Contraband Tobacco in Canada: Tax Policies and Black Market Incentives

The unlawful production, distribution, and sale of cigarettes in Canada appear to have reached unprecedented levels in recent years, creating challenges for public health officials, law enforcement, tax authorities, policy makers, and the public.

Our analysis identifies tobacco excise taxes as an important factor in the development and persistence of the contraband tobacco market. By inflating the cost of lawful cigarettes, such taxes do discourage smoking to some extent, but they also create powerful incentives to buy and sell contraband tobacco products.

Research shows that a 10% increase in the price of tobacco products can reduce lawful cigarette sales by about 3% to 10%, depending on various geographic and demographic factors. To the extent that smokers evade excise taxes by purchasing contraband, the use of excise taxes to discourage smoking and increase government revenues is rendered ineffective.

Based on the available evidence, we conclude that while tobacco taxes clearly reduce lawful tobacco sales, their impact on smoking prevalence is less clear, especially when the effects of other anti-smoking initiatives are taken into consideration. What is clear is that while several factors have facilitated the exploding contraband tobacco trade in Canada, increases in tobacco excise taxes were the spark that ignited the explosion.