Alberta’s low tax policy on tobacco is devastating

For generations, Albertans have experienced the lowest overall taxes in Canada.  This fiscal policy has become a defining characteristic of the province and part of the “Alberta Advantage” that has been promoted by provincial governments past and present.

However when this low tax policy is applied to tobacco products the result is devastating.  Any “advantage” that is to be derived from low tobacco taxes is completely undermined by higher smoking rates, increased illness and premature death, reduced productivity and greater demands on healthcare.  How does this policy provide Alberta with any competitive advantage?

Alberta presently has the most affordable cigarettes of any province as the result of low provincial taxes and high wages.  According to a recent report on tobacco affordability prepared by Alberta Health Services, it only took 38 minutes of labour for Albertans aged 15 to 24 to purchase a pack of 25 cigarettes in May 2013.  In B.C. and Saskatchewan it took 50 and 51 minutes of labour respectively to purchase 25 cigarettes.  In Manitoba it took 65 minutes of labour—the highest in Canada.

Tobacco taxes are the single most effective strategy to reduce tobacco use, especially among youth.  As any Economics 101 graduate can tell you, the price of a product or service dictates demand.  When gasoline or airline prices go up, travel goes down.  And the opposite is true—when prices go down, demand goes up.  Just check the line-ups at the next Bay Day sale and you can see this effect for yourself.

Tobacco is no exception to this fundamental economic rule.  The impact of tobacco price increases has been so well documented that a simple mathematical formula has been derived.  According to the World Bank, every 10 percent increase in the price of tobacco results in a 3 to 4 percent decline in consumption among adult smokers.  The same increase results in a 6 to 12 percent decline in consumption among adolescents since teens have less disposable income.

This effect has been witnessed in Alberta.  In 2002, the tight-fisted, debt-busting Ralph Klein government increased cigarette taxes by a whopping $2.25 per 25 pack to help reduce Alberta’s elevated smoking rates and to reduce demands on healthcare.  The extra cash (about $300 million) was applied mostly to implementing the recommendations of the Mazankowski report on healthcare reform which also recommended a tobacco tax increase to reduce the healthcare burden of tobacco use.

At the time, the increase represented the world’s largest cigarette tax increase ever recorded on a monetary basis.  The tax hike increased the overall price of cigarettes by about 30 percent.  In the year following this massive increase, overall tobacco consumption plummeted by 24 percent, 44,000 Alberta smokers left the tobacco market forever and youth smoking rates decline from 24 percent to 19 percent.  These reductions represent the largest single-year declines in tobacco use in Alberta’s history.

Based on these astonishing results, why does Alberta now have the most affordable cigarettes of any province? 

There are two main reasons for this dilemma.  The first is that Alberta has the highest wages of any province which is generally a good thing.  The second reason is the government’s decision to keep tobacco taxes low as part of maintaining a low overall tax burden.  However this policy simply cannot be justified because the Klein government still managed to maintain the lowest overall tax burden in Canada while having the highest tobacco taxes in the nation.

The Stelmach government increased tobacco taxes twice—by 63 cents in 2007 per pack and by 37 cents in 2009.  However these increases did not even keep pace with wage increases resulting from Alberta’s booming economy.  Unfortunately there has been no major tobacco tax increase in Alberta since 2002.

The Redford government has introduced an ambitious 10-year tobacco reduction strategy with the objective of reducing per-capita tobacco consumption by 50 percent by 2022.  However it will be realistically impossible to achieve this objective without using the single most effective weapon to fight tobacco use—higher taxes.  As long as Alberta maintains the most affordable cigarettes in Canada we will collectively be fighting tobacco use with one hand tied behind our back.  All other efforts to reduce tobacco use, including Bills 33 and 206, are being severely impaired by Alberta’s low tobacco tax policy.

Of course, we can’t underestimate the impact of the tobacco industry and its TWENTY-SEVEN Alberta lobbyists who are actively fighting tobacco taxes.  Their main argument is that tobacco tax increases will create a huge contraband tobacco market in Alberta.  Not surprisingly, this was the same argument that the tobacco lobby used in its attempt to dissuade the Klein government from increasing tobacco taxes. 

Fortunately the Klein government didn’t take the bait and instead decided to fight smuggling with higher tobacco taxes and increased enforcement—and the strategy worked wonders.  Alberta continues to maintain the lowest levels of contraband in the nation even after the whopping $2.25 cigarette tax increase in 2002.  According to the latest credible estimate, smuggled tobacco represents less than one percent of the total tobacco market in Alberta.  To its credit, the Alberta government has the toughest anti-smuggling regulations in the country and these measures are having the desired effect.

Ironically, the main proponents of the contraband scare tactic  (Canadian tobacco companies) received the largest fines in Canadian history for their active participation in massive tobacco smuggling schemes in the 1990s.

The timing for a provincial tobacco tax increase couldn’t be better.  Last week, the Harper government increased federal tobacco taxes by $4.00 per carton of 200 cigarettes or 50 cents per pack of 25.  This week, the B.C. government increased tobacco taxes by $3.20 per carton of 200 (effective April 1) and will be aptly directing the proceeds ($50 million annually) to cancer prevention.

According to our calculations, the federal tax increase will result in 3,600 fewer smokers in Alberta alone including 800 fewer adolescent smokers and it will prevent hundreds of premature deaths.  By matching the federal increase, the Alberta government could double these numbers while raising $75 million annually for disease prevention.

Hopefully the Alberta government will do the right thing and uphold its ambitious tobacco reduction strategy with a meaningful tobacco tax increase.  Then we can fight tobacco use with both hands!

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Action on Smoking & Health
ASH is Western Canada's leading tobacco control organization.