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Autumn 2008 | Vol 12 No 1

The last word

Contraband: The quicksand beneath smoke-free Ontario

By Michael Perley

The recent implementation of Ontario’s ban of retail tobacco displays and an amendment to ban smoking in vehicles transporting children are continuing proof of the strength of the province’s Smoke-Free Ontario Act and its accompanying strategy. Unfortunately, a growing body of evidence indicates that the protection offered by this strategy is at serious risk due to the proliferation of contraband tobacco products.

Contraband refers to cigarettes on which federal and/or provincial taxes have not been paid. It can include cigarettes manufactured by main brand tobacco companies and destined for sale to Status Indians free of provincial taxes. It can also include products manufactured under license by Grand River Enterprises on the Six Nations Reserve or unlicensed products manufactured on reserve in Ontario or New York State. The latter is often sold in plastic bags of 200 cigarettes for as little as $6 per bag.

Surveys conducted by the retail sector, the tobacco industry itself and the Ontario Tobacco Research Unit at the Centre for Addiction and Mental Health in Toronto point to a dramatic increase in contraband tobacco products in Ontario over the past several years. A precise estimate of the prevalence of contraband is difficult, but evidence suggests that up to one in three cigarettes smoked in Ontario originate in the contraband market.

There are at least four consequences of this level of contraband:

First, and most alarmingly, evidence indicates that ongoing declines in smoking rates among the general population and younger Ontarians have stalled: The recent release of Statistics Canada’s 2007 data for the Canadian Community Health Survey shows that daily and occasional smoking for Ontarians 12 years and older remained static from 2005 (20.7%) to 2007 (20.6%).

Second, cheap contraband tobacco products are easily available. This makes it more difficult for smokers to quit and promotes smoking initiation among youth, since price has long been demonstrated as the most significant deterrent to tobacco use.

Third, contraband results in lost revenue to the provincial treasury. Provincial government budget projections show a decline in annual tobacco tax revenues for the current year to below $1 billion for the first time since 2001/2, despite tax increases during the government’s first mandate of $7.50 per carton.

The fourth consequence of contraband is the suspension in federal and provincial tax increases. In its 2003 election platform, the provincial government committed to a $10 per carton tax increase during its first mandate. While $7.50 per carton of this increase has been implemented, no further progress has been made, primarily due to the presence of contraband.

Contraband tobacco is not caused by high taxes, but by an available source of supply. Ontario and Quebec have the lowest provincial tobacco tax rates in Canada; yet they have the highest levels of contraband. An effective attack on contraband requires action by both federal and provincial governments and must involve many departments – finance and revenue, aboriginal affairs, public safety and security and health.

Some key remedies are available:

• Unlicensed manufacturers must be a prime focus of remedial efforts. The supply of raw materials and packaging to unlicensed manufacturers should be illegal. Seizures of these raw materials are legal in Quebec, but not in Ontario.
• Under Ontario’s so-called quota system, tax-exempt cigarettes are supplied to each reserve using a formula based on population. However, the quota now greatly exceeds the number of cigarettes that could be reasonably consumed in a year by reserve residences, and this quota must be respected.
• Ontario tobacco manufacturing licenses should be revoked if a manufacturer is operating illegally. If the Ontario license is revoked, this should be grounds for a federal license to be revoked. Without licenses, raw materials cannot be acquired and exports cannot be made.
• Performance bonds for each tobacco manufacturer license of at least $5 million per license should be established by federal and provincial governments. If a manufacturer is found to be involved in the contraband market, the bond can be revoked.
• In the longer term, First Nations bands must be able to tax tobacco products on reserve and benefit from the revenue.

U.S. jurisdictions must also be involved. The RCMP estimates that up to 90 per cent of contraband product in Ontario originates on the St. Regis territory on the U.S. side of the Akwesasne Reserve (the reserve straddles the Ontario / Quebec / New York border).

Due to a recent significant tobacco tax increase in New York State, authorities there are likely to soon have more incentive to directly attack the problem: St. Regis manufacturers should experience increased demand, as New York smokers try to avoid to the state’s tax increase.

With smoking rates two to three times those of non-First Nations communities, on-reserve populations face particular threats from the use of tobacco products, especially from the availability of cheap products. The 2006 cancellation of the federal First Nations and Inuit Tobacco Control Strategy removed needed funds from on-reserve tobacco control. It also sent precisely the wrong signal to First Nations communities about the real concern of the federal government with the health of on-reserve populations. An effective First Nations strategy must be restored, and similar efforts must be launched provincially.

Finally, we must avoid the temptation to blame First Nations communities for this problem. A small minority of both natives and non-natives are responsible for the large majority of this trade. Bridges must be built between these communities if we are to have any real expectation of controlling what is perhaps the number one tobacco control challenge in Ontario today.

Dr. Michael Perley is director of the Ontario Campaign for Action on Tobacco.

Editorials do not necessarily reflect the views of CAMH.