Tobacco Info

From Tobacco Info No. 1 - June 2010
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Economists quash claims of Canadian Convenience Stores Association on impact of 1994 tax rollback 

By Pierre Croteau

In 1994, Canadian cigarette taxes went down, while tobacco consumption went up. Numerous scientific studies published in peer-reviewed journals using different sources of data all found that the tax drop led to increases in youth smoking and decreases in quitting.

However, the Canadian Convenience Stores Association (CCSA) sees things differently. They allege that the 1994 tax decrease only influenced the supply source for smokers who got their nicotine fix on the black market; with the price drop, they switched to legal, taxed cigarettes. This idea was reinforced in early January by a marketing professor at the HEC Montréal business school, Jean-François Ouellet, in a report that he was asked to produce by the CCSA. As a result, the CCSA proclaimed to the press, “Major tobacco tax reduction in 1994: No impact on smoking rate says HEC Montréal.

This is not the story the numbers tell, according to economics experts Emmanuel Guindon, Pierre-Yves Crémieux, Pierre Ouellette, Marc Van Audenrode and Lisa Pinheiro. They criticize Ouellet’s text for methodological weaknesses, distorted facts and far-fetched conclusions. Guindon is a health economics researcher at McMaster University in Hamilton, Ontario, and was asked to analyze Jean Francois Ouellet’s study by the Non-Smokers’ Rights Association (NSRA). Ouellette and Crémieux are economics professors at the Université du Québec à Montréal and Van Audenrode teaches the same subject at the University of Sherbrooke. All three work together as part of Analysis Group Inc., an international economics consulting firm, which was brought into the debate by the Quebec Coalition for Tobacco Control. Pinheiro, who has an educational background in mathematics and finance, is the company’s vice-president.

Coincidence or causality?

In 1995, the peer-reviewed journal Chronic Diseases in Canada published research by economist Thomas Stephens, who found that after three years of growth, the number of contraband cigarettes sold fell abruptly in 1994, while the number of cigarettes sold legally climbed steadily. Neither Ouellet nor the CCSA dispute this. However, Stephens’ article also showed that the legal vendors did more than recuperate customers from the black market. While contraband sales fell by almost 10 billion cigarettes from 1993 to 1994, taxed cigarettes increased by more than 15 billion units.

So, we see that the drastic decrease in taxes was accompanied by an increase in total cigarette sales. Scientifically speaking, this does not necessarily mean that one phenomenon caused the other, though the relationship between cause and effect in this case has now long been confirmed.

Nonetheless, professor Ouellet concluded that, “Randomness is as good a way as any in determining if a Canadian will change his smoking patterns based on decreased tobacco tax.” In lieu of these conclusions, the CCSA proclaimed, “The time has come to decrease excessive tobacco taxes in order to eliminate once and for all, and as quickly as possible, the scourge of contraband endured too long because of the unproven and unfounded fear that it would encourage people to smoke.”

Harsh criticism

Emmanuel Guindon, who worked for seven years as an economist at the World Health Organization, notes that, “Ouellet’s questionable data manipulation and methodological approach yields results that are not only at odds with published work that analyze the same data set, but that are also at odds with more than a dozen Canadian studies and a wealth of studies conducted in the United States and Europe.”

Among numerous criticisms of Ouellet’s text, the Analysis Group emphasized that Ouellet ignores the trends that were present in different provinces before the decrease in taxes, minimizes the results showing a statistically significant impact of the decrease in taxes, introduces arbitrary manipulation that distorts the data, neglects to account for variations in the socio-demographic composition of the different provinces, uses erroneous comparisons to contradict data revealing a sensitivity to quantities demanded by changes in price and arrives at conclusions not justified by his analysis.

What serious studies show

Working from the same source of information from Statistics Canada as Ouellet, economist Vivian Ho Hamilton and researchers at McGill University in Montreal, arrived at a diametrically opposed conclusion. In January 1997, they wrote in the Canadian Medical Association Journal that, “Although smoking rates are declining in Canada, tobacco tax cuts appear to have slowed the rate of decline by inducing more non-smokers to take up smoking and leading fewer smokers to quit.”

B. Zhang and a team of public health specialists from the University of Toronto conducted a similar, longer-term study, which was published in the American Journal of Preventive Medicine in 2006. They noted that, “Young adults are sensitive to cigarette prices. Reductions in cigarette prices will lead to increased smoking initiation among this group.”

Even earlier, in 2002, a pair of economics professors at Brock University, in St. Catharines, Ontario, estimated that the decrease in the sales price of cigarettes in early 1994 lead to a 25% same-year increase in the number of daily smokers among 14 to 18-year-olds.

In the same year, three researchers affiliated with the National Bureau of Economic Research in Cambridge, Massachusetts, calculated the impact of cigarette price on consumption, factoring in black market sales. The result for Canada: a 10% price drop yields a 4.6% increase in quantity demanded. This cause-and-effect relationship was even stronger among lower-income smokers.

Prabhat Jha, an epidemiologist and professor at the University of Toronto, and the principal author of a World Bank report on tobacco economics, was asked by the NSRA about the validity of the CCSA’s claims. “Evidence indicates an increase in tobacco consumption in 1994 of nearly 10%. To deny the law of demand in economics is the same as denying the law of gravity in physics,” he said.


Reduction in illicit trade in 2009
The CCSA fosters the belief that contraband continues to grow. The cigarette manufacturer Philip Morris International, in its annual report states, “In Canada, the total tax-paid cigarette market was up by 3.4% in 2009, primarily reflecting stronger government enforcement measures to reduce contraband sales.”
In its annual report, British American Tobacco, the London multinational that owns Imperial Tobacco Canada, the largest supplier in the Canadian market, notes that, “Profit in Canada increased [in 2009], benefiting from a strong currency and some reduction in illicit trade.”

At the same time, surveys by Statistics Canada show no resurgence in the prevalence of smoking or in the average consumption of cigarettes by Canadian smokers.



The lowest taxes in the land
The CCSA has asked for a decrease on cigarette taxes, claiming it influences contraband sales. Ironically, Ontario and Quebec, which are most affected by black market sales according to estimates by the CCSA, are the two Canadian jurisdictions where the total level of taxes on tobacco and the price of cigarettes have been the lowest for several years. In Quebec, the provincial tax on tobacco has remained unchanged since the fall of 2003.

According to the Royal Canadian Mounted Police, four Native reserves in Ontario and Quebec are the main source of contraband cigarettes in Canada.