MONTREAL, Jan. 22, 2014 /CNW Telbec/ - At the end of 2013, Finance
Minister Nicolas Marceau announced a deficit of $2.5 billion for 2013
and $1.75 billion in 2014-15. In order to achieve a balanced budget,
the temptation might be to increase taxes on certain products deemed to
be harmful like alcohol or tobacco. But in fact, far from being the
miracle solution to budgetary and public health problems, sin taxes
often have unwanted consequences, according to a new Economic Note published today.
Sin taxes are sometimes justified by establishing dedicated financing
for specific programs. However, the funds collected are sometimes
repurposed to pay for government expenditures other than those that
justified the creation of the taxes. Quebec's Olympic tobacco tax is a
case in point. In 1976, the government doubled the tobacco tax in order
to allow the Régie des installations olympiques (RIO) to reimburse the
debt accumulated in the building of the stadium.
"This increase was justified by the fact that from that point on, 48% of
the tax had to be paid to the Fonds spécial olympique (FSO). And yet,
we calculated that between 1976 and 2006, the period during which the
FSO was in operation, only 18.4% of the revenue from the tobacco tax
was transferred to the FSO," explains Jean-François Minardi, the author
of the study.
One of the justifications for setting up these taxes is the modification
of consumer behaviour. Numerous studies have shown, however, that after
an initial reduction, the level of consumption of products like tobacco
generally reaches a threshold beyond which remaining users will tend
not to modify their behaviour any further. The case of Quebec provides
a good example of this, as the prevalence of tobacco use has hovered
around 24% since 2003 despite the fact that the price of cigarettes has
doubled during this same period.
Another unintended consequence of sin taxes is that when the tax level
becomes too high, tax receipts start to fall. Sin taxes in general
cannot increase government revenue all while simultaneously
contributing to the reduction of the consumption of the targeted
The tobacco tax is a particularly regressive tax that hits the poor four
times harder than it hits the wealthy, among other things because the
rate of tobacco use among the poorest people is 50% higher than among
the wealthiest. For this reason, an additional hike in tobacco taxes,
which already account for 63% of the average price of a pack of
cigarettes in Quebec, would impact low-income people in particular.
"Rather than continuing to raise these taxes, governments would be
better off themselves practising the virtue of thrift in order to
balance their budgets," concludes Jean-François Minardi.
The Economic Note entitled "The Unintended Consequences of Taxes on Tobacco, Alcohol and
Gambling" was prepared by Jean-François Minardi, in collaboration with
Francis Pouliot, both public policy analysts at the Montreal Economic
Institute. This publication is available on our website.
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The Montreal Economic Institute is an independent, non-partisan,
not-for-profit research and educational organization. Through its
studies and its conferences, the MEI stimulates debate on public
policies in Quebec and across Canada by proposing wealth-creating
reforms based on market mechanisms.
SOURCE: Montreal Economic Institute
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