Sin-Tax Failure: The Market in Contraband Tobacco and Public Safety
Table of Contents:
[An Introduction to the Black Market] [The Size of the Market] [The Engine of Growth] [The Trail of Contraband] [The Native Dimension] [Other Native Involvement in Contraband] [The Warrior’s Society and the Black Market] [Other Dimensions of Violence] [Guns in Canadian Cities] [Organized Crime] [Countering the Black Market] [The High-Price, High-Tax Strategy]
[Reducing the Contraband Market]
Chapter Two
The Size of the Market
January 11th, 1994 marked the 30th anniversary of the US Surgeon General’s declaration linking smoking to serious health problems, such as heart disease and lung cancer. Yet, after decades of clear health warnings and smoking, vigorous campaigning by anti-smoking groups and years of increasingly tough anti-smoking legislation in major cities, many Canadians still smoke. According to Statistics Canada, in 1990 the average Canadian reported spending $327 on tobacco. This produced an industry worth about $8,570,000,000 in that year. By way of comparison, expenditures on alcohol and narcotics amounted to $397 and $221 respectively.
Although some reports suggest the market for tobacco has declined since 1990, there is little reason to believe this is so. Cigarette smoking is a difficult habit to break. Despite the practice coming under increasing public disfavour, new smokers continue to take up the habit. Many of these are teenaged females. In 1991, 25% of Canadian females between the ages of 15 and 19 were smokers (up from 24% in 1989). Many new Canadians are heavy smokers too. The official figures are skewed by Canadians who do not want to admit to pollsters that they smoke, parents who do not believe their children smoke, and people who will not admit to tobacco use lest their insurance companies find out about it and adjust their premiums. Even so, until the 1990s a general decline in tobacco consumption seemed to be underway.
The size of the tobacco market since 1990 has been guessed in the Lindquist Avey Macdonald Baskerville study Contraband Tobacco Estimate, of June 30th, 1992. The firm of forensic accountants believed that one in every nine cigarettes in Canada, in 1991, was contraband and that the value of the market was $1 billion (yielding a potential profit to smugglers of $709 million). They estimated that one in every six cigarettes consumed in Canada was contraband during 1992 in the 1992 Contraband Estimate - An Update of September 27th, 1993. The contraband market then was $1.9 billion. Their estimates suggest the whole tobacco market is growing again from an $8.57 billion market in 1990 to $9.6 billion in 1992.
The Ontario Flue-Cured Tobacco Growers’ Marketing Board held the opinion in November 1993 that one in every four cigarettes smoked in Canada was smuggled into the country — their estimate seems too low. Without real evidence of a major decline in smoking habits, Quebec’s consumption of fully-taxed domestic cigarettes dropped by two-thirds between March 1990 and July 1993. Canada’s consumption rate dropped by 38% during the same time. The "missing" market is being serviced by the Black Market. Contraband tobacco took one-third of the Canadian market in 1993 — which gave smugglers $1.8 billion in gross profits. Quebec reports that 50-60% of the province is now supplied by contraband. In parts of the province 100% of the market smokes smuggled cigarettes. Most estimates for Ontario suggest that contraband supplies one-third of the market.
On November 19th, 1991, a Globe and Mail, article entitled "Cigarette Smuggling Escalating" cited a letter from the Director General of Excise Duty at Revenue Canada. He described the loss of $163 million in revenue as "small relative to total federal taxes on cigarettes of approximately $4-billion" and then added, "In saying this, I don’t want to understate the seriousness of the current situation. It is important, however, to place it in a proper context." The problem is no longer trivial. At the rate of decline in tax revenue from tobacco in Quebec, it seems reasonable to assume that they will receive none at all in 1995. Ontario might experience the same situation in late 1996. Ottawa is experiencing similar losses. In 1992 it lost $750 million in revenue from cigarettes. In 1993, it probably lost twice that. The over-all loss of revenue for all Canadian governments in 1992 was $1,600 million — smugglers pocketed $800 million in profits. The Federal Government estimates it is now losing $100 million per month in revenues to the Black Market.
In 1983, the Canadian tobacco companies produced 72.5 billion units (cigarettes or equivalents) and sold 91.2% of these as fully-taxed products on the domestic market. Ten years later, they produced 50.7 billion units and sold 63.5% of them directly inside Canada. Exports have risen from 1.2% in 1983 to 28.2% in 1993. The vast majority of these exports return to Canada as contraband — but this does not account for the entire market in cigarettes. The contraband market includes American cigarettes, "counterfeited" domestic cigarettes and brands produced by plants built on Iroquois Reserves in the US and Ontario. This share of the market seems to be growing rapidly.
Alcohol has gone the same way. In 1992, the Liquor Control Board of Ontario estimated that one in every ten bottles of liquor consumed in the province had either been smuggled or bootlegged, and that $700 million or 13.5% of the provincial market was for illegal alcohol. The situation is apparently worse in Quebec. A study by the Association of Canadian Distillers observes that the rate of decline in legal sales of spirits in Canada outstripped that in the US by 60%. Given that American and Canadian rates of consumption are roughly equal, an increasing share of the Canadian market is being serviced by bootleggers.
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John Thompson is President of the Mackenzie Institute which studies political instability and terrorism. He can be reached at: mackenzieinstitute@bellnet.ca
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