New Brunswick

Plummeting tobacco sales sign of black market growth, says coalition

A steep and puzzling drop in legal tobacco sales in New Brunswick is raising questions about whether the government of Blaine Higgs may have been too hasty in disbanding a law enforcement group dedicated to catching illegal sellers.

Tobacco sales in New Brunswick dropped 8.5% last fiscal year, 14% the year before

Legal sales of cigarettes in New Brunswick have declined more than 27 per cent in four years. Some of that is due to smokers who have quit, but the province acknowledges illegal sales have also likely played a role. (Sue Ogrocki/Associated Press)

A steep and puzzling drop in legal tobacco sales in New Brunswick is raising questions about whether the government of Blaine Higgs may have been too hasty in disbanding a law enforcement group dedicated to catching illegal sellers.

Ron Bell of the National Coalition Against Contraband Tobacco, which funded by tobacco companies, says a significant and unexpected decline in provincial government tobacco tax revenue over the last two years is a sign New Brunswick smokers have turned in large numbers to the black market for cheap tobacco

"If you want to smuggle cigarettes out there, they know that New Brunswick, the chances of getting caught are pretty slim," said Bell.

New Brunswick adopted some of the highest tobacco prices in Canada in 2017, following two major provincial tax increases that boosted rates 34 per cent.   

A single pack of 25 cigarettes in New Brunswick can cost smokers more than $20 after a series of federal and provincial tax increases took effect in 2016 and 2017. It's 30 per cent more than prices in neighbouring Quebec. High prices discourages smoking, but an unexpected drop in legal sales in New Brunswick suggests it has also fuelled an increase in contraband tobacco sales. (Robert Jones/CBC)

That, along with a pair of smaller federal tax hikes, lifted the price of a carton (200 cigarettes) in the province to an average of $123.10 in February 2017. That's $34 higher than prices charged in neighbouring Quebec.

Among New Brunswick's estimated 87,000 smokers, who consume an average of two cartons per month each, that triggered an unexpected reaction.

Tax revenue down

In the fiscal year ended in March of 2018, legal tobacco sales in New Brunswick dropped nearly 14 per cent, almost double government projections. Last year, they fell another 8.5 per cent, again more than predicted, and this year they are down once more.

In March, Finance Minister Ernie Steeves originally projected in his first budget the tobacco sales declines experienced in the previous two years were over, but in September took that back.

New Brunswick Finance Minister Ernie Steeves budgeted for $141 million in tobacco tax revenue in his March budget but reduced the figure to $136 million in his first quarter update. The Department of Finance has been forced to reduce tobacco tax revenue estimates six times in the last three budget years as the legal sales of tobacco plummet. (Maria Jose Burgos/CBC)

"Tobacco tax revenue is down $5 million due to lower than projected volumes," Steeves's department acknowledged in its first quarter update. It was the sixth quarterly update since 2017 where tobacco revenue estimates had to be adjusted downward by the Department of Finance.

High tobacco prices are widely recognized as an effective method to reduce smoking rates, but they also carry risks of encouraging black markets to emerge, according to research sponsored by the Canadian Cancer Society.

"Smokers are price-sensitive, and may seek ways to purchase cheaper cigarettes, particularly as tobacco taxes increase the overall price of cigarettes. One such source is purchasing contraband cigarettes," concluded a report on tobacco use in Canada sponsored by the Cancer Society and released earlier this year.

'You've created a market for contraband'

In total, legal tobacco sales in New Brunswick are down more than one quarter since 2015. And although the province expected some of that decline as some smokers reacted to high prices by quitting or reducing consumption, most of it has come as a surprise.

Over the last two budget years, tobacco tax revenues have come in $27.7 million below estimates — equivalent to the taxes on 108 million cigarettes.

Bell said two and a half years into the high prices it is clear a lot of those cigarettes are still being sold — just not legally.

"What's happened is you've created a market for contraband. It just takes a while for that market to get established," said Bell. 

"There's that transition period where people continue to pay. They're paying more, but eventually they learn where they can find a cheaper replacement." 

Enforcement needed

Bell said the level of revenue lost to government and the loss of business to legal retailers justifies a dedicated force to combat contraband tobacco, which was recently disbanded by the Higgs government.

In May, New Brunswick Public Safety Minister Carl Urquhart told the legislature he had undone the province's special contraband tobacco enforcement unit, complaining it was not justifying its $1 million annual budget.

The force had taken credit for the seizure of 4 million illegal cigarettes in 2018, worth just over $1 million in unpaid provincial tobacco and sales taxes, but Urquhart said those seizures came from small-time operators who were costing the province more to keep in jail than they were worth.

"The runners were being stopped for contraband (tobacco)," said Urquhart.   

"The runners were receiving some very healthy fines for doing that, but the problem was that they had no money to pay their fines ...During the time that they spent in jail, no money was received by the department.

"The guy that they paid $50 to do a run for them is sitting in jail for three months, which we are paying for. I just did not feel that it was the best resource for my finances at the time."

The province does acknowledge black market sales of tobacco have likely caused some of the unexpected decline in legal sales, but it said there are no firm numbers to confirm that.

"The Department of Finance/Treasury Board does not have verifiable data to confirm the reason for the decline in sales volume," said department spokesperson Vicky Deschênes in an email to CBC News.

"It is thought to be a combination of cessation, alternative products and some contraband." 


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