Tax up, revenue down

An EY (Ernst & Young) review of tobacco tax policy in Ontario, Canada, has shown tax rate increases are reducing revenue for the province as consumers turn to a growing contraband market.
In a press note EY said the provincial government had introduced a $3-per-carton price-increase in February 2016, followed by an additional $2-per-carton increase in April 2017, and had foreshadowed further $4-per-carton increases in both 2018 and 2019.
‘Tax revenue for the province, meanwhile, has fallen short of expectations by $240 million over the five-year period from 2013 to 2017,’ EY said.
‘Research shows that continued tax rate increases are widening the price gap between legal and contraband tobacco. Legal cigarette prices have increased by 15 percent since Q4 2014. What was then a $54 per carton price gap grew to $66 per carton in Q3 2017.
‘EY research suggests that additional planned tobacco tax increases by the government of Ontario will drive that price gap to $78 per carton by the end of 2019. This could divert more legal taxed consumption into the untaxed contraband market instead. Data suggests legal demand will fall by almost 11 percent in 2018 and an additional seven percent in 2019.
‘Contraband tobacco already represents more than one third (33.8 percent) of the total market in Ontario. What’s more, Ontario accounts for over 80 percent of the total tobacco contraband market in Canada. This translates into $750 million in lost provincial revenue, or “tax gap,” per annum.’
The EY report suggests that with recent federal and Ontario tobacco tax increases, the province could see revenues fall short of its forecasts by $235m per year in 2018-19 and 2019-20.
Based on these figures, the report recommends the provincial government consider alternative taxation plans and enforcement measures to mitigate the flow of revenue to the contraband market.