The high cost of cheap smokes

Part five of our five-part series on the contraband tobacco industry.

As a young smoker, Jordan Anderson faced two major obstacles to his new habit: steep cigarette prices and laws barring retailers from selling to minors. The Toronto teenager skirted both barriers with ease, however, procuring bags of contraband smokes from a friend who regularly picked them up at an Ontario aboriginal reserve.

To a 15-year-old, more than $80 for a carton of legal cigarettes was a small fortune; $10 per 200 contraband ones was quite affordable.

“They were definitely a lot easier to come by than other cigarettes back when I was that age,” he said. “Variety stores might not sell to you but you could always find a friendly native.”

The impact of such contraband cigarettes on teens like Mr. Anderson, now 18, has become a major concern of anti-smoking and public-health advocates, who point to worrying statistics that suggest youth smoking rates have ended their years of decline, and in some groups may even be on the rise again.

Across the age ranges, previously tumbling tobacco use among Canadians has plateaued in the last few years, and health officials point the finger of blame at tax-free, unlicensed cigarettes, which cost as little as an eighth the price of the legitimate product, and by some estimates now make up over 30% of the market nationwide.

Meanwhile, First Nations smoking numbers are triple the general population, and evidence suggests their lung cancer rates, once much lower than those for the rest of Canadians, are set to climb above non-native levels.

The contraband business has raised contentious questions of tax avoidance, aboriginal rights and lost business for convenience stores and licensed cigarette manufacturers. The bargain cigarettes’ apparent health fallout, however, is the one issue that should not be ignored, anti-smoking advocates contend.

“It’s devastating to our work on tobacco control,” said Gar Mahood of the Non-smokers Rights Association. “It negates a lot of the things we have done in tobacco control. It’s destroying the work of people who have spent years trying to get on top of the tobacco epidemic.”

The lowest-end product marketed by contraband factories — those sold in anonymous plastic bags — are not exactly smooth. “They’re absolutely terrible — the taste and the feeling: they’re grungy,” said Mr. Anderson. He now has a contracting job and buys more flavourful legal cigarettes, but agreed the unlicensed ones likely do play a role in teen smoking prevalence.

“I don’t think it would encourage kids to smoke, but once kids start smoking, they may be less likely to stop,” he said.

Those in and around the aboriginal-run tobacco industry, though, deny there is any conclusive evidence that the reserve-produced products are making people more apt to smoke — and question why they should not have access to a market long dominated by non-native companies.

“Even though society has turned the thumb down on tobacco, there is a cadre of people who are going to support the industry for a good number of years,” said Bill Montour, elected chief of Six Nations reserve near Brantford, Ont. “I don’t smoke myself and I don’t encourage people to smoke, but humans will do what humans want to do.”

In fact, not all the figures back the link between contraband and smoking rates. While Alberta has one of the lowest prevalences of contraband cigarettes and Ontario the highest by most estimates, the Western province’s smoking rate in 2009 was actually higher than Ontario’s.

Whatever the cause, federal government data on smoking rates seem clear: The percentage of Canadians who used tobacco plummeted from close to 50% of adults in the mid-1960s to 19% by 2005, but has stayed more or less the same for the last four years.

Among people aged 15-19, rates fell from 25% in 2000 to 15% in 2006, then also flattened out. In fact, Health Canada’s most recent youth smoking survey found that the proportion of daily smokers in Grades 10-12 jumped slightly in the 2008-09 school year from the year before.

There is no irrefutable proof that the abundance of contraband tobacco is behind the new trend, but anti-smoking advocates say numerous studies have suggested that price is the most powerful deterrent to smoking. Research indicates a 10% increase in the price of cigarettes will result in a 3-5% reduction in overall cigarette consumption, according to the U.K.-based Society for Research on Nicotine and Tobacco.

Separate estimates using different methodology by Physicians for a Smoke-free Canada and the Canadian Tobacco Manufacturers’ Council have concluded that more than 30% of cigarettes smoked in this country are contraband, with the number soaring to close to 50% in Ontario.

Recent, yet-to-be published research spearheaded by Russell Callaghan of Ontario’s Centre for Addiction and Mental Health found 63-79% of teenage smokers surveyed in Toronto, Ottawa and Montreal had smoked contraband cigarettes within the previous month. One third said they thought the native-made product — often marketed as “organic” or “natural” — was more healthy.

Tobacco industry insiders, though, argue they are actually helping the predominately lower-income customers they serve.

“We just target a poorer community who would smoke anyway,” said Timmy Jay Montour, a tobacco wholesaler at Kahnawake reserve south of Montreal. “Now they at least have money to eat.”

If contraband is, indeed, playing a role in the smoking problem, what to do about it is still a matter of debate. Convenience stores and the major tobacco companies, backed by the conservative Fraser Institute think-tank and other analysts, have pushed for a reduction in taxes, which they say would largely remove the market for cheaper, unlicensed cigarettes.

Health groups reject the tax-cut idea, stressing that the high prices resulting from taxation are a major barrier to smoking, and lowering the levies would only restore market share to sanctioned cigarettes, not address stalled anti-smoking efforts.

The federal anti-contraband strategy has so far focused on targeting organized crime participation in the black market tobacco business.

The issue unquestionably demands more attention, said François Damphouse of the Non-Smokers Rights Association.

“What’s going on here? Is this considered a priority for the Conservative government?” he asked.

“We have one of the biggest financial frauds going on, in terms of government revenues, and basically nothing is being done to combat the issue.”

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Federal Response

The federal government insists it is determined to combat the problem of cigarettes produced in aboriginal communities and sold, tax-free and at rock-bottom prices, to non-native customers.

And yet, the Canada Revenue Agency has actually licensed many First Nations cigarette factories, a policy that it will say little about, and that anti-smoking advocates complain makes no sense at all.

In comments overlooked at the time, Pierre Bertrand of the Canada Revenue Agency told a parliamentary committee this April that the federal government has 33 tobacco manufacturing licencees.

A spokeswoman for the department said recently she could not reveal how many of those licences went to aboriginal plants, citing privacy rules. But there currently are only three major, non-native tobacco companies operating in Canada.

Just what status those federal licences grant the First Nations factories is unclear, however, as virtually none have provincial licences that would allow them to legally sell to people who are not status Indians.

Regardless, their cigarettes are sold widely in smoke shacks on reserves whose customers are mostly non-natives, and on the streets of communities across Canada.

Grand River Enterprises is a fully licensed manufacturer that boasts that it pays all applicable taxes — about $50-million a year — and only supplies its products in Canada to status Indians in quantities permitted by government. It says it has no control over what happens at that point, though.

In fact, its cigarettes — such as DKs and Putter’s — are widely available in smoke shops on reserves where the bulk of customers are non-native.

Many provinces assign quotas to bands to try to ensure that only First Nations people buy tax-free cigarettes. The limits are frequently ignored, however, said a 2008 report by the Ontario Auditor General.

One manufacturer sold about 400 cartons a month per adult band member in one community. A single cigarette maker sold more than two and a half times the total quota for all band members in Ontario one year, costing the Ontario government $100-million in lost revenue, the report said.