on Tobacco or Health, in Buenos Aires, Argentina. Revenue Minister Otto Jelinek had to put the best face on the government’s retreat:

The tax was suspended, not as an act of Government capitulation, but rather as a result of an agreement between the Government and industry to work together in battling the trade in illegal tobacco products. My officials have negotiated with industry representatives and have arranged for much improved markings and identification codes on packages of tobacco products.^{[317, p. 1]}

The codes were to identify the US wholesale purchaser, with the intention that this would facilitate the tracking down of the source of contraband once it was seized in Canada. The industry also agreed “to make every effort to ensure that exported tobacco products are delivered to bona fide wholesalers and retailers in the United States and other countries.”^{[210, p. 2]} The industry made its commitments during the negotiations, which were conducted behind closed doors without the participation of health groups.

Time would prove the commitments to be worthless. The coding system was never implemented. The industry strongly resisted the efforts by the government to have “Not for Sale in Canada” prominently displayed on the packaging. In the end, manufacturers placed the markings on the side of the package, often in colour combinations that blended in with existing package design. As soon as the tax was repealed, exports set new records, although one company (Imperial Tobacco) did show some restraint for about a year.

Further actions by tobacco companies contributed to the continued growth of the contraband market. Some Export “A” packages officially made for sale outside Canada were designed in a way that made it harder to distinguish what was legal in Canada from what was illegal. Some Player’s and Export “A” cigarettes legally sold in Canada were marketed in tin containers. Some smokers would use these containers to hold their contraband cigarettes so that no one would detect what they were doing. The containers did not have the marking “Not for Sale in Canada.” Even after the export tax was gone, RJR – Macdonald produced some Export “A” cigarettes in Puerto Rico, an indication that keeping production in Canada was not the company’s priority.

While the industry was loudly decrying the high tobacco taxes, it was implementing huge price increases of its own. Manufacturer prices to wholesalers on cartons of 200 cigarettes increased from $4.86 in 1988 to about $8.50 in 1993, a 74% increase.^[279,355] The industry was contributing to the Canadian –US price differential. Wholesale and retail margins also increased, from $2.86 in 1988 to $4.94 in 1992.^[355]

The industry profited from the contraband situation itself. In part, this was because manufacturers were paying Canadian farmers substantially less for tobacco used in exported products.

Although Imperial Tobacco manufactured Player’s, the trademark was owned by Philip Morris in the United States, a problem that prevented Imperial from exporting Player’s cigarettes. To remedy the situation, Imperial Tobacco and Philip Morris made a deal so that these exports would be possible.^[187,198] RBH made a similar deal with Philip Morris to increase exports of some of its brands.^[515]

According to estimates by forensic accounting firm Lindquist Avey Macdonald Baskerville (Lindquist Avey), the proportion of the Canadian market made up of contraband increased from 1.8% in 1989 to 2.4% in 1990, to 12% in 1991, and then to 16% in 1992.^[90,278,364] For 1993, estimates from a number of sources (Imasco Ltd^[279] and Lindquist Avey,^[366] for example) placed the illegal market at 25–31%. The problem was particularly serious in Quebec, where the contraband market was considerably more widespread.

As exports and contraband increased following the repeal of the export tax, so did all sorts of related problems. Criminality was widespread, with some smugglers becoming millionaires.^[438] Disrespect for the law was encouraged. Ordinary Canadians possessed illegal products. Teenagers were being offered contraband cigarettes on school grounds. Lower prices undermined health objectives. Governments suffered decreased revenue. Tobacco farmers were receiving less money from manufacturers. Retailers and wholesalers, especially in Quebec, saw a tremendous reduction in tobacco sales. Tensions between the indigenous and nonindigenous communities escalated.

Anatomy of a tax rollback

Given the political sensitivity of the contraband issue, the government took little action in the run-up to the 25 October 1993 federal election. In Quebec, many candidates knocking on doors found that tobacco smuggling was the major issue. Shortly after the Liberals were elected, there were hints that a tax reduction was in the works. MP Don Boudria, whose riding of Glengarry – Prescott – Russell bordered the St Lawrence River where most of the contraband entered, started to publicly build the case for a tax reduction. In mid-December, Boudria invited Liberal caucus members to a meeting to discuss tobacco smuggling.

The subject of a tax rollback was raised in December at a federal – provincial conference of Finance Ministers. Quebec had long been publicly calling for a joint federal – provincial reduction in tobacco taxes, and now the federal government was willing to discuss the idea. At the conference, the Quebec Finance Minister tried to persuade others of the need for reduced tobacco taxes. Also in December, Quebec raised the stakes by threatening a unilateral reduction if Ottawa failed to act.

Meanwhile, health groups started to sense the urgency of the situation and increased the pace of their activity. On 10 January 1994, in Montreal, CCS released a detailed report containing 44 recommendations for controlling contraband and tax-exempt tobacco.^[62] Montreal was chosen because it was in the heart of support for a tax reduction. The date was chosen because it was the day before the new Quebec government of Premier Daniel Johnson was to be sworn in. The report targeted the industry as being principally responsible for the extent of the smuggling. The main recommendation was a reimposition of the export tax, combined with measures to prevent tobacco companies from shifting production outside the country. If the export tax was reinstated, the industry would suddenly have a massive financial incentive to reduce smuggling. The report generated substantial media coverage and marked the beginning of the most intensive, exhausting lobbying period in Canadian tobacco-control history.

In Quebec, the new Revenue Minister, just after being sworn in, said that his number-one priority was a tobacco-tax reduction. In Ottawa, when an assistant to Revenue Minister David Anderson was asked about a tax rollback, she responded that “it is only one of the options the government is considering.” When asked what the other options were, she was uncomfortably silent and unable to provide any. An export tax was not on the table. A tax reduction was being planned.

When Parliament resumed on 19 January 1994, the separatist Bloc Québécois (MPs exclusively from Quebec) pressed the government daily for action on smuggling. The party’s demands received news coverage and increased support for a rollback. On 24 January, some Quebec retailers operating under the banner of the Mouvement pour l’abolition des taxes sur le tabac (MATRAC, movement to abolish tobacco taxes) started to openly sell contraband to the public as a means of increasing the pressure on government to reduce taxes. This received enormous publicity across Canada and even more in Quebec. Jubilant purchasers were pictured obtaining their low-priced cartons. Stocks sold out in a matter of hours. MATRAC took its protest and illegal sales to various municipalities around the province. The media, again especially in Quebec, continued to give ample coverage to this traveling circus. A 27 January MATRAC news release said, “To you, representatives of the media, THANK YOU!”^{[441, p. 7]} The illegal sales had raised the contraband issue to crisis proportions.

MATRAC’s illegal sales appeared to be a spontaneous tax revolt. However, André Noël, an investigative reporter with Montreal’s La Presse, discovered that MATRAC had links with the tobacco industry. Jacques Larivière, Vice-President of CTMC, met with MATRAC leaders after a meeting on 11 January at which plans for the illegal sales were finalized.^[372,440]

MATRAC received assistance from the Association des détaillants en alimentation du Québec (ADA, Quebec association of food retailers). Not only did ADA host the 11 January meeting in its offices, but it participated in the coordination of the sales campaign. For example, the local director of MATRAC in Sherbrooke, André Marcotte, was the regional director of ADA. Said Marcotte, “Behind MATRAC, one finds the ADA.”^{[441, p. 9]} ADA provided logistical help and PR expertise and prepared news releases. ADA even ensured that messages sent out by MATRAC members were consistent.

Tobacco companies were members of ADA and helped fund the organization. ADA’s Director General, Michel Gadbois, formerly worked in PR for both Imasco and Benson & Hedges.^[441] The open sale of contraband was not a new idea. In April 1993, Gadbois had raised the possibility at a news conference.^[441] He later would say that they were waiting for a change in government in Ottawa and Quebec before their campaign went into full force.

While the antitax campaign was gaining steam, so was the campaign to maintain taxes. As part of the health lobby’s efforts, representatives went on a tour of Western Canada to outline the industry’s role in contraband, to build support for an export tax, and to oppose a tax reduction.

The tobacco-tax issue was in the news daily, and opposition to a rollback was becoming extremely vocal. MPs were receiving many letters and phone calls on the issue, mostly from people opposed to the decrease. Letters to the editor were pouring in. Some Liberal MPs made public statements opposing a tax decrease. Clearly, the health message was getting across. At the same time, government leaks reported in the media indicated that a tax reduction was closer to being announced and that federal and provincial governments were looking at a joint reduction.

Key tobacco-control advocates decided to heat up the campaign even further and concluded that a full-page, hard-hitting advocacy ad was urgently needed. NSRA drafted the text over the weekend. Major health groups held a conference call on Sunday night (30 January) to modify and approve the text. On Monday, in a matter of hours, CCSH succeeded in getting more than 30 organizations to endorse the ad. The ad ran the next day, Tuesday 1 February, in the Globe and Mail. Leading off with a picture of Prime Minister Chrétien, the ad read “Are 250,000 tobacco deaths and a federal tax giveaway of $1 billion your government’s idea of bringing ‘integrity’ to Ottawa?” Readers were invited to write or call their MP to oppose a tax cut. The toll-free 1-800 number for Elections Canada was published for those who didn’t know the name of their MP. Elections Canada was inundated with so many calls that its staff couldn’t handle them. Health Minister Marleau apparently showed the ad to Chrétien, and Chrétien was not happy about it. The ad was effective and definitely enhanced the health lobby’s campaign.

As the crisis escalated, the federal government knew it would have to act quickly. Chrétien personally lobbied provincial premiers to participate in a joint tax reduction. For reasons of national unity, it was highly undesirable that Quebec be the only province to reduce taxes. Ontario was key, given its large population and proximity to Quebec. However, the Premier of Ontario, NDP Bob Rae, was publicly opposing a tax decrease, calling instead for an export tax.^[402] In Ottawa on Sunday 6 February, the federal government’s top bureaucrat, Glen Shortliffe, met with Rae’s top official, David Agnew. Attempts to bring Ontario on board were unsuccessful.

On Tuesday 8 February, the Liberals held a special caucus meeting to quell dissension within the party. Just afterwards, in the House of Commons, Chrétien announced the government’s antismuggling action plan. The key component of the plan was a reduction in taxes. The federal tobacco tax on a carton of 200 cigarettes was reduced by $5.00 nation-wide; in addition, on a province-by-province basis, the federal government would match provincial-tax decreases up to a maximum of $5.00, for a total possible federal reduction of $10.00 per carton. Taxes on other tobacco products, notably roll-your-own tobacco, would also be reduced. Enforcement by customs personnel and the RCMP would be increased.

In part to lessen the political fallout, the government announced that further measures would accompany the decrease. A 3-year health-promotion surtax, expected to raise $180 million, was imposed on manufacturers’ profits. The money would be used to fund the “largest antismoking campaign this country has ever seen.”^[107] “Kiddie packs” (packs with fewer than 20 cigarettes) would be banned. The House of Commons Standing Committee on Health would be asked to consider plain packaging. The government reimposed the export tax of $8.00 a carton. And Chrétien had strong words for the industry:

We do not want tobacco manufacturers to receive any benefit from the difficult decision we have made today. The fact is that the Canadian manufacturers have benefited directly from this illegal trade. They have known perfectly well that their tobacco exports to the United States have been re-entering Canada illegally. I believe they have not acted responsibly.^[107]

Premier Johnson of Quebec held a news conference immediately after Chrétien’s statement. Quebec reduced its taxes by $11 a carton, bringing the total federal – provincial tobacco-tax reduction in the province to $21. Johnson also criticized tobacco companies and imposed a provincial corporate income surtax on cigarette manufacturers. New Brunswick was the only other province that day to announce that its provincial tobacco taxes would go down.

Overall, the decision was a major tobacco-control setback. Retail prices, including sales taxes, were cut by more than half in Ontario and Quebec, from about $47 a carton to about $23. The lower prices were almost inviting people, especially teenagers, to smoke more. It could have been worse, as little consolation as this may be. Had health groups not been so vocal and public opposition not been so strong, the health component of the government’s announcement would probably not have been nearly as extensive. The federal tax-reduction formula permitted a smaller reduction in parts of Canada where contraband was less serious. In these provinces, the benefits of high taxes could be partially maintained.

The tobacco lobby had achieved an enormous victory, but the cigarette manufacturers received many black eyes in the process. In the month preceding the tax reduction, much of their contribution to the smuggling problem was exposed. Numerous news reports, editorials, editorial cartoons, letters to the editor, and comments on open-line shows painted them in a highly unfavourable light. Here is an excerpt from a Globe and Mail editorial published after the decrease:

Any settling of moral accounts must begin with the cigarette manufacturers. It is not enough that, as a matter of ordinary routine, they knowingly make and market a substance that kills people — a substance that, uniquely among legal products, kills when used exactly as intended. By continuing to ship cigarettes to the U.S. in massive amounts, knowing that almost every last one would be smuggled back into Canada, they have actively colluded in the systematic evasion of the law. Among the guilty, they are scarcely better than the organized crime rings they [indirectly] supply.^[199]

When CTMC President Rob Parker was asked on CBC radio’s Cross Country Checkup what the tobacco industry was doing to fight contraband, he could only muster three things: placing markings on packages for export, measuring the size of the contraband problem through Lindquist Avey reports, and recommending a decrease in taxes to the government.^[128] This was hardly a comprehensive or acceptable level of industry action, especially in view of the fact that the first item mentioned was required by law.

The strength of the public opposition to the tax rollback showed how far the public’s sentiments toward smoking had evolved. Rothmans called the decision “politically courageous.”^{[516, p. 3]}

No one suffered more political fallout from the tax decrease than Health Minister Marleau. In the wrong place at the wrong time, she was placed in the exceptionally difficult position of trying to defend the government’s decision. She was extensively criticized by health groups, including local groups in her Sudbury, Ontario, riding. She was roundly criticized at a federal – provincial meeting of Health Ministers that started, coincidentally, the same day as the tax reduction.

After Quebec and New Brunswick reduced their tobacco taxes, interprovincial smuggling became a problem. Low-priced cigarettes were being smuggled into the provinces that had not lowered their taxes. The situation in border areas was particularly serious. Retailers in Ontario and Nova Scotia pressured their provincial governments to lower their taxes to stem a decrease in retail tobacco sales. A domino effect ensued: Ontario reduced taxes within a few weeks, and a while later Prince Edward Island and Nova Scotia did the same.

Newfoundland, the Western provinces, and the territories were able to hold the line on taxes, in part because of their distance from the big markets of central Canada. Inter-provincial smuggling did not affect these jurisdictions enough to force them to back down. Even after the federal tax decrease, British Columbia and Newfoundland still had nearly the highest levels of tobacco taxation in the world.

As anticipated, the industry used Canada’s rollback to argue against tax increases elsewhere, especially in the United States. The Canadian experience was publicized in the United States by the National Coalition Against Crime and Tobacco Contraband. This organization was a front group funded by R.J. Reynolds.^[156]

The tax decreases quickly and dramatically reduced smuggling into Canada,^[282] which is not surprising. The tax reduction was so big in Quebec and Ontario that the legal price of cigarettes was in some cases lower than in the neighbouring US states of New York and Michigan. Also not surprisingly, exports plummeted, as illustrated in Figure 12.

There is no doubt that the tax rollback had an adverse impact on smoking rates after more than a decade of steady decline (see Figures 2 and 3, Chapter 2) — the prevalence of smoking increased according to several surveys.^[57,273,569] In Ontario, the proportion of male students who smoked increased from 23% in 1993 to 28% in 1995; among female students the increase was from 25% to 28% over the same period.^[457] In one Ontario study of smokers in grades 7 and 9, 34% said they smoked more as a result of the lower cost; only 3% said they smoked less.^[506] In numerous media interviews, teenagers and adults said that they had increased the number of cigarettes they smoked a day; this is some anecdotal evidence of increased smoking.

In terms of per capita consumption, the overall increase two and a half years after the rollback was much smaller than expected. At a minimum, however, the long decline in consumption and industry sales had come to an end. The potential impact of other anti-smoking interventions may have been neutralized.

The magnitude of the health impact will depend on how quickly taxes return to their former levels. In February 1995, the federal and Quebec governments announced a total tax increase in Quebec of $1.20 a carton. The health lobby applauded the move as a small but desirable step. Small indeed — if increases continue at that pace, taxes will not return to their former levels until 2011.

The 1994 tax rollback was an unprecedented blow to antismoking efforts, and attention turned to another major tobacco-control issue, plain packaging.

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