The dark side of tobacco taxes

Author: John Luik
Article Published: 10/01/2004

Neither Finance Minister Greg Sorbora nor Health Minister George Smitherman appear to get it. Both Ontario ministers, along with Premier McGuinty and his Manitoba counterpart believe the orthodox fiction pushed by Canada’s anti-tobacco activists that raising tobacco taxes is an innocuous, cost-free policy measure that improves public health. Yet the evidence clearly shows that both of these claims, that higher tobacco taxes improve public health and that they are a cost-free policy measure are untrue.

The claim that higher tobacco taxes improve public health is based on the view that young persons are particularly sensitive to the cost of smoking and will reduce their tobacco use as the price rises. The problem with this view is two-fold:  it is based on cross-sectional studies which claim to show that higher tobacco taxes reduce youth smoking and on the myth that young people quit smoking.

Cross-sectional studies are snapshots of a particular market and a particular group of young people at a specific moment. Their usefulness is severely limited by the fact that they do not follow the smoking behaviour of young people in response to tobacco tax increases over several years. They also assume that smoking is an isolated behaviour and thus often fail to examine such crucial issues as how much money young people have to spend on things like tobacco and how a price increase for cigarettes might lead them to reallocate their expenditures from other things- e.g. cell phones- in order to smoke.

This view is also based on the mistaken belief that young people actually stop smoking in large numbers. But this is not the case. As the US government’s Longitudinal Survey of Youth has shown, from ages 11-18 less than 1% of smokers quit each year. The relevant policy question then is not whether tobacco taxes encourage young people to quit but whether they discourage them from STARTING to smoke.

This is where longitudinal studies are so helpful. Unlike cross-sectional studies, longitudinal studies follow a group of young people over time in order to determine what effect an increase in tobacco taxes has on their smoking behaviour.

Take, for instance, a study by three Cornell University economists that looked at the smoking behaviour of a group of  12,036 American 8th graders as they moved through the school system from 1988-1992, using data from the National Education Longitudinal Survey. Their question was whether changes in tobacco taxes would deter these young people from starting to smoke as they entered the high risk high school years. They found that tax increases had a statistically insignificant effect (“the negative effect of cigarette taxes is nearly nonexistent”) on preventing young people from starting to smoke. This should not be surprising as it replicates the findings of other longitudinal studies and even a number of cross-sectional studies that have found that tobacco tax increases have no significant effect on young smokers or on youth experimentation and initiation.

The Cornell study is also interesting in another respect in that it shows once again that two of the strongest factors in predicting youth smoking are poor academic achievement and dropping out of school, something that suggests that the Liberal anti-tobacco strategy ought to be much more connected to its education strategy than to its tax policies. But then, raising taxes is a much simpler, albeit ineffective, response to youth smoking.

This longitudinal data from the US is also supported by evidence from Ontario. Dr. Adrian Wilkinson, formerly of the Addiction Research Foundation of Ontario, looked at data compiled by the Centre for Addiction and Mental Health in its Drug Use Among Ontario Students, a survey of the drug use of between 2800 and 4700 Ontario students in Grades 7,9,11, and 13 in odd-numbered years between 1977 and 1999. The survey asked students to indicate the extent to which they used each of 16 different substances, including tobacco and alcohol. What Wilkinson found was a remarkably similar use pattern across all drugs (see chart), regardless of whether the drugs were taxed or not, or indeed, whether they were advertised or not. As he noted, changes in price could not account for this extraordinary symmetry.

But higher tobacco taxes not only fail to prevent kids from smoking they also come with the far from insignificant consequences of increased cigarette smuggling, black markets and crime. Despite the experience of high tobacco taxes in the early 1990’s,  policymakers seem to have forgotten the lesson that people respond to economic incentives created by the government. When the price of any good reaches a certain level then it becomes profitable for someone, in this case criminals, to provide that good at a lower cost. Ten years ago Ontario and Quebec experienced a wave of hijackings and warehouse and shop burglaries- all in search of cigarettes. In one instance, a convenience store clerk was killed for 10 cartons of cigarettes.

Ontarians need look no further than New York City which now has the highest cigarette taxes in the US and one of the largest black markets for untaxed tobacco products. A recent study noted that since the recent tax hike, sales of taxed cigarettes in the city have fallen by 50%, representing a diversion of hundreds of millions of dollars from governments and legitimate businesses.

At the end of the day the government will still raise tobacco taxes. But if it wishes to increase the tax burden on some of Ontario’s least affluent citizens, it should do so without trying to con the rest of us into thinking that this will reduce youth smoking or not increase tobacco smuggling and all of the nasty things that go with it.

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